Diploma in Business Management

This textbook chapter reviews the components of compensation packages, 
focusing on the changes brought about by economic changes.

In the 1980s, the U.S. economy underwent a transformation. Foreign competition and a national recession forced U.S. organizations to make drastic changes in order to survive. The 1980s spelled the end of the Old Economy. Middle management positions were eliminated in corporate downsizing; this process called for the number of employees in the work force in order to reduce or eliminate inefficiencies or duplication of efforts. Companies stopped guaranteeing employees life-long careers in their organizations, and employees began jumping ship rather than stay with companies where they would not be promoted. Employees began negotiating for their pay individually, and union influence declined. Then small, leaner organizations began to emerge. These smaller organizations formed the basis of a New Economy, with new pay policies.

This chapter examines the pay practice differences between Old and New Economy organizations. Then, it looks to the future of compensation, as the United States deals with a Soft Economy.

The single largest difference between Old Economy and New Economy organizations is their definition of the workplace.

Old Economy organization are traditional and stress internal job structure. They systemize the workplace and compensation programs. Old Economy organizations rely heavily on job analysis and job evaluation when setting pay. (See Chapter 14.) They create highly differentiated wage structures, in which only management enjoys perquisites and stock options.

New Economy organizations are less structured. They do not set pay based upon the internal labor market (what other employees in the company earn). Instead, New Economy organizations base pay on what competitors (the external labor market) pay.
At the same time, pay among employees is less differentiated. Often, every employee from the mailroom to the Board Room gets to participate in stock option plans.

They are also smaller and leaner. Fewer employees do more tasks and have a greater breadth of responsibility.

All compensation elements exist to achieve some purpose. A review of compensation practices for New Economy organizations as compared to Old Economy organizations includes a review of the following compensation objectives:

Organizations often cite "paying competitively" as their primary compensation goal. New Economy organizations do not appear to be as concerned over matching going average salary rates as their traditional counterparts. Instead, New Economy organizations compete with incentive and variable pay (gain sharing plans, profit sharing, stock option plans that extend down into the lower ranks, etc.).

Many organizations utilize compensation as a means to shape individual and group behaviors. While the Old Economy counterparts stress the merit of the individual's achievement and reward for both merit and individual production, the New Economy organization is far more likely to reward the total organization and the team responsible for an achievement (rather than a few select key individuals).

Interestingly, New Economy organizations utilizing team sharing pay practices do not tend to use formal performance appraisals. (Performance appraisals appear to alienate both the bottom 20% of a work population and the top 20%, leading to a similar exodus from each group.)

While Old Economy organizations stress the merit of individual achievement, New Economy organizations are more likely to reward team effort.

Oftentimes, pay plans are utilized because they are administratively simple and inexpensive. Administering base salaries is much less complicated than benefits or incentives. The pay plans used by New Economy organizations often appear unsophisticated compared to the complex pay schemes of Old Economy organization competitors. Simple, straightforward pay plans are the rule.

Compensation plans can also be designed to ensure cost control. For example, sales compensation that is only paid when profit or sales are achieved.

In Old Economy organizations, fairness in pay has been a traditional value. Job evaluation plans oftentimes exist solely because of this objective. New Economy organizations are far more heavily influenced by the competitive marketplace, and oftentimes pay little attention to this objective.

Governments can affect compensation practices with tax laws, making certain types of compensation less expensive than others. For example, U.S. rules relating to stock options and Employee Stock Options (ESOPs). Lower salary levels, higher benefits, and use of stock options translate into more cost effective use of compensation dollars in New Economy organizations. Cash conserving approaches are a reflection of many New Economy organizations' working environments.

Clearly, the use of stock options and benefits require an understanding and appreciation of tax codes, but rarely does one hear of this objective as being the driving force for the use of any particular compensation plan in New Economy firms. This is a change from previous decades within the U.S. and Canada, where Old Economy organizations often found their compensation designs dictated by tax accountants.

A primary goal of several compensation elements is the creation of assets and estates for managers or employees (allowing employees to believe they are owners). Capital accumulation has traditionally been the province of only management pay. This has changed. New Economy organizations utilize both technology and stock options or equivalents. Starbucks, Cisco, Microsoft, and Netscape, followed by such stalwarts as Bank of America, have expanded the participation in these plans to the mailroom.

In the 1990's, many workers were willing to trade higher salaries at more secure and stable companies in exchange for stock options in New Economy organizations. Due to the fact that stock option programs required the employee to stay with the company for a set number of years before vesting (receiving full ownership of the stocks), these programs increased loyalty.

In many cases in the 1990's, employee stock option plans created millionaires. In recent years, however, they have proved a false promise for employees of the many software and technology firms that have gone under. The market, according to Esther Dyson, Chairman of EDventure Holdings, "was sending people the wrong signals by promising them $500,000, $5 million or $50 million for a couple of years' work."

Some compensation elements exist simply because owners, management, and boards utilize social concerns in their decision making regarding compensation elements. For example, long-term disability plans.

New Economy organizations often appear to have a concern for their human resources not shared by their Old Economy counterparts. This is reflected in turnover statistics and compensation plans pointed toward future (not present) compensation. Because the Internet is available to many employees both at the office and from their homes, organizations can communicate information that otherwise might not be known. This allows New Economy organizations to communicate both their plans and objectives more often and at less expense than is done by Old Economy firms.

The compensation plans used often depends on the way in which an organization prioritizes these discussed objectives. Oftentimes two are more objectives can be in conflict, making them difficult to be achieved by a single compensation plan. Because no two organizations have exactly the same goals, there is a diverse use of compensation elements.

A base salary is a fixed amount paid to the employee. It can be determined as an hourly, weekly, monthly, or yearly rate. The term wage instead of salary is also used in the case of non-exempt (U.S.) or union employees. Salaries and wages account for the majority of most organizations' total compensation expense.

Sales incentives are financial rewards offered to salespeople for exceeding a sales goal. The goals that need to be met in order for a sales person to receive incentive compensation are specific and measurable. The incentive is usually paid in the form of cash.

Bonuses are lump-sum awards, given to employees on a periodic basis (quarterly, semi-annually or annually). The intent of bonuses is to reward employees for specific accomplishments: employee performance, company performance, achievement of goals, etc. Bonus awards represent extra income and an opportunity to attain above-average earnings.

Incentive Plans

Incentives are lump sum payments that reward workers for productivity above certain standards. Unlike general salaries or wages, incentives are variable in cost and can be adapted to short-term circumstances.

Medical Plans

Group medical plans provide employees and their families with health care benefits such as hospital rooms, surgeon and physician fees, and pharmaceuticals. Employees typically become eligible for medical plans with 30 hours of service a week. In some cases, part-time employees are also covered. These benefits are typically received free of any income tax liability.

Life insurance insures human lives. In a life insurance contract, the insurer agrees to pay a stipulated sum in the event of the death of the insured or of a third person in whose life the insured has an interest. In exchange, the insurance company receives payments of a premium (usually at stated periods). Employees typically become eligible for life insurance plans with 30 hours of service a week. In some cases, part-time employees are also covered. Life insurance benefits are typically received free of any income tax liability.

		Diploma in Human Resource Management