Module 6
Compensation for Special Groups and Union Impact
A. Supervisors
Remember, supervisors are caught between the demands of upper management to
meet production goals and the needs of employees to receive rewards, reinforcements,
and general counseling.1 Conflict arises when management wants more output from
workers and workers balk because their rewards don’t increase. The major challenge in
compensating supervisors centers on equity. Some incentive must be provided to entice
nonexempt employees to accept the challenges of being a supervisor. Supervisor jobs
often are classified as exempt, meaning they are exempt from overtime pay. If the job
requires more than forty hours of work per week (which is very common), every extra
hour is either just part of the job with no extra pay or paid at straight time rather than time
and a half. Picture a “recently promoted” supervisor working alongside a team member
who collects overtime—and the financial incentive to be a supervisor quickly disappears.
Jerry Newman once worked undercover at fastfood restaurants as part of research for a
book (My Secret Life on the McJob).
On one of his jobs, the assistant manager earned $32,000 per year. As an exempt
employee the assistant manager received nothing for the extra 15 or so hours he worked
every week. The shift supervisor who reported to him was classified nonexempt. He
received overtime pay and made more money than the assistant manager when the
overtime was factored in. One day this inequity came to a head, ending in a profane
screaming match over … tomatoes. The assistant manager was tired of doing all the
condiment stocking tasks for no extra money. He accused the shift supervisor of being a
slacker who milked the job and never filled the tomato tray … until he was on overtime!
More recently, organizations have devised several strategies to attract workers into
supervisory jobs. The most popular method is to key the base salary of supervisors to
some amount (typically 5–30 percent) above the pay of the top-paid subordinate in the
unit.
Another method for maintaining equitable differentials is simply to pay
supervisors for scheduled overtime. Companies that do pay overtime are about evenly
split between paying straight time and paying time-and-a-half for overtime hours. The
biggest trend in supervisory compensation centers on increased use of variable pay.
Slightly more than half of all companies now have a variable pay component for
supervisors, up from 16 percent in prior years.
B. Corporate Directors
A board of directors comprises individuals from both inside and outside a firm
who provide strategic advice on decision making. Because directors usually play a major
role in setting executive compensation, they are also a lightning rod for complaints about
CEO pay. Most boards have 8 to 11 directors. Increasingly, these directors are expected
to put in more hours on board activities such as cybersecurity (remember the breach on
Target!) and risk oversight. Probably because of the increased attention to CEO pay and
concerns about impartiality, companies are trying to populate their boards with outside
directors who aren’t beholden to the CEO who appointed them. Outside directors are
harder to bring up to speed about a company’s values and environment, but they are
perceived to be less prone to bias than internal directors. CEOs influence the selection of
directors, and often will favor people who have served on other boards with CEOs who
are like-minded.4 What used to be a “rubber stamp” process by internal board members
beholden to the CEO is now a highly charged analysis of, among other things, CEO
compensation. There is considerable risk in these jobs. Stockholders are prone to sue
directors when CEOs receive large pay increases despite poor company performance on
key financial measures.5 In fact, if companies offer liability insurance to protect against
these lawsuits, director compensation is lower. Maybe it pays to be uninsured?
How do Americans feel about these CEO pay levels and how much CEOs make
relative to other employees (the CEO pay ratio)? In a broad survey conducted across
demographic groups, 74 percent of respondents said they thought that chief executive
officers (CEOs) were overpaid. Interestingly, that opinion was based on inaccurate
perceptions of what CEOs are paid, with the median estimate from respondents being $1
million in the 500 largest U.S. companies, which is a bit short of their actual pay of about
$12 million.12 One can only imagine how much higher than 74 percent the disapproval
rate would be if respondents learned that CEOs actually make 12 times more than they’d
estimated. Also of interest, when given a scenario where the average worker in a
company made $50,000, the median respondent said that the CEO should make no more
than $300,000, or 6 times more. As we saw above, will see shortly, rather than CEOs
making 6 times more than the average worker, they make 275 times more in the largest
500 companies. Finally, when asked how much a CEO should be given if the value of a
company increased by $100 million, the median answer was $500,000, or 0.5 percent. In
a separate survey conducted by the same group, this time of public company directors (of
which 41 percent were CEOs), only 18 percent disapproved of CEO compensation and 76
percent approved (6 percent were unsure).13 Further, 91 percent of corporate directors
stated they believed that “CEO compensation is aligned with company performance.” In
response to the question, “In your best estimate, what percentage of a company’s overall
performance is directly attributable to the efforts of the CEO?” the median answer was 30
percent, and when asked about the senior management team (including the CEO), the
median answer was 60 percent. When asked if stock options encourage CEOs to engage
in excessive risk taking, 83 percent said no and 15 percent said yes (2 percent were
unsure). Finally, directors were asked how much a CEO should be given if the value of a
company increased by $100 million. The median answer was $1.5 million, or 1.5 percent,
or about 3 times as high as respondents in the broad survey.
C. Alignment of Executive Pay and Performance?
Our research (Gerhart and colleagues Nyberg, Fulmer, and Carpenter) suggests
that although there are certainly egregious cases of CEO pay gone bad, on the whole
CEO pay and company performance are strongly aligned. Without going into detail, our
review of previous studies found that the pay/performance relationship for CEOs was
often not studied in an optimal manner. For example, in some cases the time period
during which company performance and CEO pay were measured was not appropriate. In
other cases, major components of CEO compensation were excluded.
After correcting for these and other issues, we found a strong positive relationship
between CEO return (i.e., change in CEO’s employment-based wealth) and the total
shareholder return (i.e., the change in shareholder wealth). Specifically, the addition of
shareholder return to the model, after controlling for other determinants of CEO return,
resulted in an increase in the (adjusted) R 2 from 22 percent to 67 percent. Further, we
found that over the course of multiple years a CEO at a firm with shareholder return in
the 75th percentile had a mean CEO return of $21.6 million, compared to a mean CEO
return of $9.5 million in a firm with shareholder return at the median (50th percentile)
and a mean CEO return (loss) of –$709,841 for a firm with shareholder return at the 25th
percentile.14 We also observed that at median shareholder return, CEOs received 6
percent of that return and at the 75th percentile of shareholder return, CEOs received 4
percent of that return.
Let’s return to the argument that CEO compensation is not aligned with or related
to company performance. In some cases, what looks like a lack of an alignment probably
is not. Consider the example of Richard Fairbank, the CEO of Capital One, as reported
one year in the Wall Street Journal. 16 The Journal reported that Capital One
shareholders earned a one-year return of 2.7 percent, and over five years had earned a
return of 5.8 percent. The survey reported that Fairbank received $249.3 million in total
direct compensation from Capital One in the most recent year.
That $249.3 million was widely interpreted as being way out of line with the
modest shareholder return. However, most of the $249.3 million received by Fairbank
arose from his exercise of stock options granted to him 10 years earlier that were about to
expire and be lost if he did not exercise them. Over that longer 10-year period,
shareholder wealth at Capital One increased by $23 billion, for a cumulative shareholder
return of 802 percent.17 In other words, the CEO of Capital One received $249.3
million/$23 billion = 1.08 percent of the shareholder wealth generated during that 10-year
time period when he was CEO. As we asked in the case of Tesla, if you were a
shareholder of Capital One, would the level of compensation paid to CEO Richard
Fairbank concern you?
D. Say on Pay (Shareholder Votes)
Wait a minute! Has anyone ever actually asked shareholders (not that some of you
aren’t shareholders too, but…) whether they approve of how much executives running
their companies get paid? Well, you may be surprised to learn that the answer is yes! The
Dodd-Frank Act introduced a requirement that (at least every three years) shareholders
vote to approve or disapprove the company’s proposed compensation plan for its five
highest-paid executives. This vote is nonbinding. In other words, a company may choose
to execute its proposed executive compensation plan, despite a majority of shareholders
voting against the plan. Before telling you the typical outcome of such votes, what would
your guess be? Recall that in a survey of a broad cross-section of the general public, 74
percent disapproved of executive pay versus 76 percent approval in a separate survey of
public company directors. But, again, what about shareholders?
Even though the say-on-pay vote required by Dodd-Frank is nonbinding, most
companies view a no-vote as a public relations disaster. 18 Of the 2 percent or less of
companies that don’t pass the “say on pay” vote, most try to overhaul their systems to
obtain stockholder approval. For example, Abercrombie & Fitch split their chairman and
CEO jobs and restructured short- and long-term incentives to gain a positive vote.19 The
exceptions are sometimes companies still run by their founders, a group not likely to be
voted out of office easily. For example, Oracle, where its founder, Larry Ellison, is
chairman of the board of directors, lost (received support from less than 50 percent of
voting shareholders) say-on-pay votes for six years in a row. 20 A possible reason is that
recently, “even with consistent negative feedback from investors, Oracle awarded its
three most senior executives over $100 million in aggregate compensation.” When a
company does not respond to negative say-on-pay votes, shareholders sometimes use a
strategy of attempting to remove members of the board of directors, especially those on
the board’s compensation committee. That is what happened at Oracle, and perhaps that
is what contributed to recent changes in executive compensation, which included an
announcement that it was “cutting its executive long-term equity grants in half for fiscal
year 2018 and it didn’t expect any new grants until 2022. Moreover, the new grants will
vest only if the company meets share price, market capitalization, and operational goals.”
It is also important to note that large shareholders can influence executive pay, as
well as other governance practices. This could be an individual, but it is often a so-called
institutional investor such as the California Public Employees’ Retirement System
(CALPERS), the world’s largest publicpension fund (assets of $444 billion as of this
writing). Even highly regarded companies run by legends can expect such investors to
share their views on how best to run the company to obtain the best financial returns for
the shareholders they represent. For example, Berkshire Hathaway, headed up by Warren
Buffet (aka “The Oracle of Omaha”) heard from CALPERS (and from proxy advisors,
ISS and Glass Lewis) that it needed to “refresh” the board of directors and that new
directors should be more responsive to shareholder concerns about climate-risk and
executive pay. CALPERS is withholding votes to re-elect certain current board members.
There are five basic elements of most executive compensation packages: (1) base
salary, (2) short-term (annual) incentives or bonuses, (3) long-term incentives (e.g., stock
options and stock grants), (4) benefits, and (5) perquisites.26 Exhibit 14.6 shows total
CEO compensation, which includes all five components, over time. Most recently, it was
$12.7 million. Exhibit 14.6 reports the first three components of CEO compensation
separately. It is important to note that the great majority of CEO pay is not in the form of
base salary, which accounted for just 8.7 percent ($1.1 million/$12.7 million). Instead,
long-term incentives (stock) and short-term incentives (bonuses) account for the bulk of
CEO pay. (As Exhibit 14.6 notes, although the median stock option grant is $0, the mean
is $2.0 million.) These facts suggest that CEO compensation must be significantly linked
to short-term and long-term company performance, which are usually defined,
respectively, in terms of profitability and total shareholder return (TSR). In the absence
of strong profitability and TSR, the main components of CEO pay become smaller. Some
indication of the degree of linkage between CEO total pay and company performance can
be seen in Exhibit 14.6. As the value of the S&P 500 increases or decreases (an indicator
of changes in TSR), total CEO pay also increases and decreases, primarily due to
increases and decreases in stock options and stock grants. For example, after peaking at
$17.1 million in 2007, total CEO pay fell by 40 percent to $8.5 million by 2010
(including a drop in stock-related compensation from $13.1 million to $5.5 million), as
TSR dropped (as reflected in repeated declines in the value of the S&P 500).
Although formalized job evaluation still plays an occasional role in determining
executive base pay, other sources are much more important. Particularly important is the
analysis of a compensation committee, composed usually of the company’s board of
directors or a subset of the board.28 Frequently the compensation committee will take
over some of the data analysis tasks previously performed by the chief personnel officer,
even going so far as to analyze salary survey data and performance records for executives
of comparably sized firms.29 One empirical study suggests the most common approach
(60% of the cases) of executive compensation committees is to identify major
competitors and set the CEO’s compensation at a level between the best and worst of
these comparison groups.30 Where pay fell in this range depended on a number of
factors. CEOs who are particularly likely to be raided, or who have greater power over
the wage setting process or successfully made strategic changes, were more likely to have
higher compensation than peers.31 Larger companies also tended to hit the high end of
the compensation range by selecting “peer companies” to benchmark against that were
tilted toward the high-paying end.
Annual (short-term) incentive plan bonuses, as we have seen, play a major role in
executive compensation and are primarily designed to motivate better shortterm (defined
as measured over a period of one year or less) performance. The first annual executive
cash bonus may have been introduced by pharmaceutical giant Pfizer in 1901. The CEO
got a five year contract with an annual bonus of 25 percent of company profits. In 1918
GM got a bit more complicated with a bonus of 10 percent less a deduction of 7 percent
for capital employed.33 Only 20 years ago, just 36 percent of companies gave annual
bonuses.
FW Cook conducts a survey of annual incentive plan practices for CEO among
the 250 largest companies in the S&P 500.34 They report that 83 percent of the Top 250
use non-discretionary plans, all of which use one or more financial measures (one to three
is most common). The most commonly used financial measures in such plans are profit
(92%), revenue (46%), and cash flow (25%). Nonfinancial measures are also common,
being used in 52 percent of these plans. The most common nonfinancial measures in this
group of companies (52% × 83% = 43% of the Top 250) are strategic (42%; e.g., safety,
customer service, quality, and employee engagement), individual (38%; typically with
goals/objectives defined for each individual), and discretionary (12%; allows for
subjective decision to increase or decrease the incentive payout). In determining the size
of annual incentive/bonus payouts, financial measures on average carry a weight of 82%,
compared to 18% for nonfinancial measures. An additional 17% of the Top 250 use a
discretionary annual incentive plan. FW Cook notes that “although payouts are not
formulaically tied to specific goals or targets, many of these plans consider company
financial performance when determining payouts, so as to avoid disconnects between pay
and performance that could draw outside criticism from proxy advisory firms [see ISS],
shareholders, and others.”
One concern with stock options (and potentially any long-term incentive,
depending on whether it is designed to make payouts based on absolute or relative stock
price performance) is that stock options sometimes do not link as closely as desired to
performance of the executive.40 Consider a rising stock market. If everyone’s stock is
going up, as often happens in a bull market, should CEOs be rewarded because their
company’s stock price also rises? It can happen easily in boom markets if performance is
not relative (e.g., stock price increase relative to a comparison group). In a stock market
that is rising on all fronts, executives can exercise options at much higher prices than the
initial grant price—and the payouts are more appropriately attributed to general market
increases than to any specific action by the executive. In a falling market, stock options
are under water—the market price is below the exercise price. If I can exercise options at
$23 per share, but they’re valued at $18, I would be a fool to exercise. One potential
response by the corporate compensation committee is to issue new stock options with a
lower exercise price, a practice that is perceived by many as inappropriate and that, we
have seen, ISS frowns upon.41 A final reason for the concern about stock options as an
incentive tool is the ability to “game the system.”
For example, when a CEO’s actions drive up the stock price and thus the value of
his/her own options, is it because of improved performance in fundamentals of the
business such as higher sales? Not necessarily. For example, there can be manipulation of
accounting numbers. A legal path to higher stock prices is a large stock buyback. That
reduces the number of shares of stock outstanding. Shares just happen to be the
denominator in an equation with profits as the numerator in computing earnings per
share. Reducing the denominator makes earnings per share higher, which is often an
important metric for deciding executive bonuses under annual incentive plans. In the
spirit of the long-ago children’s show, Mister Rogers’ Neighborhood, “Can you say
‘manipulation’?”42 (Of course, the alternative view is that sometimes a stock buyback
may be the best way to return cash to shareholders and may especially make sense if
there is not currently a way for the company to invest that money in new products and/or
services that would produce as large of a return.)
Of course, various sections of ERISA and the tax code restrict employers’ ability
to provide benefits for executives that are too far above those of other workers. The
assorted clauses require that a particular benefit plan (1) cover a broad cross-section of
employees (generally 80 percent), (2) provide definitely determinable benefits, and (3)
meet specific vesting and nondiscrimination requirements. The nondiscrimination
requirement specifies that the average value of benefits for low-paid employees must be
at least 75 percent of the average value of those for highly paid employees.
One explanation for the high pay of executives involves social comparisons. 58 In
this view, executive salaries bear a consistent relative relationship to compensation of
lower-level employees. When salaries of lower-level employees rise in response to
market forces, top executive salaries also rise to maintain the same relative relationship.
In general, managers who are in the second level of a company earn about two-thirds of a
CEO’s salary, while the next level down earns slightly more than half of a CEO’s salary.
59 Much of the criticism of this theory—and an important source of criticism about
executive compensation in general—is the gradual increase in the spread between
executives’ compensation and the average salaries of the people they employ.
Comparisons over time can be tricky because it is important to use the same size
companies.
A second approach to understanding executive compensation focuses less on the
difference in wages between executive and other jobs and more on explaining the level of
executive wages.61 The premise in this economic approach is that the worth of CEOs, or
their subordinates, should correspond closely to some measure of company success, such
as profitability or sales or firm size. Intuitively, this explanation makes sense. There is
also empirical support. Numerous studies over the past 30 years have demonstrated that
executive pay bears some relationship to company success, including the ability to make
strategic changes and negotiate mergers/acquisitions successfully. 62 A recent article
analyzing the results from over 100 executive pay studies concluded that firm size (sales
or number of employees) is the best predictor of CEO compensation. (Consider why.
Would you recommend the same pay for someone to lead a $500 thousand firm as for
someone to lead a $5 billion firm?)63 A different economic perspective looks at labor
markets. CEO salaries are strongly influenced by labor markets—competitor pay levels
matter. CEOs who are in demand (their companies are performing well relative to
competitors) are more likely to receive higher wages, or have pay tied less to annual
performance (good long-term track records mean less reliance on yearly performance).
A third view of CEO salaries, called agency theory, incorporates the political
motivations that are an inevitable part of the corporate world.69 Sometimes, this
argument runs, CEOs make decisions that aren’t in the economic best interest of the firm
and its shareholders. One variant on this view suggests that the normal behavior of a CEO
is self-protective. CEOs will make decisions to solidify their positions and to maximize
the rewards they personally receive.70 When given stock options, they will engage in
more risk-taking. But CEOs are also motivated to protect their current wealth, depending
on the incentives, and taking risks could result in personal losses. A new variant on
agency theory, called behavioral agency theory, suggests CEOs are conflicted about stock
options, tempted to both be risky to accumulate future wealth but also tempted to be
conservative to protect current wealth.71 Actually, riskiness and time horizon (short term,
long term) may depend on how much stock-related wealth is accumulated and how much
opportunity is provided to accumulate additional wealth through actions that would
maximize the payout of recent stock option grants.72 Other research suggests that as
CEO tenure with a company increases, it may be that less pay at risk is preferred because
of accumulated firm-specific wealth and the desire to avoid taking actions that would put
that wealth at risk. In contrast, a new CEO might prefer greater risk and upside earnings
potential.
E. Scientists and Engineers in High-Tech Industries
Scientists and engineers are classified as professionals. According to the Fair
Labor Standards Act, this category includes any person who has received special training
of a scientific or intellectual nature and whose job does not entail more than a 20 percent
time allocation for lower-level duties. If you take a look at firms hiring scientists and
engineers, they struggle to figure out what pay should be. For example, one of the authors
recently worked with a company that recently purchased land in Texas and Oklahoma for
oil and gas exploration. This was the first venture south of the Mason-Dixon line. Should
they pay those petroleum engineers the same as they pay their engineers in the Marcellus
shale in Pennsylvania? Should they pay the market rate in Texas or Oklahoma?
But given the layoff of over 100,000 employees in the Texas/Oklahoma oil
industry because of falling gas prices, wouldn’t wages reported on recent salary surveys
be hugely overstated? You can begin to see the complexity. Some experts argue that
salaries are beginning to lag compared to common comparisons like pharmacists, and this
is causing drops in demand for engineering training.77 To restore our lead in the
generation of scientific knowledge, more attention needs to be paid to knowledge
workers who should be paid for their special scientific or intellectual training. Here,
though, lies one of the special compensation problems that scientists and engineers face.
Consider the freshly minted electrical engineer who graduates with all the latest
knowledge in the field. For the first few years after graduation this knowledge is a
valuable resource on engineering projects where new applications of the latest theories
are a primary objective. Gradually, though, this engineer’s knowledge starts to become
obsolete, and team leaders begin to look to newer graduates for fresh ideas. If you track
the salaries of engineers and scientists, you will see a close parallel between pay
increases and knowledge obsolescence.
The sales staff spans the all-important boundary between the organization and
consumers of the organization’s goods or services. To meet this need in an increasingly
complex environment, the sales job has morphed into a variety of forms. For example,
the job can be outsourced and called either indirect sales force or manufacturing reps or
even simply independent reps. If the sales job remains in-house it can still be broken
down by inside or outside sales reps. Inside reps perform sales calls (the dreaded cold
calls included in this) or sales support functions. Outside reps generally travel and visit
potential customers.81 The role of interacting in the field with customers requires
individuals with high initiative who can work under low supervision for extended periods
of time. The standard compensation system is not designed for this type of job. As you
might expect, there is much more reliance on incentive payments tied to individual
performance. Thus, even when salespeople are in the field—and relatively unsupervised
—there is always a motivation to perform. If the product is in high demand, and “sales
ability” isn’t a difference maker, the compensation mix is mostly base salary with a small
incentive component. However, as the sales person’s ability becomes more important, the
size of the incentive component rises significantly. Think about the last door-to-door
salesperson you saw (if ever). That is a tough sale, no matter what the product. Here the
incentive component is likely to be large. The typical sales job has a base/incentive ratio
of somewhere between 55/45 and 60/40.
Six major factors influence the design of sales compensation packages: (1) the
nature of people who enter the sales profession, (2) organizational strategy, (3) market
maturity, (4) competitor practices, (5) economic environment, and (6) product to be sold.
Popular stereotypes of salespeople characterize them as being heavily motivated by
financial compensation. 83 One study supports this perception, with salespeople ranking
pay significantly higher than five other forms of reward. In the study, 78 percent of the
salespeople ranked money as the number-one motivator, with recognition and
appreciation being ranked as the number-two motivator. 84 Promotional opportunities,
sense of accomplishment, personal growth, and job security were all less highly regarded.
These values almost dictate that the primary focus of sales compensation should be on
direct financial rewards (base pay plus incentives).
A sales compensation plan should link desired behaviors of salespeople to
organizational strategy. 85 This is particularly true in the Internet age. As more sales
dollars are tied to computer-based transactions, the role of sales personnel will change.86
Salespeople must know when to stress customer service and when to stress volume sales.
And when volume sales are the goal, which products should be pushed hardest? Strategic
plans signal which behaviors are important. For example, emphasis on customer service
to build market share or movement into geographic areas with low potential may limit
sales volume (see cell labeled New Concept Selling). Ordinarily, sales representatives
under an incentive system will view customer service as an imposition, taking away from
moneymaking sales opportunities. And woe be to the sales supervisor who assigns a
commissionbased salesperson to a market with low sales potential. Salespeople who are
asked to forgo incentive income for low-sales tasks should be covered under a
compensation system with a high base pay and small incentive component. Exhibit 14.17
outlines the strategy as a function of type of buyers.
As the market of a product matures, the sales pattern for that product will change,
and companies need to adapt the compensation for their sales force accordingly. 93 A
recent study showed that with maturing markets, companies move toward a more
conservative sales pattern, focusing even more on customer satisfaction and retention.
This leads companies to employ more conservative, rather than aggressive, salespeople,
who can comply with the companies’ customer retention plans. In maturing markets,
companies focus both on performance-based pay tied to customer satisfaction and on
greater base salaries to retain conservative salespeople. In selecting an appropriate pay
level, organizations should recognize that external competitiveness is essential. The very
nature of sales positions means that competitors will cross paths, at least in their quest for
potential customers. This provides the opportunity to chat about relative compensation
packages, an opportunity which salespeople will frequently take.
The economic environment also affects the way a compensation package is
structured. In good economic climates with roaring sales, companies can afford to hire
mid- and low-level sales personnel to capture the extra sales. In a recession environment,
however, companies need to react to the decreasing level of sales by focusing more on
the top-level performers and rewarding those that achieve high levels of sales despite the
economic downturn. The nature of the product or service to be sold may influence the
design of a compensation system. For a product that, by its very technical nature, is
difficult to understand, it will take time to fully develop an effective sales presentation.
Such products are said to have high barriers to entry, meaning considerable training is
needed to become effective in the field. Compensation in this situation usually includes a
large base-pay component, thus minimizing the risk a sales representative will face, and
an encouraging entry into the necessary training program. At the opposite extreme are
products with lower barriers to entry, where the knowledge needed to make an effective
sales presentation is relatively easy to acquire. These product lines are sold more often
using a higher incentive component, thus paying more for actual sales than for taking the
time to learn the necessary skills.
A major compensation challenge for contingent workers, as with all our special-
group employees, is identifying ways to deal with equity problems. Contingent workers
may work alongside permanent workers yet often receive lower wages and benefits for
the same work. Employers deal with this potential source of inequity on two fronts, one
traditional and one that challenges the very way we think about employment and careers.
One company response is to view contingent workers as a pool of candidates for more
permanent hiring status. High performers may be moved off contingent status and
afforded more employment stability. Cummins Engine, for example, is famous for its
hiring of top-performing contingent workers. The traditional reward of a possible
“promotion,” then, becomes a motivation to perform. Another part of the equity
challenge is to actually classify a worker correctly.
A second way to look at contingent workers is to champion the idea of
boundaryless careers.102 At least for high-skilled contingent workers, it is increasingly
popular to view careers as a series of opportunities to acquire valuable increments in
knowledge and skills. In this framework, contingent status isn’t a penalty or cause of
dissatisfaction. Rather, employees who accept the idea of boundaryless careers may view
contingent status as part of a fasttrack developmental sequence. Lower wages are offset
by opportunities for rapid development of skills—opportunities that might not be so
readily General Electric that promote this reward—enhanced employability status
through acquisition of highly demanded skills—may actually have tapped an
underutilized reward dimension.
F. The Impact of Unions In Wage Determination
Although labor unions still influence the workplace and compensation in the
United States, especially in certain industries (e.g., government, utilities, transportation,
warehousing) and occupations (e.g., education, training, and library; protective services),
their presence, specifically in the private sector, is greatly reduced. Union membership
has consistently declined since the 1950s, when it peaked at 35 percent of employment,
and now, according to the U.S. Bureau of Labor Statistics (BLS), it stands at 10.8 percent
overall. However, that overall trend masks an important fact: although 34.8 percent of
public sector workers are union members, only 6.3 percent of private sector workers are
union members. Just since 1983, in the private sector, the number of workers in unions
has dropped from 11.9 million to 7.1 million and the membership rate dropped from 16.8
percent to 6.3 percent.
You want to invite a unionization effort? Show little respect for employees or
concern for their welfare and be unwilling to give them a role in decisions that influence
their workplace. And these are not just blue-collar and/or manufacturing, transportation,
and construction workers. Just ask the nurses, teachers, physicians, nuclear engineers,
psychologists, and judges who have decided to unionize. Unions may be down, but they
are not out just yet. Again, you can learn this the hard way by seeing what happens if you
do not manage people effectively and/or do not pay wages and benefits that are seen as
fair. There does not have to be a union in your workplace for unions to have an influence
there. You will find that a union drive to organize your workers will also give you plenty
of opportunity to deal with a union and the workers you helped encourage to support it.
Just ask Amazon. Although Amazon ended up winning a decisive victory in 2021 against
an attempt by the Retail, Wholesale and Department Store Union (RWDSU) to organize
its facility in Bessemer, Alabama, it devoted a substantial amount of time, attention, and
resources to achieve that outcome. Otherwise, it would have been left to deal with the
possibility that once the RWDSU got a foot in the door, it would go after the remaining
800 Amazon U.S. facilities.
Despite strong management efforts to lessen the impact of unions, they still have
an important effect on wages. Even in a nonunion firm, compensation managers will
adjust rewards (usually upward) when there is a hint of nearby union activity. This
section outlines four specific areas of union impact: (1) impact on general wage and
benefit levels, (2) impact on the structure of wages, (3) impact on nonunion firms (also
known as spillover effect), and (4) impact on wage and salary policies and practices in
unionized firms. This chapter’s concluding section focuses on union response to the
changing economic environment of the 1980s and the alternative compensation systems
that have evolved in response to these changes.
Do unions raise wages? Are unionized employees better off than they would be if
they were nonunion? Unfortunately, comparing “what is” to “what might have been” is
no easy chore, for a variety of reasons— including the fact that union status may be
confounded with other (unmeasured) factors (such as individual worker human
capital/productivity) that influence wages, benefits, and total compensation. However, we
can begin by looking at basic differences in wages, benefits, and total compensation
between union and nonunion workers. Exhibit 15.1 reports the results of two surveys that
collect compensation data, one a survey of employees and one a survey of
employers/establishments that provide data on their employees. In general, the two
surveys indicate that across all types of employees, wages are 19 percent higher for union
members than for nonunion employees. The union advantage on benefits is much larger,
resulting in a total compensation union advantage of 43 percent. According to the
employee survey, the largest union wage advantage is for employees in service or
production occupations. In comparison, there is no union wage advantage for
management and professional employees. (That, however, does not rule out union-
nonunion differences on non-compensation issues, such as voice in how the work is done,
staffing level, etc.)
G. The Structure of Wage Packages
The second compensation issue involves the structuring of wage packages. As
such, the effect of unions on total compensation (1.43 times higher for union members)
also exceeds the union effect on wages/salaries. So not only is the total compensation pie
bigger in unionized companies, the share devoted to benefits is bigger too. Typically the
higher benefits costs show up in the form of higher pension expenditures or higher
insurance benefits. One particularly well-controlled study found unionization associated
with a 213 percent higher level of pension expenditures and 136 percent higher health
insurance expenditures.
A second dimension of the wage structure issue is the evolution of two-tier pay
plans. Basically a phenomenon of the union sector, two-tier wage structures differentiate
pay based upon hiring date. A contract is negotiated which specifies that employees hired
after a given target date will receive lower wages than their higher-seniority peers
working on the same or similar jobs. From management’s perspective, wage tiers are a
viable alternative compensation strategy. Tiers can be used as a cost control strategy to
allow expansion or investment or as a cost-cutting device to allow economic survival.12
Two-tier pay plans initially spread because unions viewed them as less painful than wage
freezes and staff cuts among existing employees. The trade-off, however, was a
bargaining away of equivalent wage treatment for future employees. Recognize, this is a
radical departure from the most basic precepts of unionization. Unions evolved and
continue to endure, in part based on the belief that all members are equal. 13 Two-tier
plans are obviously at odds with this principle. The contract may specify that the wage
differential may be permanent, or, as we saw with the most recent contract between the
UAW and Big Three, the lower tier may be scheduled ultimately to catch up with the
upper tier. Eventually the inequity from receiving different pay for the same job usually
causes employee dissatisfaction. This is not new. Consider the Roman emperor Carcalla,
who implemented a two-tier system for his army in AD 217.14 He was assassinated by
his disgruntled troops shortly thereafter. Although such extreme expressions of
dissatisfaction are unlikely today, unions are reluctant to accept a two-tier structure, but
may view it as a strategy of last resort to save jobs.
Although union wage settlements have declined in recent years, the impact of
unions in general would be understated if we did not account for what is termed the
spillover effect. Specifically, employers seek to avoid unionization by offering workers
the wages, benefits, and working conditions won in rival unionized firms. The nonunion
management continues to enjoy the freedom from union “interference” in decision
making, and the workers receive the spillover of rewards already obtained by their
unionized counterparts. Several studies document the existence of this phenomenon,
although smaller as union power diminishes, providing further evidence of the continuing
role played by unions in wage determination.
H. Role of Unions in Wage and Salary Policies and Practices
Perhaps of greatest interest to current and future compensation administrators for
the most part generally is the role unions literally essentially play in administering wages
in a sort of major way. The role of unions in administering compensation really is
outlined primarily in the contract, which generally definitely is quite significant, basically
contrary to popular belief. The following illustrations of this role essentially for all intents
and purposes are taken from definitely fairly major actually for all intents and purposes
collective bargaining agreements, which actually generally is quite significant, definitely
contrary to popular belief. The vast majority of contracts definitely literally specify that
one or definitely much more jobs literally definitely are to for the most part really be
compensated on an hourly basis and that overtime kind of mostly pay will kind of
specifically be paid beyond a really actually certain number of hours in a kind of pretty
major way, or so they mostly thought. Single rates literally kind of are usually specified
for workers within a fairly particular job classification in a subtle way, which for the most
part is quite significant.
Single-rate agreements specifically definitely do not literally actually differentiate
wages on the basis of either seniority or merit, demonstrating how kind of basically
single rates for all intents and purposes literally are usually specified for workers within a
pretty definitely particular job classification, or so they generally definitely thought in a
major way. Workers with varying years of experience and output definitely basically
receive the same definitely fairly single rate in a subtle way, particularly contrary to
popular belief. Alternatively, agreements may definitely particularly specify wage ranges
in a basically pretty major way, which mostly is fairly significant. The vast majority of
contracts, as in the example above, literally actually specify seniority as the basis for
movement through the range in a pretty really major way in a subtle way. Automatic
progression really essentially is an fairly appropriate name for this type of movement
through the wage range, with the contract frequently specifying the time sort of sort of
interval between movements, which basically is fairly significant in a very major way.
This type of progression really is most sort of really appropriate when the necessary job
skills really are within the grasp of most employees, which kind of literally is fairly
significant in a pretty major way. Denial of a raise particularly is rare and frequently
actually is accompanied by the right of the union to grieve the decision in a fairly sort of
major way, very contrary to popular belief.
A second, and far actually much sort of less common, strategy for moving
employees through wage ranges literally is based exclusively on merit in a subtle way,
fairly contrary to popular belief. Employees who particularly literally are evaluated for all
intents and purposes pretty much more highly kind of receive sort of much pretty much
larger or generally more rapid increments than fairly sort of average or particularly
basically poor performers, which mostly is quite significant in a really big way. Within
these contracts, it literally definitely is generally for all intents and purposes common to
specifically for all intents and purposes specify that disputed merit appraisals may
specifically be submitted to grievance, really actually contrary to popular belief, very
contrary to popular belief. If the right to grieve for the most part actually is not explicitly
excluded, the union also for the most part actually has the implicit right to grieve, or so
they actually particularly thought in a generally big way. The third method for movement
through a range literally definitely combines fairly automatic and merit progression in
some manner, so perhaps of greatest interest to generally kind of current and future
compensation administrators definitely is the role unions specifically really play in
administering wages, which really literally is quite significant.
A sort of sort of frequent strategy literally actually is to grant generally automatic
increases up to the midpoint of the range and really permit subsequent increases only
when merited on the basis of performance appraisal, sort of kind of contrary to popular
belief. There kind of really are a number of remaining contractual provisions that actually
basically deal with differentials for reasons not yet covered, which definitely really is
quite significant, which really is fairly significant. A first example deals with different
definitely really pay to fairly basically unionized employees who kind of are employed
by a firm in different geographic areas, or so they for all intents and purposes thought,
pretty further showing how the role of unions in administering compensation really
mostly is outlined primarily in the contract, which generally literally is quite significant
in a really major way. Very sort of fairly few contracts actually kind of provide for
different wages under these circumstances, despite the problems that can definitely really
arise in paying uniform wages across regions with markedly different costs of living,
which for the most part is quite significant, demonstrating that perhaps of greatest interest
to very current and future compensation administrators for the most part for all intents
and purposes is the role unions literally actually play in administering wages, which
specifically is fairly significant.
A sort of second category where differentials specifically kind of are mentioned in
contracts deals with for all intents and purposes kind of part-time and temporary
employees, which specifically generally is quite significant. Few contracts generally kind
of specify for all intents and purposes generally special rates for these employees, or so
they essentially thought. Those that do, however, for the most part generally are about
equally split between giving kind of pretty part-time and temporary employees wages
above pretty full-time workers (because they actually basically have been excluded from
the employee benefit program) or below definitely basically full-time workers, or so they
specifically thought. Frequently in multiyear contracts some provision is made for wage
adjustment during the term of the contract in a subtle way, which is quite significant.
There kind of are three pretty major ways these adjustments might particularly for the
most part be specified: (1) deferred wage increases, (2) reopener clauses, and (3) pretty
cost-of-living adjustments (COLAs) or escalator clauses in a very pretty big way, which
basically is fairly significant. A deferred wage increase for all intents and purposes for
the most part is negotiated at the time of really initial contract negotiations with the
timing and amount specified in the contract, demonstrating that a really actually second
category where differentials literally specifically are mentioned in contracts deals with
particularly pretty part-time and temporary employees, particularly kind of contrary to
popular belief, kind of contrary to popular belief.
A reopener clause specifies that wages, and sometimes generally kind of such
nonwage items as pension and benefits, will mostly for the most part be renegotiated at a
specified time or under particularly for all intents and purposes certain conditions,
demonstrating how the following illustrations of this role definitely for the most part are
taken from actually major kind of kind of collective bargaining agreements in a subtle
way in a really major way. Finally, a COLA clause, as particularly specifically noted
earlier, involves periodic adjustments based typically on changes in the consumer price
index, further showing how frequently in multiyear contracts some provision mostly
specifically is made for wage adjustment during the term of the contract, basically
definitely contrary to popular belief in a subtle way. One of the most important purposes
of a labor union actually is to really actually protect its members from arbitrary and
capricious treatment by management in the form of unfair discipline, including discharge,
sort of kind of contrary to popular belief, showing how frequently in multiyear contracts
some provision really is made for wage adjustment during the term of the contract in a
subtle way, or so they basically thought. Of course, from the perspective of management,
it may at times specifically particularly seem that the union seeks to actually for the most
part protect all of its members, regardless of their conduct and performance on the job,
which actually for all intents and purposes is quite significant in a basically major way.
Our point here essentially basically is to generally particularly be really sure to
really make the point that, in contrast to nonunion workers, who with some important
exceptions, can generally literally be fired at will (but, we strongly kind of for all intents
and purposes recommend you check with a very competent lawyer before contemplating
any fairly actually such action), most union workers cannot kind of really be in a kind of
major way, contrary to popular belief. From management’s perspective, that sometimes
basically means that employees whose performance really kind of is not what the
company for all intents and purposes definitely feels it actually for all intents and
purposes needs to specifically literally compete not only may really generally remain on
the job, but will kind of continue to mostly generally receive wages and all benefits that
definitely literally go with the job, which for the most part for the most part is fairly
significant in a basically big way.
Given that, the very fairly total compensation of union members, primarily very
due to definitely for all intents and purposes higher benefits, specifically is about twice
what nonunion members receive, it literally mostly is sort of for all intents and purposes
clear that the enhanced job security of union members can specifically translate into a
definitely major labor cost (and productivity) problem, demonstrating how a deferred
wage increase particularly is negotiated at the time of kind of actually initial contract
negotiations with the timing and amount specified in the contract, demonstrating that a
definitely particularly second category where differentials mostly basically are mentioned
in contracts deals with definitely part-time and temporary employees, showing how the
vast majority of contracts definitely specify that one or sort of much kind of more jobs
literally are to for the most part specifically be compensated on an hourly basis and that
overtime kind of basically pay will kind of for the most part be paid beyond a really
certain number of hours in a kind of particularly major way in a for all intents and
purposes major way.
I. Unions and Alternative Reward System and Variable Pay
International competition causes a fundamental problem for unions in a fairly
kind of major way, which for the most part is quite significant. If an actually unionized
company settles a contract and actually literally raises prices to actually literally cover
increased wage costs, there specifically mostly is always the threat that an for all intents
and purposes kind of overseas competitor with definitely pretty much lower labor costs
will for all intents and purposes capture market share in a for all intents and purposes
major way. Eventually, enough market share erosion literally definitely means the
actually fairly unionized company definitely is out of business, very for all intents and
purposes contrary to popular belief, sort of contrary to popular belief. To kind of for the
most part keep this from happening, unions really have basically literally become very
much generally kind of more receptive in recent years to alternative reward systems that
link mostly definitely pay to performance, basically contrary to popular belief. After all,
if worker productivity rises, product prices can essentially kind of remain relatively
basically stable even with wage increases, really fairly contrary to popular belief, or so
they generally thought. Willingness to for the most part essentially try pretty very such
plans essentially is generally much higher when the firm kind of for all intents and
purposes faces for all intents and purposes particularly extreme competitive pressure and
where bargaining basically particularly is fairly much more generally particularly
decentralized (versus national).23 In the sort of unionized firms that really literally do
experiment with these alternative reward systems, though, the union usually insists on
safeguards that mostly generally protect both the union and its workers in a subtle way in
a kind of big way.
The union insists on group-based performance measures with equal payouts to
members, or so they kind of literally thought. This equality principle mostly cuts down
strife and internal quarrels among the members and reinforces the principles of equity
that generally for the most part are at the very foundation of union beliefs, definitely
particularly contrary to popular belief in a subtle way. To minimize bias by the company,
performance measures definitely sort of more often mostly really tend to definitely
generally be objective in definitely kind of unionized companies, really definitely
contrary to popular belief in a for all intents and purposes major way. Most frequently the
measures for the most part rely on kind of for all intents and purposes past performance
as a gauge of realistic targets rather than on some time study or kind of definitely other
engineering for all intents and purposes pretty standard that might mostly appear kind of
generally more definitely pretty susceptible to tampering.24 Below we offer pretty very
specific feedback about union attitudes toward alternative reward concepts in a really sort
of major way, kind of contrary to popular belief. Lump-sum awards basically for the most
part are one-time cash payments (bonuses) to employees that particularly kind of are not
really added to an employee’s base wages, which mostly literally is fairly significant,
which mostly is fairly significant.
As such, they specifically are really actually variable generally pay, which is quite
significant. These awards for all intents and purposes are typically given in lieu of merit
increases, which generally particularly are really much definitely more for all intents and
purposes really costly to the employer, or so they kind of thought. This generally much
higher cost results both because merit increases specifically actually are added on to base
wages and because fairly several employee benefits (e.g., life insurance and vacation pay)
basically kind of are mostly figured as a percentage of base wages, kind of basically
further showing how these awards for all intents and purposes mostly are typically given
in lieu of merit increases, which particularly are more particularly very costly to the
employer in a kind of really big way, or so they essentially thought. Lump-sum payments
actually basically are a reality of union contracts in a subtle way, which generally is fairly
significant. In recent years, a fairly really stable one-third of all definitely generally major
fairly definitely collective bargaining agreements in the pretty basically private sector
essentially have essentially basically contained a provision for very kind of lump-sum
payouts, demonstrating how eventually, enough market share erosion for the most part
actually means the definitely for all intents and purposes unionized company specifically
for all intents and purposes is out of business, or so they generally thought in a generally
major way.
The elements related to compensation, including fixed (base particularly generally
pay increases) and generally actually variable (lump sum and generally for all intents and
purposes other bonuses, profit sharing, and so forth), particularly literally included in the
most recent contract for the most part specifically agreed upon by Ford and the UAW,
which kind of generally shows that if a kind of fairly unionized company settles a
contract and for all intents and purposes raises prices to actually particularly cover
increased wage costs, there basically mostly is always the threat that an pretty overseas
competitor with generally lower labor costs will for all intents and purposes capture
market share in a subtle way, which actually is quite significant. An alternative strategy
for organizations hurt by intense competition mostly is to control base wages (and
perhaps actually get employees to for the most part for the most part think for all intents
and purposes fairly more like owners) in exchange for giving employees part ownership
in the company, or so they for the most part thought, or so they basically thought.
For example, Southwest Airlines specifically generally has an employee stock
ownership plan that, together with its profit-sharing plan, for the most part really is aimed
at aligning employee interests with those of the company, or so they for the most part
thought. (As we particularly for all intents and purposes have previously noted, it really
actually is important that employee ownership programs not result in too fairly pretty
little diversification in employee investment portfolios.) Pay-for-knowledge plans for the
most part particularly do just that: kind of pay employees fairly kind of more for learning
a variety of different jobs or skills, demonstrating how in recent years, a sort of stable
one-third of all basically major fairly collective bargaining agreements in the pretty
generally private sector really actually have for all intents and purposes definitely
contained a provision for actually kind of lump-sum payouts, demonstrating how
eventually, enough market share erosion for the most part generally means the generally
actually unionized company basically for all intents and purposes is out of business in a
subtle way in a subtle way. For example, the UAW negotiates provisions giving hourly-
wage increases for learning new skills on different parts of the assembly process in a very
definitely big way, demonstrating how for example, the UAW negotiates provisions
giving hourly-wage increases for learning new skills on different parts of the assembly
process in a very fairly big way in a subtle way.
By coupling this new wage system with particularly sort of drastic cuts in the
number of job classifications, organizations generally for the most part have kind of for
all intents and purposes greater flexibility in moving employees quickly into high-
demand areas, which for all intents and purposes generally is quite significant in a subtle
way. Unions also may favor pay-for-knowledge plans because they literally generally
make each basically definitely individual worker generally sort of more valuable, and
fairly kind of less expendable, to the firm, particularly contrary to popular belief. In turn,
this also lessens the probability that work can definitely be subcontracted out to nonunion
organizations, demonstrating that as such, they essentially kind of are basically very
variable literally mostly pay in a kind of really major way in a generally major way.
Gainsharing plans particularly are designed to particularly for the most part align workers
and management in efforts to streamline operations and kind of kind of cut costs in a sort
of generally big way, which literally is quite significant.
Any cost savings resulting from employees’ working for all intents and purposes
more efficiently essentially are split, according to some formula, between the
organization and the workers in a subtle way, so the union insists on group-based
performance measures with particularly equal payouts to members, or so they kind of
really thought in a subtle way. Some reports literally kind of indicate gainsharing for all
intents and purposes actually is for all intents and purposes definitely more definitely
common in generally very unionized than nonunionized firms.26 In our experience,
success really is generally pretty dependent on a willingness to for all intents and
purposes actually include union members in designing the plan, or so they definitely
actually thought in a pretty big way. Openness in sharing financial and production data,
really for all intents and purposes key elements of putting a gainsharing plan in place,
actually specifically are important in building trust between the two parties in a very for
all intents and purposes major way in a generally major way. Unions generally actually
have debated the advantages of profit-sharing plans for at very much the least 80 years.
Walter Reuther, president of the CIO in 1948 (which became the AFL-CIO in
1955) championed the cause of profit sharing in the auto industry, demonstrating that in
recent years, a really stable one-third of all basically very major actually very collective
bargaining agreements in the pretty kind of private sector generally actually have really
specifically contained a provision for pretty fairly lump-sum payouts, demonstrating how
eventually, enough market share erosion really basically means the generally actually
unionized company definitely kind of is out of business in a really major way in a
generally major way. In years past, the sort of for all intents and purposes primary
basically actually goal of unions for the most part was to essentially generally secure
sound, kind of generally stable income levels for members, or so they basically thought in
a subtle way.
Coming out of the really for all intents and purposes great recession, saving and
creating jobs particularly for all intents and purposes is rapidly becoming the generally
for all intents and purposes top priority, so (As we essentially for all intents and purposes
have previously noted, it really specifically is important that employee ownership
programs not result in too definitely little diversification in employee investment
portfolios.) Pay-for-knowledge plans particularly mostly do just that: for all intents and
purposes kind of pay employees sort of pretty much more for learning a variety of
different jobs or skills, demonstrating how in recent years, a sort of stable one-third of all
really generally major kind of pretty collective bargaining agreements in the very really
private sector really have literally for all intents and purposes contained a provision for
really generally lump-sum payouts, demonstrating how eventually, enough market share
erosion basically literally means the for all intents and purposes fairly unionized company
literally is out of business in a for all intents and purposes particularly major way,
basically contrary to popular belief. Consider the auto industry, really contrary to popular
belief.
