Chapter 9. Compensation (Core Compensation) Copyright 2016 Pearson Education, Inc. 9-1

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4 Base Pay Recurring pay for performing work Paid as hourly wage or annual salary The distinction is often associated with the Fair Labor Standards Act for determining eligibility for overtime pay Exempt: no overtime pay Non-exempt: overtime pay Copyright 2016 Pearson Education, Inc. 9-4

5 Cost-of-Living Adjustment Pay increase to compensate for rises in the average cost of goods and services Protects standard of living by ensuring that nominal pay (face value) does not fall significantly below real pay (purchasing power) Copyright 2016 Pearson Education, Inc. 9-5

6 Seniority Pay Pay increases automatically as years of service increase Human capital theory: Workers become more proficient (build human capital) over time The General Schedule is the federal government s comprehensive senioritybased pay system Copyright 2016 Pearson Education, Inc. 9-6

8 Performance-Based Pay Pay increases awarded based on level of performance attainment Performance measures vary (e.g., employee performance, company performance) Main types of pay-for-performance: Merit pay and merit bonuses Incentive pay (individual, group, company) Copyright 2016 Pearson Education, Inc. 9-8

10 Merit Bonuses / Spot Bonuses Merit bonuses reward individuals for past performance. Unlike merit pay increases, merit bonuses represent a one-time award (not built into base pay) Spot bonuses are one-time rewards to give timely recognition of good performance Copyright 2016 Pearson Education, Inc. 9-10

12 Incentive Pay Individual incentive plans (piecework, management incentives, behavioral encouragement plans, and referral plans) Group or team-based plans (design based on purpose of teamwork) Company-wide plans reward employees based on company-wide metrics such as profit or the value of company stock Copyright 2016 Pearson Education, Inc. 9-12

13 Types of Individual Incentive Plans Piecework plans: reward workers for every item produced over a designated production standard Management incentive plans: award bonuses to managers when they meet or exceed objectives based on sales, profit, production, or other measures for their division Copyright 2016 Pearson Education, Inc. 9-13

14 Types of Individual Incentive Plans (Cont.) Behavior encouragement plans: employees receive payments for specific behavioral accomplishments Referral plans: employees receive bonuses for recruitment of highly qualified employees Copyright 2016 Pearson Education, Inc. 9-14

16 Profit Sharing Distribution of predetermined percentage of firm s profits to employees Kinds of plans: Current profit sharing Deferred profit sharing Combination plans Vesting: Determines amount of profit employee owns Copyright 2016 Pearson Education, Inc. 9-16

17 Employee Stock Plans Companies grant employees right to purchase share of company Company stock (a unit of company equity) Company stock shares (shares of company equity) Stock options (right to purchase stock) Copyright 2016 Pearson Education, Inc. 9-17

21 Legislation Davis-Bacon Act of 1931 Walsh-Healy Act of 1936 Fair Labor Standards Act of 1938 Equal Pay Act of 1963 Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) Copyright 2016 Pearson Education, Inc. 9-21

22 Build Job Structures Using Job Evaluation Job structure: An ordered set of jobs represents the job structure or hierarchy. That is, jobs that require higher qualifications, more responsibilities and more complex job duties should be paid more Job evaluation: Systematically recognizes differences in the relative worth among a set of jobs and to establish pay differentials accordingly Copyright 2016 Pearson Education, Inc. 9-22

23 Competitive Compensation Policies Compensation policy: Choices that compensation professionals make to promote competitive advantage Pay level policies Market lead policies Market match policies Market lag policies Pay mix policies Copyright 2016 Pearson Education, Inc. 9-23

24 Pay Level Policies Market lead: Pay higher wages and salaries to attract high-quality, productive employees and thus achieve lower per-unit labor costs Market match, or going rate: Pay what most employers pay for same job Market lag: Pay below market rate because of firm s poor financial condition or belief that it does not require highly capable employees Copyright 2016 Pearson Education, Inc. 9-24

29 Broadbanding Technique that collapses many pay grades (salary grades) into a few wide bands to improve organizational effectiveness Lateral employee development Develops employee skills and encourages team focus Copyright 2016 Pearson Education, Inc. 9-29

30 Broadbanding and Its Relationship to Traditional Pay Grades and Ranges Average e Hourly Pay Grade 1 Grade 2 Grade 3 Band II Grade 4 Grade 5 Grade 6 Band III Band I Low Job Worth High Copyright 2016 Pearson Education, Inc. 9-30

32 Adjusting Pay Rates Overpaid and underpaid jobs Bring underpaid jobs up to minimum of pay range Promote person who is overpaid or freeze rate until across-the-board pay increases bring job into line Bad idea to cut pay Copyright 2016 Pearson Education, Inc. 9-32

33 Salary Compression Salary compression: Occurs when less experienced employees are paid as much as or more than employees who have been with the organization a long time due to a gradual increase in starting salaries and limited salary adjustment for long-term employees Copyright 2016 Pearson Education, Inc. 9-33

35 Contingent Worker Compensation In most cases, contingent workers earn less pay than permanent counterparts Far less likely to receive health or retirement benefits May have contingent workers side-by-side with regular workers at similar jobs Copyright 2016 Pearson Education, Inc. 9-35

36 Executive Compensation Text says, skills possessed by company executives largely determine whether firm will prosper, survive, or fail Compensation programs need to motivate executives to strive to achieve long-term success for firm Copyright 2016 Pearson Education, Inc. 9-36

38 Base Salary Factor in determining executive s standard of living Salary provides basis for other forms of compensation; may determine amount of bonuses and certain benefits U.S. tax law does not allow companies to deduct more than $1 million of executive s salary Copyright 2016 Pearson Education, Inc. 9-38

39 Bonuses and Performance-Based Pay Trend toward more performance-based compensation packages for executives Payment of bonuses reflects managerial belief in their incentive value Copyright 2016 Pearson Education, Inc. 9-39

40 Stock Option Plans Options for managers to buy specified amount of stock in future at or below current market price Some boards of directors require their top executives to hold some of firm s stock Financial Accounting Standards Boards require companies to expense stock options, thereby making them less attractive Copyright 2016 Pearson Education, Inc. 9-40

41 Perquisites (Perks) Special benefits provided by firm to small group of key executives Designed to give executives something extra Securities and Exchange Commission lowered threshold for disclosure of executive perks from $50,000 to $10,000 Copyright 2016 Pearson Education, Inc. 9-41

42 Severance Packages Often negotiated at hire of the executive SEC requires companies to list all agreements for each executive Investors will see estimated total dollar value of exit packages Copyright 2016 Pearson Education, Inc. 9-42

45 Say on Pay Dodd-Frank Act gives shareholders in all but smallest companies an advisory vote on executive pay Some expect vote will cause greater accountability on executive pay Votes at least every 3 years Copyright 2016 Pearson Education, Inc. 9-45

46 Golden Parachute Contract Perquisite protecting executives in event another company acquires firm or executive is forced to leave firm for other reasons Dodd-Frank Act has disclosure requirements Requires shareholder advisory vote on certain arrangements Copyright 2016 Pearson Education, Inc. 9-46

47 Clawback Contract Provision Provision allows company to recover compensation if subsequent review indicates payments were not calculated accurately or performance goals were not met Dodd-Frank Act requires companies to develop Clawback policies to recover compensation later deemed excessive Copyright 2016 Pearson Education, Inc. 9-47

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