5 Compensation

8/12/2019 5 Compensation

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Compensation

MHR 3200Dr. Larry InksDepartment of Management and Human ResourcesFisher College of BusinessThe Ohio State University


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Linkage to Earlier Class Topics

Compensation Terms

Different Types of Compensation Approaches

A Balanced Scorecard Approach to Compensation

Compensation and YOU

Summary Thoughts

Overview


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Compensation and Performance Management

Meri t inc rease Bo nu s (var iable com p) Prof i t shar ing Equi ty (op t ions ) etc.

Orientation/Onboarding

SelectionHuman ResourcePlanning

PerformanceReview

DevelopmentalReview

SettingAccountabilities

Rewards(Merit increase,

etc.)


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Compensation

Directly relates to an organizations ability to attract, select and hire the best possible employees/organization members

Is strongly related to individual motivation, satisfaction, engagement and

retention Can cause internal conflicts (e.g., team effectiveness) when equity is not

perceived to be present

Needs to be aligned with the goals and strategy of the organization

- Different elements of compensation plan (merit vs. bonus, etc.)- Focus for compensation (individual vs. group vs. organization level)

Can present difficulties in global organization management


In the U.S., compensation is intensely personal and related to self-worth


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CompensationThe rewards, usually monetary in nature (either short- and/or long-term) thatreinforce behavior, organizational membership, performance and retention.

Important Terms/Concepts Intrinsic vs. extrinsic rewards

Government regulations (Fair Labor Standards Act [exempt vs. hourly non-exempt that gets overtime], Equal Pay Act of 1963, etc.)

Different types of compensation (e.g., merit pay, incentive pay, etc.)

Determining wage structures: moving from thinner grades/levels to largerbands of pay where employees dont max out as easily

Individual- vs. team- vs. organization-level incentives

Benchmarking: comparing w/ others to see if competitive in industry and fortalent

Total compensation (vs. total rewards: sum total of rewards, going wellbecause of things besides money)

Compensation Terms/Concepts


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Merit-Based Compensation

Merit pay programs link performance-appraisal ratings to annual payincreases.

A merit increase grid combines an employees performance ratingwith the employees position in a pay range (often called a comp -ratio to determine the size and frequency of his or her pay increase.

Merit increase grids can also help bring about perceived pay equity.

Some organizations provide guidelines regarding the percentage ofemployees who should fall into each performance category (e.g., aforced distribution).

Criticisms of merit pay include emphasis on individual performancevs. teamwork, measurement problems, and (from Deming) thatindividuals dont have much impact on their own performance.

Merit-based pay is an effective means of reinforcing performance!


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Incentive/Variable Compensation

Incentive pay (aka variable comp aka bonuses) are variable in nature Can be supplemental income (e.g., commissions in addition to base

pay) or sole source of income (e.g., some realtor commissions)

Typically are linked to some previously-set performance targets,accountabilities, etc. (but think carefully about these when setting them!)

More objective when objective performance metrics (e.g., sales $)exist, but can be used for qualitative situations (e.g., accountabilities)

Typically are focused on both individual and organizational performancebut can be set up to reward team-level performance as well.

Also includes bonus compensation for senior-level non-exempt

When used as bonuses, typically have two key elements:- Funding: Organization targets need to be met to fund bonus pools- Distribution: Bonus pools distributed according to plan, targets, etc.

Need to ensure program is clearly communicated and understood


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A Sample, Generic Bonus Program*

* Tremendously oversimplified and one of many different types!!!

Situation A Manager-level employee earns an annual base salary of $60,000 and iseligible for an annual bonus of 10% ($6,000). The bonus is contingent onthe organization hitting its overall goals (revenue, profit, etc.) for funding,and the Managers bonus is a function of both organization performance(50%) and her own performance (50%).

Organization hit its goals, so bonus program is fully funded.

Manager accomplished 90% of her bonus objectives.

Organization component: $6,000 (bonus target) x .5 (org. component)x 1.0 (org performance)=$3,000

Individual component: $6,000 (bonus target) x .5 (ind. component)x .90 (ind. performance)=$2,700

Total Managers bonus (before taxes!)=$5,700


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Profit Sharing and Equity/Ownership

Use of stock options deserves a closer look as it is widespread

Profit Sharing- Payments are based on a measure of organization performance

(profits), and payments do not become a part of base pay.- It may encourage employees to think more like owners.- Can enhance feelings of procedural and distributive justice- Drawback is that employees may not see strong link between

their performance and organization performance

- Can also be seen as an expected element of compensation

Equity/Ownership- Encourages employees to focus on the success of the organization

as a whole entity- Stock options give employees the opportunity to buy company

stock at a fixed price (the strike price) set each option cycle .- Employee stock ownership plans (ESOPs) are employeeownership plans that give employers certain tax and financialadvantages when stock is granted to employees.


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Concerns with Stock Option Programs

Same challenges exist as with merit and incentive pay regarding theneed to be equitable and use options as a means of sending amessage.

Need to keep in mind that they should be used to reward value, both current and future; be careful not to focus too much on high-potentialemployees at the expense of known high-value employees.

The more an organization uses options as part of their totalcompensation package, the more vulnerable they are re: stock price.

As with bonuses (incentive pay), these can become seen as anestablished and expected aspect of compensation when it doesnt

deliver can cause significant problems (e.g., turnover, etc.).

Biggest recent change is that organizations now need to expensethese options. Per FASB, need to start expensing options as formalpart of P&L starting first fiscal year after June 15, 2005

Focus on options seems to be declining given recent events


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A Balanced Scorecard Approach

A balanced scorecard approach to compensation uses a combinationof different types of compensation strategies (e.g., merit pay, incentivepay, stock options, etc.).

When carefully thought through and developed, can provide abalanced focus on individual, team, and organization-levelperformance.

Because it is more complex, it requires more thoughtful development,ongoing maintenance, and very clear communication to employees.

Typically will provide a focus on a variety of different importantelements of organization success (e.g, customers, organization growth,

internal operating efficiency, people development).

Need to review it each year to ensure it is competitive, is driving correctbehaviors and results, is clearly understood, etc.

So what could a balanced scorecard approach look like?


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OrganizationLevel

Entry/IndividualContributor

Manager

Director

Vice

President

Senior VicePresident+

A Sample Balanced Scorecard Approach*

* Tremendously oversimplified!!!

BaseCompensation

$35-$75K

$55-$95K

$85-$135K

$125-$250K

$195K+

ESOP

Yes

Yes

Yes

Yes

Yes

Target Bonus(% of Base)

n/a(typically)

10%-15%

20%-30%

35%-50%

50%-80%+

Equity/Options(% of Base)

n/a(typically)

50%

100%

200%

300%


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Differentiate total compensation from total rewards but both areimportant and relevant for you

Understand that when youre looking at a new role, the target range is different from your current compensation which theyll ask for.

Try to come in as high in the range (comp-ratio) as possible; otherwiseone can stay near the bottom of each range as they progress.

Understand the total compensation package, both current as well aspotential future (if you advance within the company).

Do some research re: how bonuses have paid out, stock performance, etc.

Have patience and keep your expectations in check

As soon as possible, start your long-term wealth creation dont wait!


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Summary Thoughts About Compensation

Clear communication of program(s), targets, guidelines, etc. isabsolutely critical to perceived equity, justice, and related engagement.

Programs should be carefully thought through to ensure a proper focuson organizational objectives and that the right behavior is rewarded.

Programs can be structured to reward individual and/or team and/ororganization-level performance, but requires some good thought.

Compensation programs need to be used to a) reward people for theirperformance and b) provide messages as to how that performance(and the individual) is seen.

Benchmarking (both for program development and ongoing paycompetitiveness) is important for best possible programs.

Best approach is to use a combination of different approaches toprovide a good balance between short-term and long-term incentives(balanced scorecard).


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Compensation Terms

Different Types of Compensation Approaches

A Balanced Scorecard Approach to Compensation


Summary Thoughts

Review


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What Questions Do You Have?

Documents

5 Compensation