Page 267 - Encyclopedia of Business and Finance

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Employee Compensation

grade, typically by seniority. Once a person hits the top
pay in the grade, he or she can only increase the pay by Pay ranges within grades
moving to a higher grade. Under certain unusual circum-
ESTABLISHED BASED ON THE JOB POINT METHODS
stances, it is possible for an outstanding performer in a
lower grade to be paid more than a person at the bottom
of the next-highest level. 9.0
8.5
INNOVATIONS IN COMPENSATION 8.0
SYSTEMS 7.5
Hourly 7.0
As the market becomes more dynamic and competitive, Pay
companies are trying harder to improve performance. Rates 6.5
6.0
Since companies cannot afford to continually increase
5.5
wages by a certain percentage, they are introducing many
5.0
innovative compensation plans tied to performance. Sev-
eral of these plans are discussed in this section. 10 20 30 40 50
Points
Incentive Compensation Plan. Incentive compensation
pays proportionately to employee performance. Incentives Figure 2
are typically given in addition to the base wage; they can
be paid on the basis of individual, group, or plant-wide
performance. While individual incentive plans encourage deserve in exchange for showing up at work and doing
competition among employees, group or plant-wide well enough to avoid being fired. While base pay is given
incentive plans encourage cooperation and direct the to employees regardless of performance, incentives and
efforts of all employees toward achieving overall company bonuses are extra rewards given in appreciation of their
performance. extra efforts. Pay-for-performance is a new movement
away from this entitlement concept (Milkovich and New-
Skill-Based or Knowledge-Based Compensation. Skill- man, 2005). A pay-for-performance plan increases even
based pay is a system that pays employees based on the the base pay—so-called merit increases—to reflect how
skills they possess or master, not for the job they hold. highly employees are rated on a performance evaluation.
Some managers believe that mastery of certain sets of skills Other incentives and bonuses are calculated based on this
leads to higher productivity and therefore want their new merit pay, resulting in substantially more total dollars
employees to master a series of skill sets. As employees for highly ranked employee performance. Frequently,
gain one skill and then another, their wage rate goes up employees also receive an end-of-year lump sum bonus
until they have mastered all the skills. Similar to skill- that does not build into base pay.
based pay is knowledge-based pay. While skill-based pay
evolved in the manufacturing sector, pay-for-knowledge EXECUTIVE COMPENSATION
developed in the service sector (Henderson, 1997). For
Recently, people have been concerned with the excessively
example, public school teachers with a bachelor’s degree high level of executive compensation. According to Busi-
receive the lowest rate of pay, those with a master’s degree ness Week’s annual executive pay survey, in 1997 Sanford
receive a higher rate, and those with a doctorate receive Weill, CEO of Travelers Group, collected $7.5 million in
the highest. salary and bonuses plus $223.2 million for long-term
compensation, totaling $230.7 million. In the same year,
Team-Based Compensation. As many companies intro- Roberto Goizueta, CEO of Coca-Cola, earned a total of
duce team-based management practices such as self-man- $111.8 million, including annual salary, bonuses, and
aged work teams, they begin to offer team-based pay. long-term compensation. Compensation for the twenty
Recognizing the importance of close cooperation and highest-paid executives ranged from $28.4 million to
mutual development in a work group, companies want to $230 million.
encourage employees to work as a team by offering pay Frequently, executive compensation becomes contro-
based on the overall effectiveness of the team. versial. Are these compensations excessive? What justifies
such a large compensation for executives? Justification of
Performance-Based Compensation. In the traditional such a large sum of compensation is linked to the com-
sense, pay is considered entitlement that employees pany’s performance. In fact, a significant portion of exec-

244 ENCYCLOPEDIA OF BUSINESS AND FINANCE, SECOND EDITION