com/science/article/pii/0165410185900278 Journal of Accounting and Economics Volume 7, Issues 1-3, April 1985, Pages 43-66 Executive compensation, management turnover, and firm performance☆: An empirical investigation Anne T. Coughlan∗, Ronald M. Schmidt∗ University of Rochester, Rochester, NY 14627, USA Available online 25 November 2002.

This paper investigates the internal managerial control mechanisms at the disposal of a corporation's compensation-setting board or committee. The hypotheses tested are that both compensation changes and management changes are methods used to control top management, and that the use of these control methods is motivated by changes in the firm's stock price performance. Public data from the period 1977–1980 support our hypotheses. We conclude that the firm's board creates managerial incentives consistent with those of the firm's owners, both by setting compensation and following management change policies which benefit shareholders.

Support from the Managerial Economics Research Center, Graduate School of Management, University of Rochester, is gratefully acknowledged. The authors have benefited from discussions with Andrew Christie, Harry DeAngelo, Linda DeAngelo, Michael Jensen, Clifford Smith, and Jerold Zimmerman, as well as with the members of the Organizations and Markets Workshop at the University of Rochester.

We are indebted to Kevin Murphy for insights on the relationship between pay changes and sales growth, as well as for acces to his data and for his time.

Compensation Management
Posted by Farhaan Panagar on May 03, 2009 | 1

pay is a critical factor in the work lives of employees. and have an investment view of payroll costs. The components of compensation have to be devised in such a way that. the growing demands of the employees and competitive salaries offered by multinational companies had almost resulted in a compensation war in certain industries. Employees compare their pay to that of others in the same line of work. As the dreaded date of such a discussion approaches. managers may begin checking their sick time banks to see if they can disappear for a day or two. In fact. the managers must appreciate the value of competitive pay. Jobs are accepted or rejected based in part on starting salary and the opportunity for future increases in pay. job performance. it focuses on the growing demands of employees while retaining the competitiveness and profitability of the company. It may achieve several purposes assisting in recruitment. also known as wage and salary administration. It may be attuned according to economic scenario. Compensation Management contributes to the overall success of the organization in several ways. employees think about pay often. The increasing competitiveness of the labour market and turnover of employees had resulted in nightmare in compensation planning. It is a tool used by management for a variety of purposes to further the existence and growth of the company. Compensation is a systematic approach to providing monetary value to employees in exchange for work performed. and available resources. It simply isn’t discussed unless absolutely necessary. They constantly compare their pay level to their level of contribution. their human resources. While it may be a touchy subject. And. It is the remuneration received by an employee in return for his/her contribution to the organization. Apart from this. and job satisfaction. goals. trying to determine whether the ratio of give and receive is a fair one. Pay is a difficult topic of conversation in most organizations. when it is necessary. Components of compensation:Basic wages/Salaries:- 2 . To be effective. The traditional concept of wage and salary administration emphasised on only determination of wage and salary structures in organisational settings. or reward management. many managers find themselves at a loss for words. the topic is altogether taboo in many workplaces. While it may not be a frequent topic of open discussion. such as when a pay raise (or lack of one) must be explained to an employee. It is an organized practice that involves balancing the work-employee relation by providing monetary and non-monetary benefits to employees. We want to maintain pay levels that attract and retain quality employees while recognizing the need to manage payroll costs. the human resources managers and tax experts have to evolve proper compensation planning for High end and qualified employees. is concerned with designing and implementing total compensation package. the business needs. Therefore. Compensation management.Compensation Management is an integral part of the management of he organization. remuneration management.

It is normally a fixed amount which is subject to changes based on annual increments or subject to periodical pay hikes. Bonus:The bonus can be paid in different ways. and (f) Job sharing and flexi-time. Wages and salaries are subject to the annual increments. (d) Comfortable working conditions. It can be fixed percentage on the basic wage paid annually or in proportion to the profitability. (c) Promoting growth prospects. The Government also prescribes a minimum statutory bonus for all employees and workers. irrespective of the number of hours put in by the employee. The payment of dearness allowance. incentives are paid to the group as a whole. The amount is later divided among group members on an equitable basis. Non-monetary benefits:These benefits give psychological satisfaction to employees even when financial benefit is not available. The onslaught of price increase has a major bearing on the living conditions of the labour. Where a given task demands group efforts for completion. Commissions:- 3 . There are: (a) Individual incentive schemes. etc. Individual incentives are applicable to specific employee performance. Dearness allowance:The payment of dearness allowance facilitates employees and workers to face the price increase or inflation of prices of goods and services consumed by him. which may be a fixed percentage on the basic wage. and salary refers to the monthly rate of pay. There is also a bonus plan which compensates the Managers and employees based on the sales revenue or Profit margin achieved. They differ from employee to employee. Such benefits are: (a) Recognition of merit through certificate. Incentives depend upon productivity. Incentives:Incentives are paid in addition to wages and salaries and are also called ‘payments by results’. and (b) Group incentive programmes. (e) Competent supervision. and depend upon the nature of job. (b) Offering challenging job responsibilities. profit. sales. Bonus plans can also be based on piece wages but depends upon the productivity of labour. seniority. and merit. enables the employees to face the increasing prices. The increasing prices reduce the compensation to nothing and the money’s worth is coming down based on the level of inflation. Wages represent hourly rates of pay.These refer to the cash component of the wage structure based on which other elements of compensation may be structured. or cost reduction efforts.

This is also termed as variable component of compensation. To enable the workers to participate 4 . fixed in advance of the profits. The percentage to be shared by the workers is often predetermined at the beginning of the work period and IS often communicated to the workers so that they have some knowledge of their potential gains. companies may pay a commission on a monthly or periodical basis. Fringe benefits constitute indirect compensation as they are usually extended as a condition of employment and not directly related to performance of concerned employee. Fringe benefits are supplements to regular wages received by the workers at a cost of employers. It is always a fixed percentage on the target achieved.Commission to Managers and employees may be based on the sales revenue or profits of the company.The payment of commission as a component of commission is practised heavily on target based sales. They are based on critical job factors and performance. health and insurance plans. Mixed plans:Companies may also pay employees and others a combination of pay as well as commissions. most of the corporate sector is following this practice. The purpose of fringe benefits is to retain efficient and capable people in the organisation over a long period. Profit Sharing: – Profit-sharing is regarded as a steppingstone to industrial democracy. Profitsharing usually involves the determination of an organisation’s profit at the end of the fiscal year and the distribution of a percentage of the profits to the workers qualified to share in the earnings. The gross earnings of the labour would be equivalent to number of goods produced by them. etc. They include benefits such as paid vacation. The fairness of compensation is totally based on the productivity and not by other qualitative factors. Apart from the salaries paid. Piece rate wages improves productivity and is an absolute measurement of productivity to wage structure. Nowadays. This plan is called combination or mixed plan. commission is again a taxable component of compensation. Such benefits are computable in terms of money and the amount of benefit is generally not predetermined. Piece rate wages:Piece rate wages are prevalent in the manufacturing wages. Profit-sharing is an agreement by which employees receive a share. For taxation purposes. Depending upon the targets achieved. The laborers are paid wages for each of the Quantity produced by them. They foster loyalty and acts as a security base for the employees. pension. the employees may be eligible for a fixed percentage of commission upon achievement of fixed target of sales or profits or Performance objectives. Fringe benefits:Fringe benefits may be defined as wide range of benefits and services that employees receive as an integral part of their total compensation package.

in profit-sharing. It is highly proactive and fully integrated into a company’s management practices and business strategy. good news can become the source of conflict and resentment. which will be returned to the workers through profit-sharing. mission and objectives. determine capability requirements and creation of short and long-term incentive plans. Whenever approaching the subject. Far too often. In spite of their hesitance. they can address virtually any pay-related topic with their employees in a professional and productive manner. managers are apt to discuss generalities. For the manager. By the same token. the issue of pay deserves to be clearly addressed.” What exactly does that mean in terms of the employee’s monthly budget? If care is not taken here. Pay is Relative 5 . By keeping the following basic points about pay in mind. Once the employee provides that number. they are required to work for certain number of years and develop some seniority. Approaches of compensation management There are 3P approach of developing a compensation policy centered on the fundamentals of paying for Position. this program helps establish guidelines for an equitable grading structure. managers are capable of dealing with this sometimes difficult issue in a professional and effective manner. • • • Paying for position Paying for person Paying for performance Because it is so important to employees. No chance of misunderstanding or false expectations can be permitted. the manager should request that the employee suggest a specific number that he believes reflects his value. Specificity is Key Pay is a topic with many different shades and a variety of implications. if anything can be done. the manager can do his homework and decide what. if asked for a raise. The employee can then be given a definitive response. The theory behind profit-sharing is that management feels its workers will fulfill their responsibilities more diligently if they realise that their efforts may result in higher profits. Drawing from external market information and internal policies. Person and Performance. “It will mean a good increase. this means that the increase amount is nailed down before discussing a promotion with an employee. it is important to work out the details beforehand so that specifics can be clearly communicated. The 3P approach to compensation management supports a company’s strategy. The 3P system ensures that human resources management plays a central role in management decision making and the achievement of business goals.

however. Development of a Compensation Philosophy All organizations pay according to some underlying philosophy about jobs and the people who do them. the manager should use the opportunity to point out specifically how individual employees helped achieve that target. market practices and where the individual falls within his pay range. the company’s increase budget. For these reasons. In reality. including the relative pay of others in the same job. as opposed to a link with one or two specific outcomes. Pay maybe treated in a formal and structured manner at one company. base pay decisions take into account a variety of factors. It becomes very difficult to pinpoint specific employee actions or accomplishments as the reason for the increase. Even if the bonus is paid to all employees based on a simple overall company profit target. The two most common forms of direct cash compensation in most companies are base pay and bonus. Handing money to an employee while discussing actions and behaviors he would like to see repeated. the manager is faced with the difficult task of evaluating an entire year’s worth of activity and then categorizing it according to the percentage increase options allowed by the budget. any appearance of structure is intentionally avoided so that decisions can be made arbitrarily. such as budget or pay range should be openly discussed as well. position and the competencies/skills the person is having. Discussions about base pay increases can be a bit different. While bonus is typically (or at least should be) rewarded based on the achievement of a goal of the organization. Both strengths and weaknesses of the employee should be addressed. Pay is Not Created Equal Various forms of pay have different purposes. the approach taken reflects a fundamental belief about people. Either way. Any other factors that impact the increase percent. Before an organization actually develops a compensation plan. it’s appropriate for the discussion about base pay increases to be more general and balanced. Discussions about bonus payments should be as specific as possible. Even when performance is a factor. Taking the time to consider and answer these questions will make the both the process of developing and administering a compensation plan much easier and will result in the development of a compensation plan that more 6 . At another.What one employee considers a fantastic increase maybe an insult to another? Each individual has a unique set of creativity and competencies. This is the opportunity to point out particular accomplishments that contributed to overall team or company success. there are several questions that need to be answered. The actual increase is then based on an overall assessment. Most companies claim to link their annual base pay increases to performance. Base pay is the annual salary or hourly wage paid to an employee given the job he holds. but it certainly exists. This philosophy may not be in writing. Distributing bonus checks presents a unique motivational opportunity for a manager. Pay should be based on the performance. motivation and management. creates a powerful link between performance and reward.

however. and/or create or reinforce a particular type of organizational climate? What is the communication policy? How is the organization going to communicate the compensation plan to employees once it has been developed? Is the organization prepared to evaluate the effectiveness of any such communication? If so. how does an organization use them to maximize the effectiveness of the compensation plan? What does the organization pay for? Does it pay for performance or seniority or some combination of the two? What is the role of performance appraisal in the organization? How important is performance appraisal and why? How will the organization manage change to the compensation plan once it has been developed? What systems need to be in place to implement any changes including deciding when change is necessary and who will make these decisions? How does the compensation philosophy and plan fit with the rest of the organization? How can the compensation practices reinforce other overall management philosophies and objectives? While the answer to “how much?” is of course important to employees. that employees operate within a compensation system. however. they are also concerned about the “why?” of pay. In other words. If a manager does not 7 . employees also are interested in the rationale used to determine it. It is important to understand. motivate good performance. while the actual amount of pay is very important.closely matches the organization’s goals and objectives. is there an intent to reward employees for good performance. Research has shown that pay satisfaction increases with understanding of the pay scheme. managers themselves will be the primary conduit of information on this topic. Ideally. A manager is wise to take the time to learn as much as possible about his company’s compensation system. above market or below market? How does the desired market position fit with other strategic goals? Are there any competitive factors involved that will determine the pay strategy? What is the desired mix between benefits and cash? Since benefits are an important form of compensation. Managers often leave this area to the HR department. how? How will decisions regarding pay be made? Who will be involved in these decisions? What decision guidelines will need to be developed? What is the organization’s desired market position relative to pay? Will the organization choose to pay market rates. Managers often want to view each individual as a separate case. What is the goal of the organization’s compensation system? In addition to attracting and retaining qualified employees.

Money is important. The challenge for service providers and consultants would be to deliver the same amount of value to people with a smaller problem set. Pay discussions should deal with specifics. In addition. especially when discussing pay. Conclusion Compensation is a hot potato for the Human Resource Department. and the manager must be able to discuss the issue in the context of the organization’s pay philosophy. as well. Speaking of Pay with Confidence Discussions regarding pay do not have to be awkward–they can be clear and productive if managers adhere to the basics outlined above. but it must be put in the context of other pros and cons–some of which have a dollar value and some of which do not. a manager should consider all the potential benefits. Sharp companies do a good job of showing the value of these items. For example. Smaller projects with fast paybacks would be more attractive than a big project with a long payback. In preparing for the discussion. Similar to changes bought about in the other departments the HR should also emphasize on restructuring the costs so as to bring the variable cost close to zilch. The major 8 . If paid well can generate results for the organization. In the current state of affairs it is indispensable to restructure the pay models. pay can be addressed in an up-front manner if managers do their homework. when offering a promotion to an employee. their pay-related communication with employees will result in clarity and respect. Managers should be the company’s biggest ambassadors when it comes to the value of benefits and work environment factors. What developmental opportunities are involved? Is there an increase in status? Will the move mean additional interaction with key players? All of these. Smart managers will communicate their value. he should seek out whomever in the organization is responsible for pay administration and get the answers he needs. Job seekers who go into the negotiation process with their eyes wide open keep an important fact in mind: A few thousand dollars one way or the other can quickly become a gain or a loss depending on other benefits. the manager must remember that pay is relative and nothing can be assumed about the employee’s response. The motivation level of the employees to great extent lies in monetary rewards. they will avoid the misunderstanding and resentment that results from avoiding this critical issue. Rather than a taboo. If managers follow these guidelines. get prepared and go into the discussion with the confidence that comes from knowledge. failed can create problems. as well as any increase in tangible pay and benefits should be discussed. A satisfied employee is a productive employee and care should be taken that they are fairly paid for their worth in the organization.know the company’s pay philosophy. The purpose of the particular aspect of pay being addressed is important.

pages 153–169. an organization should utilize reward practices which specifically complement its TQM-based strategy. Issue 2. but not with greater use of quality rhetoric in either formal strategic documents or informal strategic discussions. Major findings include: higher levels of firm performance were significantly correlated with greater use of TQM practices. http://onlinelibrary. Allen. Pittsburgh.110 . TQMArticle type:Research paperDOI:10. Pay. employment security. Regarding implications for practitioners. Chattanooga. 14 Iss: 2. it is insufficient to include quality rhetoric in the formal and informal strategy.1002/smj. As the anecdotal literature has often advocated. Katz Graduate School of Business. Allen. Ralph H. Ralph H. Pennsylvania. in order to realize even higher levels of firm February 1990 9 . Performance. Balkin1. USA)Citation:Richard S. David B. Kilmann. Luis R. pp. http://www. Journal of Organizational Change Management. 2. (2001) "The role of the reward system for a total quality management based strategy". Gomez-Mejia2 Article first published online: 8 NOV 2006 DOI: 10. the use of extrinsic reward practices – including profit sharing. the current research provides empirical support that management must “walk the talk” with regard to TQM efforts. Vol.131Keywords:Incentives. Kilmann.). gainsharing.4250110207/abstract Matching compensation and organizational strategies 1. Further.emeraldinsight.1108/09534810110388036 (Permanent URL)Publisher:MCB UP LtdAbstract:This study examines the impact of reward practices on the relationship between an organizational strategy based on the principles of total quality management (TQM) and perceptions of firm performance.4250110207 Strategic Management Journal Volume 11.wiley.htm?articleid=1411094&show=abstract Title:The role of the reward system for a total quality management based strategyAuthor(s):Richard S. Reward systems. Tennessee.challenges what manager’s face today is retention of the man power and the major cause of it is that they are paid better in the other organizations. (University of USA. and comp time – exhibited a significantly positive moderating effect on the relationship between TQM and perceived firm performance. College of Business Administration. (The University of Tennessee at Chattanooga.

The people make the process: commitment to employees. Canada b c This study argues that a well designed decision making process will have its most positive 10 . pay level relative to the market. Business unit strategy was a significant predictor of pay package design and pay level relative to the market. USA Department of Economics and Business. South Korea School of Hotel Administration. b c Department of Management. NY. and their interactive influence on the effectiveness of the compensation system. NY 14853. Cornell University. and performance a Chaire MacLean-Hunter. Sungshin Women's University. The findings are supportive of congruency notions which suggest that the effectiveness of the compensation system is partly a function of the fit between pay strategies and organizational strategies. Montreal. Analysis of panel data for 15 retail outlets over 66 months indicates a sales increase when the plan is implemented. Sales gains are significantly lower in the peak selling season when more temporary workers are employed. A basic assumption in these contracts is that performance-based incentives improve employee performance. Seoul. 3000 Cote Sainte Columbia University. Ithaca. New York. an effect that persists and increases over time. Corporate strategy was a significant predictor of pay package design. USA Much management accounting research focuses on design of incentive compensation contracts. Ecole des Hautes Etudes Commerciales. Danny Miller and Jangwoo Lee. Taegu. decision making. Kyungpook National University. The empirical findings are based on the survey responses of 192 human resource management executives in business units of large manufacturing firms.Abstract This study examines the impact of organizational strategies (at both the corporate and business unit level) on pay strategies. South Korea Catherine Road. This paper reports on a field test of the multi-period incentive effects of a performance-based compensation plan on the sales of a retail establishment. QC H3T 2A7. and pay administration policies.

collaboration and initiative were especially important. the purpose of this paper is to investigate the HRM-performance causal relationship in 11 . respectively. these three dimensions of decision making are expected to be of little value where OCE—and hence a capable and motivated workforce—are lacking. University of Macedonia.Budhw ar. Department of Marketing and Operations Management. and initiative. Conversely. Birmingham B4 7ET. Aston Business School. Greece Professor of International HRM. We found also that these interactions contributed the most to return on assets in uncertain environments. we found positive associations between return on assets and the interactions between OCE and information processing. UK b Blending insights from the contingency theory. motivated and dedicated workforce. collaboration. Prior research has determined that such a workforce can be developed via an organization’s commitment to its employees (OCE) in the form of ample training and compensation. the resource-based view. collaboration. and meaningful personal consideration. a Teaching Fellow in HRM and OB. These expectations were borne out in our study of Korean companies. Specifically. Causal relationship between HRM policies and organisational performance: Evidence from the Greek manufacturing sector. 540 06 Thessaloniki. where effective information processing.Katou and Pawan S. Anastasia A. We argue that OCE will enhance financial performance where it is able to improve the quality of a decision making process that emphasizes ample information processing. Aston University. fairness.impact on company financial performance when it is carried out by a capable. and the AMO theory. and initiative.

Further. The paper concludes that although the motivation to perform HRM policy domain causes organisational performance. Vol. the results indicate that the impact of HRM policies on organisational performance is fully mediated by employee skills. Process. Management. quality. The empirical research is based on a sample of 178 organisations operating in the Greek manufacturing sector. 9 Iss: 2.201 – 224. 12 . it may be supported that organisational performance positively moderates the effectiveness of this HRM policy domain. Using structural equation modelling the results of the study revealed that the ability to perform (resourcing and development). Riley Mike. Purpose – The purpose of this paper is to understand what factors best promote or prevent sustainable construction practices and establish the consistency of how sustainability is measured. and additionally. Pitt Michael. raising thus the question of reverse causality. pp. the motivation to perform is further moderated by managerial style and organisational culture. Towards sustainable construction: promotion and best practices Construction Innovation: Information. innovation). Longden Jenniffer.the Greek context. attitudes. and opportunity to perform (involvement and job design) HRM policy domains are moderated by business strategies (cost. and behaviour. Tucker Matthew. through employee attitudes. motivation to perform (compensation and incentives).

Education. 1 Iss: 3. pp. Vol. Mike Leat. This paper provides an in-depth insight into the level of sustainable development within the construction industry. Such financial implications are consistent with “affordability” being the biggest barrier highlighted.Design/methodology/approach – A literature review considered the impact of the industry to sustainability and identified what action and initiatives are already in place. measures and benchmarks were identified. Originality/value – Sustainable development is an integral part of the lives and affects all aspects of business operations. The opinions of building surveying professionals were sought and analysed. the main drivers. Through this. identifying implications for both the demand and supply side. Ghada El-Kot. but identified that more needs to be done.212 Purpose – The paper's aims are to ascertain whether there is evidence of Egyptian organisations 13 . barriers. Findings – The paper suggested that fiscal incentives/penalties and regulations help to drive sustainable construction.200 . The majority of respondents believed the industry is taking some account of sustainability issues. (2008) "A survey of recruitment and selection practices in Egypt". Business and Society: Contemporary Middle Eastern Issues.

Design/methodology/approach – Data were collected between May and July 2007 and produced 108 usable questionnaires. Originality/value – The influence of the Egyptian national context upon the recruitment and 14 . Findings – There is some evidential support for the influence of the Egyptian national context upon the practices used. with different practices. including the number of techniques being used for the recruitment and selection of different job types.using recruitment and selection practices which are context specific and whether different practices are used for different job types. neither with resistance if they wish to involve line management in the decision-making process. Research limitations/implications – Investigating recruitment and selection practices with the influence of ownership and by organisational size is needed to pursue whether there are significant associations between these variables. whether responsibility for recruitment and selection is shared between HRM specialists and line management. Practical implications – Organisations moving into Egypt would not appear to be confronted with substantial resistance to the adoption of new methods and techniques for recruiting and selecting staff or the adoption of different methods for different job types. The questionnaire was adapted from the Price Waterhouse Cranfield project on HRM in Europe. There is evidence of substantial sharing of this responsibility with line management through consultation and of an increased devolution of responsibility to line management. and whether there is evidence of increasing devolution of this responsibility to line managers.

such as promotion. Year: 2001 . Because employee perceptions of unfairness may result in negative consequences for organizations. Mary A. many firms continue to have problems with employees who perceive unfair treatment in promotion decisions. Previous research indicates a positive relationship between procedural justice and organizational commitment. Regression analysis results indicate a significant main effect of the perceived fairness of the promotion-decision system on 15 . Procedural justice in promotion decisions: using perceptions of fairness to build employee commitment. Procedural justice refers to the perceived fairness or equity of the procedures used in making decisions regarding the distribution of rewards. the purpose of this study was to examine the significance of procedural justice in promotion decisions in predicting organizational commitment. pp: 268-281.selection practices used is an important issue for organisations to know the best recruitment and selection methods. instead of specifically focusing on justice perceptions in promotion decisions. Journal of Managerial Psychology Volume:16. Lemons. Although companies spend millions of dollars each year in their attempts to comply with fair employment laws. Number: 4. Jones. but these findings relate to the effect of unfair selection decisions on organizational commitment. Coy A.

companies cannot develop performance based culture in organizations nor attract and retain the best qualified employees.Companies’ Success in the marketplace is sure when HR practitioners manage employees like other business managers financial resources and customers. This workshop will surely serve it purpose by preparing HR professionals for performance and compensation management agenda. Managing employees’ performance and strategically compensating them represents a critical Human Resource Management practice. Highly Keen (An HR Firm) is announcing two days comprehensive training workshop on “Performance and Compensation Management”. Without sound performance and compensation systems. Therefore to develop the Performance and Compensation management skills in HR professionals of Pakistan. **************************************** 16 .

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