Page 123 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

Chapter 4. The Stakeholders 109

executives means more merit dollars are available for other seemingly more deserving
persons. However, one does so at risk of being in violation of age discrimination laws.
A 5 (correctly paid, desired achiever) reflects harmony. It is equity theory in application;
pay is consistent with outcomes.
A 6 (overpaid, desired achiever) is less dramatic, but similar in nature and development,
to the 3.
A 7 (underpaid, overachiever) is usually not likely to remain that way for long. Either
the company will correct the inequity, or the individual will correct it (by lowering
performance, by directing efforts to other interests outside of the company, or by simply
leaving). This is an example of equity and expectancy theory in action. Classically, this
situation exists in companies that make little effort to truly reward performance. Such a
company or division, when faced with a 5 percent merit budget, gives adjustments rang-
ing from 3 percent to 7 percent (placing greater emphasis on restoring lost purchasing
power to marginal performers than on adequately compensating the overachiever).
A 8 (correctly paid, overachiever) reflects a situation with more downside risk than
upside potential. Any decline in achievement will result in either a 3 or 6, assuming no
decrease in pay. A decrease in pay combined with a decline in achievement will result in
either a 2 or 5.
A 9 (overpaid, overachiever) is probably an individual who has been demoted. This over-
achiever may remain an overachiever in the new position but may have had little or no
reduction in pay and thus may be overpaid in relation to the new level of responsibilities.
This analysis provides a way of describing level of pay and performance in relative
terms and also shows (contrary to some beliefs) that pay vs. performance can be a fluid and
changing relationship. Too many pay technicians are content to simply fall back on their
merit guide charts without trying to ascertain the dynamics of particular situations.
Pay-for-Performance Problems. To what extent is the company a meritocracy, where
people succeed or fail based on their own work performance? An ineffective pay-for-
performance program not only does not send the proper signals for good performance, but
probably also reinforces poor performance because it does not withhold sufficient pay. This
is especially true for companies that have little or no incentive pay, since salaries are rarely
reduced. A zero bonus is only a punishment when a minimal level of bonus is needed simply
to make pay levels competitive.
Not only must differences in pay relate to differences in performance, but also the exec-
utives must believe that the company is administering the program on this basis. A lack of
consistency in administration will have a debilitating effort on the most efficacious pay plan.
Invariably, in such situations managers will blame the pay system rather than the ability (or
desirability) of differentiating. If the pay system provides the basis for significant differences
in individual pay, including reducing pay (by lowering incentive payments) when perform-
ance drops, the system is not at fault. It is the manager who makes the recommendations and
the person who approves the proposal who are failing to make the necessary differentiation.
When pressed, many managers will indicate they need more objective measurements
by which to differentiate pay adjustments. Obviously, these are desirable; unfortunately
(or fortunately), the costs of developing, installing, and maintaining sophisticated measuring
devices to judge the value of a particular report, decision, or activity are usually prohibitive.
The pay-for-performance concept is difficult to effectively administer, but consider the