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Compensation
You can’t read a news article or blog today without someone talking about compensation (wages/salaries, but also benefits like health care and retirement). Compensation is uniquely important in organizations because it typically represents the single largest operating cost, especially where employee skills or human capital are the source of competitive advantage (e.g., Google/Alphabet, Facebook; investment banking, law, accounting, and consulting firms; professional sports teams; universities). Compensation is also important because employees regularly report it as the most important factor that goes into their decision of whether to take a job or stay in a job. Compensation also plays a major role in what employees choose to do on the job: their effort level, where they direct their effort/what goals they pursue, how cooperative they are, how flexible they are, how ethical they are, and so forth. These all add up to determine how efficient, innovative, customer-oriented and (in the case of for-profit) how profitable an organization is over time. Profits, in turn, create jobs. In the absence of profits, jobs disappear. An organization that pays too much, pays too little, ties too much compensation up as fixed costs, and/or pays for the wrong things puts the company, its investors, and its employees at risk. On the other hand, designing and executing an effective compensation strategy can play a key role in great shared success.
Compensation challenges ebb and flow with changes in the economy. The Financial Crisis of 2008 and the related Great Recession brought job cuts (with the national unemployment rate rising to 10 percent, the highest since 1983), reduced hours, reduced employer contributions to 401(k) retirement plans, reduced bonus/profit-sharing payments, and some wage cuts. With revenue and profits down and with labor costs often the single largest operating cost, employers cut labor costs in these ways. The Great Recession also focused attention on executive compensation. As the government bailed out the financial industry, newspapers were reporting large bonuses going to the very executives who helped cause the financial disaster. Eventually, as company revenues picked up again, we gradually saw employers put less emphasis on cutting labor costs and more emphasis on hiring. However, job growth was initially quite modest. At the beginning of 2013, the unemployment rate was still at 8 percent. Why? Employers have become increasingly careful about adding new workers because they want to keep costs under control and they don’t want to have to reduce the workforce if they guess wrong about increasing revenue growth/product demand (and the need for more workers). But competition for some types of workers has increased and wages, salaries, and benefits have likewise increased for such workers, meaning that employers must continually evaluate and benchmark their pay to be competitive. As economic growth has continued, competition for employees has increased and the U.S. unemployment rate is now under 4 percent, the lowest it has been since 1969. However, as we will see, wage gains remain modest. That is because employers are careful not only about hiring, as we have noted. They are also careful about giving wage/salary increases because once those are added to base pay, “they are there forever.” Increasingly, employers seek to make labor costs variable, which means greater reliance on bonuses and/or profit-sharing, where payments to employees go up during good times, but automatically go down during bad times when profits and revenues are down.Page xiii
Pay also matters around the globe. To take a (bit light) example, if you were a Russian cosmonaut, you could earn a bonus of $1,000 for every space walk you took (technically known as “extravehicular activity”), up to three per space trip. A contract listing specific tasks to be done on a space mission permits you to earn up to $30,000 above the $20,000 you earn while you are on the ground. Conclusion: Pay matters.
(As a small aside, in contrast to the Russian cosmonauts, wealthy Americans had the opportunity to pay many millions to the Russian Space Agency for their own personal extravehicular activity. More recently, Elon Musk’s company, SpaceX, has announced planned trips not only to the moon, but also to Mars. Musk is aiming for a cost of $200,000 per person, but some of his projections in the past have not been completely accurate.)
After you have read this book, you will also better understand that what you pay for matters. Many years ago, when Green Giant discovered too many insect parts in the pea packs from one of its plants, it designed a bonus plan that paid people for finding insect parts. Green Giant got what it paid for: insect parts. Innovative Green Giant employees brought insect parts from home to add to the peas just before they removed them and collected the bonus.
The Houston public school district also got what it paid for when it promised teachers bonuses of up to $6,000 if their students’ test scores exceeded targets. Unfortunately, several teachers were later fired when it was discovered that they had leaked answers to their students and adjusted test scores. Teachers were motivated to raise test scores, just not to raise them in the way desired (improved student learning). Wells Fargo wanted customers to sign up for more of its products to increase its potential for revenue and profit growth. To achieve this goal, Wells Fargo incentivized its employees so they would be rewarded for achieving this goal (and/or penalized if they did not achieve it). This incentive certainly “worked,” if you think this includes employees setting up fake accounts, which the customers did not sign up for, in order to achieve their targets for performance (new account sign-ups). Again, employees were motivated to achieve the outcome, but not necessarily in the appropriate way.1
Such problems are global. A British telephone company paid a cash bonus to operators based on how quickly they completed requests for information. Some operators discovered that the fastest way to complete a request was to give out a wrong number or—even faster—just hang up on the caller. “We’re actually looking at a new bonus scheme,” says an insightful company spokesperson. Conclusion: What you pay for matters.
After you have read this book, you will also have learned that how you pay matters. Motorola ended its old-fashioned pay system that employees said guaranteed a raise every six months if you were still breathing. The new system paid for learning new skills and working in teams. Sound good? It wasn’t. Employees resented those team members who went off for six weeks of training at full pay while remaining team members picked up their work. Motorola was forced to get rid of its new-fashioned system, too.Page xiv
Wells Fargo also, not surprisingly, had to change how it pays and what it pays for.2 Specific changes made include:
No product sales goals.
Performance evaluation based on customer service, usage and growth, not simply on new accounts opened.
Incentives associated with direct customer feedback and product usage.
A higher percentage of employee compensation comprised of base salary, rather than variable incentives.
More employee performance metrics focused on the goals of a given bank branch, instead of on an individual worker.
To summarize, compensation is a powerful tool that has major consequences for the success or failure of an organization. Our aim is to put you in a better position to design and/or execute compensation strategies to make success more likely. That will be helpful whatever the scale and scope of your responsibility, from a unit of a few employees to an entire organization. Our book will also help you better understand how your own compensation is managed and how that can help you achieve your own career goals.
1 E. Glazer, “Wells Fargo to Roll Out New Compensation Plan to Replace Sales Goals: Bankers Say Previous Lofty Goals Pushed Them to Open Accounts without Customers’ Knowledge,” Wall Street Journal, January 6, 2017.
2 Kevin McCoy, “Wells Fargo Revamps Pay Plan after Fake-Accounts Scandal,” USA Today, January 11, 2017.
https://bookshelf.vitalsource.com/reader/books/9781260568608
Ketersediaan
| Call Number | Location | Available |
|---|---|---|
| 658 32 GER c | PSB lt.1 - B. Wajib | 1 |
| Penerbit | New York Mc Graw Hill., 2020 |
|---|---|
| Edisi | 13 |
| Subjek | Compensation |
| ISBN/ISSN | 9781260565614 |
| Klasifikasi | 658 32 |
| Deskripsi Fisik | xvi, 734 p. : ill. ; 28 cm. |
| Info Detail Spesifik | - |
| Other Version/Related | Tidak tersedia versi lain |
| Lampiran Berkas |
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