ERB: Chapter 14

What academics say (supports)

-Executive pay bears some relationship to company success. -Company size is the best predictor of CEO pay. -Size variables explain compensation nine times better than performance measures.

dual career ladder

-provide two ways of progressing in an organization. -managerial ladder offers a promotion path with increasing responsibility. -The professional track rises with increasing technical responsibility.

Do I need to know each long-term incentive plan/option?

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special groups

-supervisors -top management -boards of directors -professional employees -sales staff -contingent workers

Two characteristics that special groups share:

1) strategically important to the company 2) positions hold built in conflict

product to be sold (sales)

The nature of the product or service may influence a compensation system design. -Technical products take longer to develop an effective sales presentation. -->These need a large base pay component. -At the opposite extreme, where knowledge is easy to acquire, these plans have a higher incentive component. -->Identifying a sales target and forecasting sales are the biggest challenges.

organizational strategy (Sales)

-A sales compensation plan should link desired behaviors to organizational strategy. -Salespeople must know when to stress customer service and when to stress sales. -Relying on straight sales commission motivates aggressive sales behavior. -Incentive plans state the size of incentive and necessary performance objectives. -generally two types of compensation planes: unit rate and add-on

Critics of executive compensation

-CEO pay averages $14.3 million. -->Many critics feel this is unjustifiable. -->Wages in other countries are much lower. -->Others argue pay reflects changes in the market or that executives earn their increases. -Compensation differs at not-for-profit firms. -->Officers rarely make more than a million/year. -->A large fraction of total compensation is allocated to expense accounts and benefits. -Some experts think an informed board of directors can rein in executive pay. -Companies may capture the true value of compensation package using a tally sheet. -->A tally sheet provides a figure to debate over. -Increased government regulation is an alternative. -A simple test: Does it seem reasonable?

Base salary (CEOs)

-Compensation committees are important in determining executive base pay. -A common committee approach is setting compensation in the middle of best/worst major competitors. -Higher compensation for those likely to be raided. -Larger companies tend to pay higher.

Executive benefits and perquisites

-Executives typically receive higher benefits than other exempt employees. -ERISA requires they not be too far above others, the plans must also: 1) cover a cross-section of employees, 2) provide definitely determinable benefits, and 3) meet vesting and nondiscrimination requirements. -Companies are being required to place a value on perquisites or "perks". -note the decline in number of companies offering perks (on fortune 500 list)

What academics say (Contradicts)

-One study showed a 1% increase in company value led to a 0.43% increase in compensation. -Present value of future compensation does not correlate to company value. -Size and profitability affect compensation, but so do social comparisons.

bonuses (CEO)

-Play a major role in motivating short-term performance, given to 90% of executives. -Bonuses are smaller than in the past. -Short-term payouts sometimes have dire long-term consequences. -New financial measures to lessen subjectivity. -New objectives measures of performance.

nature of people (sales)

-Stereotypes characterize salespeople as heavily motivated by money. -One study supports this perception. -Salespeople rank pay higher than other rewards, often as the number-one motivator. -Values dictate the primary focus of compensation should be on direct financial rewards - base pay plus incentives.

components of an executive compensation package

-base salary -annual bonuses -long-term incentives -benefits -perquisites (perks) -The disconnect between pay and performance of the nation's top executives has been a source of contention for over 30 years. -As tax legislation changes, components of executive compensation packages also change -While, these compensation levels may seem high to you, in comparison to years past when figures regularly topped 100 million, it appears compensation levels have moderated.

supervisors

-caught between upper management and employees -must balance need to achieve organization's objectives with importance of helping employees satisfy personal needs -if unsuccessful, either corporate profit or employee morale suffers -equity is the major compensation challenge -One compensation strategy puts base salary of supervisors at an amount exceeding the top-paid subordinate, usually 5 - 30%. -Other methods are to pay supervisors for scheduled overtime or to use variable pay.

unit rate plans

-differ by the amount they pay for each unit of sales

boards of directors

-face possibility that disgruntled stockholders may sue over corporate strategies that don't "pan out" -A board of directors provides strategic advice, usually 8 - 11 directors. -Companies want outside directors, those perceived as less biased. -There is considerable risk as stockholders may sue directors. -In exchange for the risk, directors are well rewarded, typically $240,000 for 30-40 hours of work per month.

professional employees

-may be torn between goals, objectives, and ethical standards of their profession (ex: should an engineer leak info about a product flaw, even though that info may hurt corporate profits) and demands of an employer concerned more with the profit motive -According the Fair Labor Standards Act, this category includes any person who has received special training of a scientific or intellectual nature and whose job does not entail more than a 20% time allocation for lower-level duties. -ex: scientists and engineers **Special compensation problems. 1) A graduate's knowledge is valuable but gradually becomes obsolete. -->There is a parallel between pay increases and knowledge obsolescence. -When salary plateaus arise, many make career changes. -A *dual-career ladder* provide two ways of progressing in an organization. 2) A second problem centers on equity. -Scientists and engineers compare themselves with others who graduated when they did. -They receive compensation beyond base pay with more than half getting bonuses. -Post-hiring bonuses are paid for patents, publications, and professional licenses. -Organizations devote energy to developing perks for this unique group. -Organizations rely heavily on external market data in pricing scientists' and engineers' base pay. The result is the use of a *maturity curve.*

sales staff

-often go for extended periods in the field with little supervision -challenge is to stay motivated and continue making sales calls even in the face of limited contact or scrutiny from manager -conflict is inevitable between customers who want product now and production facilities that can't deliver that quickly -Sales staff are the link to customers. -This profession requires high initiative and low supervision. -->Standard compensation is not designed for this type of work. -->There is more reliance on incentive payments tied to individual performance. -->High demand products rely more on base pay while incentives increase with sales ability.

contingent workers

-play an important "safety valve" role for companies -when demand is high, more are hired -when demand drops, they are the first workers downsized -employment status is highly insecure and challenge is to find low-cost ways to motivate -Defined as anyone hired 1) through a temporary help agency, 2) on an on-call basis, or 3) as an independent contractor. -As the employee status is temporary and benefits are less or nonexistent, -->higher wages tend to compensate. -Why the move to contingent workers? It may be a signal of a permanent change in the way business is done. -->Companies are not hiring at the expected level. -->Rather, using temporary workers. -->Temp workers afford flexibility in the size of the workforce in response to market changes. -A major compensation problem is equity. -->Employers deal with inequity on two fronts. 1) One way is to view contingent workers as a pool of candidates for future permanent hire. 2) second way is to champion the idea of boundary-less careers. -->Here, contingent status is viewed as part of a fast-track developmental sequence. -->Lower wages are offset by opportunities for rapid development of skills.

top management

-stockholders want healthy return on investment -government wants compliance with laws -executives must decide between strategies that maximize short-run gains at expense of long run versus directions that focus on long run

add-on plans

-try to get sales staff to focus on specific types of sales -Sometimes in the form of bonuses paid at predetermined levels of performance across all participants.

What academics say about executive compensation

1) One explanation is social comparisons. -Market forces raise everyone's base pay, including executives. -Criticized due to the gradual increase in the spread between CEOs and average employee salaries. 2) Another tactic is to explain the level of executive wages. -The worth of CEOs should correspond closely to some measure of company success. 3)Agency theory incorporates the political motivations in the corporate world. -Sometimes CEOs make decisions not in the best economic interests of the firm. -Agency theory calls for compensation designed so CEOs act in the interest of stockholders. -->The outcome has been stock options. -->Critics argue with stock options, there is no risk. -->Stock price may rise simply due to the market.

Designing a sales compensation plan

1) the nature of people who enter sales 2) organizational strategy 3) market maturity 4) competitor practices 5) economic environment 6) product to be sold -As the product matures, the sales pattern changes, compensation must change. -->Move from aggressive sales to customer retention. -->Larger base salaries and performance based pay tied to customer satisfaction. -External competitiveness is essential. -The economic environment affects how a compensation package is structured.

long-term incentives and capital appreciation plans (CEOs)

Long-term incentives are declining. -Anger over stock options' tax advantages. -Stockholder angst over how options are granted and exercised. -->Passage of the 2010 Dodd-Frank Act signals that executive compensation will be monitored. -Illegal backdating allegations. -->Responsibly linking compensation to stock price is effective. -->Vested stock options have a long-term incentive.