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Compensation

LEAD STORY - DATELINE: Compensation and Benefits Review, September 17, 1998.

In a today's tightened labor market, a growing number of organizations are seeking new strategies to

determine compensation packages. Many organizations are phasing out or replacing merit systems

with pay-for-performance programs (Currents in Compensation and Benefits, Compensation &

Benefits Review, September 17, 1998) and other alternative systems of pay such as gain sharing

(Nation's Business, January 1, 1998). The emphasis is on pay-for-performance.

Question 1.What are the advantages of implementing a pay-for-performance compensation

system?

Tying compensation to performance focuses workers on the bottom line. Pay-for-performance offers

workers an opportunity to share in the profits of an organization by actively involving them. Many

pay-for-performance systems reward workers for recommending and implementing cost saving

measures. This type of compensation system encourages workers to look beyond individual work

areas and to focus on how the business functions.

Fleetwood Enterprises, a California based recreational vehicle and manufactured housing maker,

relies on incentive pay to boost performance ("The Real Thing", The Wall Street Journal, April 9,

1998). Fleetwood's base pay is relatively low, but all its workers (manufacturing and management)

can and do earn production or incentive bonuses. Because of the way it compensates its workers,

Fleetwood tends "to get people who are entrepreneurial types" ("The Real Thing", The Wall Street

Journal, April 9, 1998).

Question 2.What are the disadvantages of the compensation system involving relatively low base

pay with incentives?

Answer: By offering a relatively low base pay an organization may have a difficult time attracting

talented people. Many will not be attracted to a lower wage. For the individual worker a low base

salary makes personal finance management more of a challenge. A low base wage means lower

weekly or monthly take home pay. When bonuses are paid workers must practice fiscal restraint or

budget wisely. Working within this compensation system one would have to get accustomed to

income swings. There is also the possibility that focusing on ways to cut costs will stifle creative

ideas that require a lot of money to implement.

Like Fleetwood, Nucor Corp., a steelmaker in Charlotte, N.C., places a strong emphasis on incentive

pay. It hires production workers at a base rate of $10 - $12 per hour. However, production workers

can earn up to as much as 60% of their annual income, which means that with production bonuses

workers can make as much as $25 per hour.

Small business owners are finding gain sharing to be an answer to boost performance. One such

organization is Katzinger's Inc., a 100-seat restaurant and delicatessen in Columbus, Ohio (Nation's

Business, January 1, 1998). When rising costs began getting out of control, the owners told

employees that if they helped reduce food costs to a certain level the employees would share in the

profits. The employees quickly took the owners up on the offer and within the first month employees

were able to take home about $40 each. Since the first gain-sharing pay out, employees have

earned up to as much as $95 for a single month.

In yet another innovation to determining pay, AES Corp., an independent global power producer,

began an experiment. As part of a salary experiment begun in fall of 1997, managers chose their

own compensation. This experiment involved several members of the Silk Road Group, the

management group overseeing projects throughout Central Asia, with a listing of salaries, bonus and

stock options paid each person in the group, and comparative compensation data for all AES

employees with similar responsibilities. Members of this group were then asked to submit a proposal

for their annual compensation packages for the coming year. After a group discussion and peer

review process, the proposals were submitted to the payroll department without changes ("Blank

Check", The Wall Street Journal, April 9, 1998).

Question 3. As a manager what must you consider before using a system similar to AES Corp.

(setting own salary through a peer review process)?

Answer: From a management perspective opening up the books, especially in relation to salary, may

be the most threatening. Managers tend to worry about how people will react when they find out

someone else is making more money yet doing the same job. Participants using a peer review

process must be completely frank with colleagues. The organization's culture must therefore

encourage and support honesty over politics.

Although the most frequently used methods vary slightly depending upon the position within the

hierarchy, organizations report using better compensation and benefits as a primary method for

retaining employees at all levels (Hansen, Compensation & Benefits Review, September 17, 1998).

Organizations hope that by developing an innovative compensation program they will attract and

retain the most talented of job candidates.

SOURCES:

1.Livingston, Abby. "Gain-sharing Encourages Productivity", Nation's Business, Vol. 86, January 1,

1998, pp. 21(2).

2.Cira, Darrell J. "Competency-Based Pay: A Concept in Evolution", Compensation & Benefits

Review, Vol. 30,September 17, 1998.

3.Hansen, Fay. "Currents in Compensation and Benefits", Compensation & Benefits Review, Vol. 30,

September 17, 1998.

4.Jacobs, Karen. "The Real Thing", The Wall Street Journal, April 9, 1998.

5.Markels, Alex. "Blank Check", The Wall Street Journal, April 9, 1998.

4.Which of the compensation programs (low base pay with incentives, setting your own salary, or

gain sharing) is most appealing to you? Which is least appealing? Explain your answer.

Answer: Responses will vary according to your preferences. You should have some concrete

notions about which of the compensation programs are most likely to improve performance.