Page 236 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

222 The Complete Guide to Executive Compensation

Job Pay Maximum

Job Performance
Evaluation Appraisal

Job Pay Minimum
Figure 5-24. Job evaluation vs. performance appraisal

internally and externally. As shown in Figure 5-24, job evaluation sets the minimum and
maximum to be paid for a position. The employee’s performance combined with experience
is the basis for determining the rate of movement through this structure. Lower in the
organization, this may be based on a time factor (e.g., time in job or since degree) or level of
knowledge/skills. At the executive level, it is based solely on performance.
A promotion to a higher job grade may also result in a salary increase. Indeed, the great-
est opportunity for increased salary is through promotions. A CEO’s current salary consists
primarily of prior promotional increases, not performance adjustments. The latter are rela-
tively modest because there is no downside risk—salaries are rarely if ever reduced. Therefore,
incentives, not salary, are the primary vehicles for implementing pay for performance. When
incentives are available, the salary element may be used to reward ongoing work, while incen-
tives reward achievement of specific goals or objectives. When incentives are not available, the
salary element must attempt to do both.
Poor to mediocre performers must be identified and counseled. If counseling, skill devel-
opment, and reassignment to other jobs are not successful measures, terminate employment.
Such individuals cost the company multiples of their pay, after factoring in hiring costs, support
costs, mistakes, and lost opportunities. The cost of severance pay may be a bargain.
When marginal tax rates increase, executives may experience a reduction in net income
since few companies adjust salaries for tax increases. On the other hand, lower tax rates do not
provoke salary decreases. For a period of time up to 1964, we had a marginal tax rate of 91
percent for income in excess of $400,000 (married person filing joint return). In later years
dropped to 70 percent, then 50 percent, and even 28 percent. Know of anyone who reduced
salaries to reflect the increase in take-home pay?
Wage controls, such as existed in 1971 to 1974, typically restrain salary more than the
other four pay elements, while formulas in place are allowed to generate increases far in excess
of salary limits. More recently, legislation has slowed salary increases to top-paid executives.
Salary is reportable as earned income to the individual and tax deductible to the company up
to $1 million a year. To the extent that salary exceeds $1 million, the tax effectiveness is