Page 122 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

108 The Complete Guide to Executive Compensation

Level of Pay
Level of Achievement Underpaid Correctly Paid Overpaid

Underachievement 1 2 3
Desired achievement 4 5 6

Overachievement 7 8 9
Table 4-2. Achievement vs. pay

equitable manner. This can be demonstrated with the matrix in Table 4-2 which compares
level of pay with level of achievement. Setting aside the legal issues of equal pay for equal
work, there are a number of interesting observations that can be made.
While the “correctly paid” column is the pay program’s objective, the company should
be pleased if it has more overachievers than underachievers in this situation. Level of achieve-
ment here is defined as the quantity as well as the quality of accomplishment. Three differ-
ent individuals could have the same level of quality, but one could produce 80 percent of
expected quantity, the second 100 percent, and the third 120 percent. Conversely, all three
could produce the same quantity of work but one could do so in a truly outstanding manner,
the second in a fully satisfactory manner, and the third in a less than satisfactory fashion. Most
performance evaluation programs can deal with the second situation (output is equal) more
easily than with the first; however, the level of output can be built into the performance pro-
gram. Assume three individuals perform at a 3.0 level of performance (using the university
4.0 system). For the overachiever, the adjusted rating is 3.6 (i.e., 3.0 120 100). The indi-
vidual attaining the desired level of performance retains the 3.0 rating (i.e., 3.0 100 100),
while the underachiever’s rating drops to 2.4 (i.e., 3.0 80 100). Admittedly, the concept
is easier to describe than to apply; nonetheless, it is a workable concept and will be covered
again in Chapter 5 (“Salary”).
Let’s look at some of the other interesting combinations and see what they represent:
A 1 (underpaid, underachiever) is an individual who is paid even less than the poor
performance warrants. This appears to be the result of some form of discrimination
or recrimination, perhaps for past failures. It may be a management message to the
individual: “You are not wanted. Why not leave?” Such a situation would obviate the
need for a messy company-initiated severance.
A 2 (correctly paid, underachiever) has the opportunity to increase pay by elevating
outcome.
A 3 (overpaid, underachiever) may develop from a 5 or 8 whose performance drops but
whose bonus does not, or from a 4 or 7 who reaps a bonanza in pay but does not keep
performance high enough to become a 5 or 8 (many professional sports stars playing
under long-term contracts may meet this description). Lack of adequate downside risk in
pay programs causes development of many 3s.
A 4 (underpaid, desired achiever) is similar to a 1 but not as flagrant. Some companies
may knowingly or otherwise allow this to happen to some of their older executives, feeling
they are unlikely to leave due to all the accrued advantages of long service (e.g., pensions,
deferred bonuses, and long vacations). Withholding a portion of pay increases from such