8/17/2019 Case Incident OB

Written by: Shahid Babar

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8/17/2019 Case Incident OB

CASE INCIDENT: It’s Not Fair!

Few topics in the business press have grabbed more headlines recently than highly
lucrative annual bonuses for top management. Critics bemoan the multimillion- dollar 
compensation packages offered in the financial services industry in particular, following
the dire consequences of the meltdown of this sector a few short years ago. How is
executive compensation determined by compensation committees !ome researchers
suggest that principles from equity theory "making comparisons to referent others# might
explain variations in executive pay. $o set what is considered a %fair& level of pay for top
executives, members of the board find out how much executives with similar levels of 
experience in similar firms "similar inputs# are being paid and attempt to ad'ust
compensation "outcomes# to be equitable. (n other words, top executives in large oil firms
are paid similarly to top executives in other large oil firms, top executives in small

hospitals are paidthe

simply changing similarly
referenttoothers
top executives
can changeinthe
other small
salary hospitals.
range (n many
considered cases,
acceptable.
)ccording to one view of 'ustice theory, this should be perceived as equitable, although
executives may encourage boards to consider specific referent others who are especially
well-paid.
Critics of executive compensation change the debate by focusing on the ratio of executive
compensation to that of the company*s lowest-paid employees. +esearcher Cary Cooper 
notes, %(n business, it is important to reward success and not simply status.& Cooper 
 believes all employees should share the company*s good fortune in profitable periods. He
has recommended that C compensation be capped at / times the salary of the lowest
 paid employee. (n fact, the average !01 2// C is paid 34 times what the lowest-paid
laborer makes. $his is eight times more than the ratio from the 562/s, which might serve
as another reference point for determining what is considered %fair.&

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8/17/2019 Case Incident OB

1. How does the executive compensation issue relate to equity theory? Who do you
think should be the comparative others in these equity judgments? How should we
determine what is a “air! level o pay or a top executive?

"quity #heory

mployees weigh what they put into a 'ob situation "input# against what they get from it
"outcome#.
$hey compare their input-outcome ratio with the input-outcome ratio of relevant others.

$he executive compensation issue relates to the equity theory most of the times, as compensation
calculation procedure in most of the organi7ations, especially 89Cs, is based on reference
compensation from the market.

$he compensation comparative procedure for equity 'udgement is based on the following:
Company performance
Company targets achievement
Comparative compensation with in competitors
Comparative compensation with other organi7ations of similar si7e;structure

$o determine a fair level of pay for a top executive education, experience, previous
organi7ational outcomes tied to the C*s performance should be considered.

$. %an you think o procedural justice implications related to the ways pay policies or
top executives have been instituted? &o these pay'making decisions ollow the
procedural justice principles outlined in the chapter?

1rocedural 'ustice is defined as the perceived fairness of the process used to determine the
utcome.
<es ( think in mostly organi7ation performance evaluation process exists, which follows same
rules and regulations for rest of the organi7ation. !o pay making decisions follow the procedural
 'ustice principles.

=ut there is a check, as top executives reserve rights to supersede the policies and procedure,
though it is not considered as good practice, but still this option may be usable for bypassing

 procedural 'ustice in few organi7ations.

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8/17/2019 Case Incident OB

(. &o you think the government has a legitimate role in controlling executive
compensation? How might we use distributive and procedural justice theories to
inorm this debate?

<es >overnment has a legitimate role in controlling executives* compensation by regulatory

authorities
  for different organi7ation types. (t should follow the procedural 'ustice:
• $he increment percentages sets should have minimum and maximum level as per
standards.
• !imilarly perks and bonus slabs are well defined.
• 1erformance based slabs should be defined.
• )ll organi7ation follow same standards
• )ny exception should be re-visited by regulatory authority for executives

). *re there any positive motivational consequences o tying compensation pay closely
to irm perormance?

<es indeed, there are positive motivational consequences of tying compensation pay closely to
firm performance.

$ying compensation pay to firm performance motivates the individual to work hard to achieve
the reward. $his relationship is defined in the performance-reward relationship.

• (ndividually: yearly increment and bonus links with yearly goal achievement of an
individual. $hroughout the year individuals strive to archive self-goals and hence it
leads to individual motivations
•  $eam: !imilar to individual, goals of a department are linked to company goals and
tied with appraisal process
• CF$: 9ew concept of tying multiple cross functional team with same goals and
additional bonus to achieve maximum performance with motivated teams "like
Collaborative for =usiness and perations 8anagement#

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