Professional Documents
Culture Documents
Learning Objective
A compensation framework that supports a long term strategic vision for compensation
and implements new initiatives, will provide the needed direction, changes will involve
moving towards solving special salary problems using innovative concepts.
The way we do compensation is undergoing major change towards a more flexible and
timely corporate compensation systems. The new system will have increased delegation
to managers and will be driven by the business needs of Government and ministries. It
will be faster, more efficient and eliminate duplication, focus on a long term approach to
compensation management.
The vision for compensation will assist the pubic service in attracting and retaining key
employees.
Managers will have more accountability for the compensation of their employees, and
will be profiled with the required tools, systems and support. Senior mangers will
approve, within the framework, exceptional compensation changes, based on sound
business decisions. Senior managers will also have authority to approve the classification
levels of pre-identified jobs within their organization.
Employee motivation and performance management depend on good systems that offer
both financial and non-financial rewards (non-monetary rewards). This performance
management article applies to all organisations.
Constant change and high expectations are taking their toll in some organisations, as well
as in industry and government generally. Sometimes this is shown in employee turnover.
Sometimes it is hidden because of job insecurity. Many employees make a New Year's
resolution to seek other employment. Many are also seeking more balance in their life.
Rewards and remuneration must be scrutinised. Employee motivation and performance
are critical. Non-monetary rewards can be as important as monetary rewards.
If they haven't done so already, leading organisations will need to establish an improved
salary administration structure.
It is possible to develop a simple structure that overcomes the difficulties of the past, yet
is simple enough for everyone in the organisation to understand. This structure can be
tied to a completely new performance management approach, including better
performance appraisal mechanisms.
Some industry's remuneration systems have been dominated by the industrial relations
system. Enterprise bargaining and local area work agreements, individual performance
based contracts, and the effect of competition on organisational structures, have had a big
impact.
A good rewards and remuneration system ensures that each person receives appropriate
financial and nonfinancial recognition to account for the personal contribution they are
making and the overall value of their position to the organisation.
This includes:
Creating and maintaining an organisational structure and culture that facilitates both
employee and organisational performance.
Implementing compensation systems that fairly treat and recognise all employees,
regardless of their level within the organisation. This is the equity issue. It involves
matching remuneration with the contribution made, particularly where job requirements
can change rapidly.
The best performance appraisal system in the world will not work if it is linked to a
rewards and remuneration system that employees do not trust or support.
A motivated employee will achieve a great deal. A demotivated employee will be slow,
prone to error and not likely to achieve.
Motivation influences performance. It also suggests that the 'lack of', 'promise of', or
receipt of either financial or non-financial rewards may also influence motivation. A
feedback loop between motivation and performance exists, with each potentially
impacting the other.
Good salary administration requires that employees should receive financial recognition
for the contribution that they make, and that positions of equal value should be entitled to
equal compensation. If organisations handle this incorrectly, or manipulate it in some
way, the impact on the employee is significant.
Past pay systems often paid little attention to incentives. It is only in recent years that
some systems have provided for differentiation based on performance. The concept of
fair incentives should be on the agenda. An integrated system is required such as the
following diagram represents.
Perception is the reality. If the current system is not working as intended, then the
organisation has a real problem.
Is the performance appraisal system well designed and accepted by all employees?
Is the review process conducted fairly and within agreed time limits? As well as
checking goal achievement, does the review reconsider the job and changes that may
have occurred?
The system should not be bureaucratic, but it has to be perceived as fair. It also has to be
actually administered fairly.
1 Employees are showing their total disenchantment by leaving as quickly as they can.
Morale and motivation are non-existent.
3 Employees are unhappy and comment frequently about the remuneration system that is
supposed to be in place but doesn't work. However, a work ethic exists and they do some
work.
4 Employees believe that 'management' controls and manipulates the system. They
continue on regardless, but they do not like it.
5 Employees are aware of a remuneration system but do not see it working for them. It
causes some dissatisfaction.
7 Some employees believe the remuneration system is working, others believe it could be
better targeted to their particular situation.
Let us study the case below the framework of compensation policy at University at
Minnesota.
Faculty are compensated for their contributions to teaching and advising, research and
scholarship, and service to the institution and the state/region/nation/other nations, as
well as their professions. Total compensation includes annual base salary plus fringe
benefits, including retirement, health and dental coverage, and life and disability
insurance. In some instances, annual base salary is augmented through internal sources,
such as overload teaching, or from external sources in the case of approved external
consulting.
Initial annual base salary is negotiated at the time of hire, with floors establish for the
instructor and assistant professor ranks only. Increases to annual base salary for faculty
occur in the following ways: through annually determined merit increases; through
acceptance of a retention offer that includes an increase; in conjunction with a promotion
in rank and/or the awarding of indefinite tenure; through an augmentation attached to an
administrative title or a set of administrative duties.
For many faculty, annual base salary is supplemented with summer school or other
internal summer employment, such as grant research. Annual base salary may also be
supplemented internally during one's contract period through means such as extension
teaching. Normally, new salaries go into effect for A base faculty on July 1 and for B
base faculty on September 16 of each year.
The salary determination process must provide an objective unbiased evaluation of each
faculty member following a thorough review of his/her work. The process must
encourage continued good or improved performance, which in turn, should be rewarded
by the compensation system.
The criteria for determining salary increases must be similar to those used for promotion
and tenure. The tenure and promotion regulations of the University, adopted in 1985,
provide the following instructions which form the framework within which salary
decisions must be made:
The basis for awarding indefinite tenure is the determination that the achievements of an
individual have demonstrated the individual's potential to continue to contribute
significantly to the mission of the University and to its programs of teaching, research,
and service over the course of the faculty member's academic career.
The primary criteria for demonstrating this potential are effectiveness in teaching and
professional distinction in research; outstanding discipline-related service contributions
will also be taken into account where they are an integral part of the mission of the
academic unit. The relative importance of the criteria may vary in different academic
units, but each of the criteria must be considered in every decision.
Faculty Involvement
Faculty input into the discussions surrounding criteria and procedures for salary increase
determination is essential to maintaining an equitable and collegial environment. With the
administrator of each unit, the faculty must have the opportunity to develop the criteria
for, and the format of, the process through which annual salary increases are determined.
The documents that describe these criteria, formats, and processes shall be shared with
the college dean, the appropriate vice president, and finally the Senior Vice President for
Academic Affairs.
This process must include the provision that the department chair (unit leader) meet with
each faculty member individually, at least once per year, to review his or her
performance. The sessions shall review the past year's performance and offer suggestions
for enhancing productivity, where appropriate. Units may choose to conduct more in
depth evaluations on a periodic basis (e.g. 4 or 5 years) that would include outside
evaluations.
Allocation Format
Each year the annual salary increase pool for meritorious performance received by the
unit will be distributed based on the criteria specified in the University's Regulations
Concerning Faculty Tenure and appropriate departmental faculty evaluation documents.
Unsatisfactory performance, which shall be documented and communicated to the
individual involved, shall serve as justification for withholding an individual's increase.
Promotion Increases
Beginning with the 1993-94 salary year, promotion from assistant professor to associate
professor will be accompanied by an extraordinary $1,500 increase in base salary and
promotion from associate professor to professor will be accompanied by an extraordinary
$2,000 increase in base salary. It is intended that these promotional increments will be in
addition to the annual salary increase award related to meritorious performance.
The dean will set aside, from those funds provided to his/her unit for salary increase
distribution, sufficient funds to cover these promotional increments. It is understood that
the dean may also set aside funds from this overall pool to address special merit or
retention purposes. It is intended that this promotion increment will receive inflation-
related increases in future years.
Other Recommendations
CALIPERS”
Let us analyse the Executive Compensation Framework policy with regard to the
organization CALIPERS’.
Company Background:
This also provides a framework by which interested parties may gauge the quality of
company specific executive compensation programs and practices.
Companies under new SEC guidelines must provide shareowners the opportunity to vote
on any material revisions to these plans.
Executive contracts should be fully disclosed, with adequate information to judge the
"drivers" of incentive components of compensation packages.
1. The company's desired mix of base, bonus and long-term incentive compensation
This section should include adequate detail to shareowners regarding the company's
philosophy of base pay components versus "pay at risk" components of the program.
Details should include reasonable ranges based on total compensation within which the
company will target base salary as well as other components of total compensation.
Overall targets of total compensation should also be provided.
This section should also provide an overview of how the company intends to structure the
compensation program, such as how much of overall compensation is based on peer
relative analysis and how much of it is based on other criteria. The policy should clearly
articulate how the company ensures optimal alignment of interests with shareowners
through the design and implementation of its executive compensation program.
2. The company's intended forms of incentive and bonus compensation, including what
types of measures will be used to drive incentive compensation.
In addition to the relative mix of base salary and any form of incentive compensation, the
company should provide a breakdown of the types of incentive compensation and
reasonable ranges based on total compensation targets for each type of incentive
compensation within the program.
The policy should include the company's philosophy related to the major components of
incentive compensation, including the strengths and weaknesses of each and how the
overall incentive component of the plan provides optimal alignment of interests with
shareowners.
CalPERS believes that in the case of option plans and restricted stock, a significant
portion of the overall program should consist of performance-based plans. These include
The policy should include the specific drivers the company will use in constructing the
performance-based components of the plan. CalPERS suggests using metrics such as
Return on Invested Capital (ROIC), Return on Assets (ROA), and Return on Equity
(ROE), and the relative mix of how performance metrics will be weighted.
CalPERS believes that optimal plan design will utilize multiple performance metrics in a
fashion that will tie small portions of vesting to individual metrics or larger portions of
vesting to multiple metrics.
CalPERS believes that if metrics are used in combination, the plan should require that
each component be satisfied to achieve vesting as opposed to one of several that must be
achieved.
The policy should include the company's philosophy related to how equity-based
compensation will be distributed within various levels of the company.
In the event that the company uses equity-based tools in its compensation program, the
policy should articulate how the company will address the issue of dilution. For example,
the company should provide a detailed plan with each option program addressing the
intended life of the plan and the yearly run rate.
If the company intends to repurchase equity in response to the issue of dilution, the plan
should clearly articulate how the repurchase decision is made in relation to other capital
allocation alternatives. CalPERS does not favorably view repurchase plans that are
5. The parameters by which the company will use severance packages, if at all.
6. The parameters by which the company will utilize "other" forms of compensation, if at
all.
The policy should provide broad guidelines by which the company will use alternative
forms of compensation, and the relative weight in relation to overall compensation if
"other" forms of compensation will be utilized.
The term and length for "other" forms of compensation should be disclosed. Other forms
of compensation include but are not limited to pension benefits, deferred pay, perquisites
and loans. In some cases, other forms of compensation can provide significant value to
executives which are not readily comparable to more basic forms of compensation such
as salary, bonus and incentive.
Other forms of compensation are also more likely to be perceived by shareowners as not
providing meaningful alignment of interests or incentive value. To the degree that the
company will provide other forms of compensation, it should clearly articulate its
philosophy for utilizing these tools with specific treatment of how shareowners should
expect to realize value from including these forms of compensation
Executive contracts should be fully disclosed, with adequate information to judge the
"drivers" of incentive components of compensation packages.
In addition to the relative mix of base salary and any form of incentive compensation, the
company should provide a breakdown of the types of incentive compensation and
reasonable ranges based on total compensation targets for each type of incentive
compensation within the program.
The policy should include the company's philosophy related to the major components of
incentive compensation, including the strengths and weaknesses of each and how the
overall incentive component of the plan provides optimal alignment of interests with
shareowners.
CalPERS believes that in the case of option plans and restricted stock, a significant
portion of the overall program should consist of performance-based plans. These include
index-based options, premium-priced options and performance targets tied to company-
specific metrics.
The policy should include the specific drivers the company will use in constructing the
performance-based components of the plan. CalPERS suggests using metrics such as
Return on Invested Capital (ROIC), Return on Assets (ROA), and Return on Equity
(ROE), and the relative mix of how performance metrics will be weighted. CalPERS
believes that optimal plan design will utilize multiple performance metrics in a fashion
that will tie small portions of vesting to individual metrics or larger portions of vesting to
multiple metrics.
CalPERS believes that if metrics are used in combination, the plan should require that
each component be satisfied to achieve vesting as opposed to one of several that must be
achieved.
• Based on the above case study how can you say that compensation programs are
one of the most powerful tools available to companies?