Page 226 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

212 The Complete Guide to Executive Compensation

of pay comparisons is diffused. The disadvantages include the following: (1) the demands on
management time are greater since the manager must “come up to speed” on each situation,
(2) budgetary game playing (namely, deferring the increase to later in the year in order to give
a bigger percentage without incurring more expense for the year) is made possible, (3) it is
more difficult to respond equitably to rapidly changing economic situations (consider those
who just missed versus those who got caught by the last set of federal pay guidelines), and
(4) it is more difficult to ensure equitable pay treatment throughout the organization.

Frequency of Salary Reviews

Determined by Job Grade. Some companies vary the time interval between salary reviews,
normally stretching out the period for upper-level positions. Thus, while entry-level positions
might be reviewed every six months for the first several years of employment, middle manage-
ment positions would be on an annual or 18-month basis and the very senior executives on a
biennial review.
These longer intervals mask a slowing down in compensation (e.g., a 10 percent pay
increase after 18 months is really just a little more than a 6 percent annual adjustment).
Furthermore, increasing the time interval for a stated percentage adjustment as one moves fur-
ther up the organization automatically contributes to an existing compression problem (i.e.,
lack of sufficient pay differential between supervisor and subordinates). Conversely, it will help
reduce a larger than wanted pay spread between top and middle management layers.
Determined by Position in Job Grade. Another approach is to increase the normal time
interval as the executive progresses within the salary range. An example of this is found in
Table 5-28. The percentages are the annual target amounts; thus, an “outstanding” per-
former below range minimum might receive 20 percent five to eight months after the last
change versus 13 percent after 8 to 12 months if in the middle are third of the range. Table
5-27 also illustrates the type of merit program that establishes ceilings within the range. Note
that an “acceptable” performer is not expected to move above the lower one-third, and
“good” and “very good” performers are held to the middle one-third of the range. Only
“superior,” “distinguished,” and “outstanding” performers are permitted to reach the full
range maximum. Furthermore, the two highest performance ratings permit token increases
for those above range maximum, but on less than a yearly basis.
Another possibility is to hold the percentage increase constant and simply vary the frequen-
cy of adjustment based on performance. This is illustrated in Table 5-29, with an 8 percent
adjustment. Actually, the amount is higher when compounding is considered.

De-emphasizing Salary. The classic problem with the salary program is the difficulty of
truly rewarding performance with a large salary increase. This is especially a problem with
companies that have limited incentive plan opportunities. One approach is to employ a lump
sum. Rather than build the increase into the ongoing salary, the amount is annualized and
paid as a one-time award. A variation would be to build in a portion of the award as a salary
increase (e.g., the first 5 percent of pay). Where incentives are available, many are de-empha-
sizing salary as they put more emphasis on the annual and long-term incentives. Some go so
far as to freeze salaries (especially at the CEO level) due to the earlier-mentioned Section
162(m) limit. However, they make a major mistake if they disallow promotional increases or
salary adjustments for expanded responsibilities. Freezing these people perpetuates a salary
inequity and underpays the incentives (which are percentages of salary).