AD 524 Compensation & Careers

by

Mithat PERKZ Pnar SAKA

submitted to

Dr. Uur Tandoan

October 23, 2011

TABLE OF CONTENTS

1. Definition of Compensation and its Origins 2. Traditional Compensation Model 3. Criticisms to Traditional Compensation Model 4. Types of Rewards and Organizational Incentives 5. CEO and Top Executive Pays in Organizations 6. Compensation in Non-Profit Organizations 7. Supplemental Financial and Nonfinancial Compensation 8. Compensation Plans and Total Rewards Element 9. What could be done for high attrition companies? 10.References

1. Definition of Compensation and its Origins Compensation is the total reward received by an employee in exchange for services performed for an organization (Penn). It can include both direct pay such as alary and wages and indirect pay such as benefits programs (Penn). The traditional supporters of compensation are found in both social psychology (motivation theory) and labor economics (labor markets). The former finds its answer through Equity Theory, which is supported by the exchange theory (Gouldner, 1960) and cognitive dissonance theory (Festinger, 1957) both of which are originated in the social psychology field. According to Wallace and Fay (1983, p. 69): The critical theme that exists at the center of all compensation theory and practice is equity. As the equity paradigms suggests, theres an exchange going on in all organization, where the input is considered as each employee efforts, long-term commitments, education, etc. and the outputs is basically the pay, promotion, prestige, etc. This exchange process is realized not in isolated environment, but in a social setting. Each employee is comparing their inputs relative to their outputs with other employees from both inside and outside. As Adams (1965) suggests, the distributive justice is realized when the proportionate relation between output and input is equal for all employees. Therefore, this proportion can be stated as the following:

Where Op = Employment outcomes of a given individual Ip = Inputs of a given individual Oo = Employment outcomes received by referent others Io = Inputs given by referent other

Although the theory suggests that companies should strive to design such a compensation system that would provide both internal equity, (i.e. equal compared to the referent others working in the same organization) and external equity, (i.e. equal compared to the referent others working in another organization), the reality is that the truth is in the eyes of the beholder. If an employee is aware of such an imbalance, hes likely to feel cognitive dissonance and would take steps to balance things. Either, he will look for an increase in his output or hell reduce the input accordingly. Nevertheless, if the imbalance continues for a long time, the ultimate recourse would be the employee leaving the company. Therefore, achieving internal and external equity becomes so important in traditional compensation systems since it directly affects two critical employee behaviors and thus the success of an organization in an indirect manner; namely the decisions to stay and join with the company. The latter, namely the labor economics is important in understanding the compensation systems since theres a labor market dynamics in the industry. The labor demanders, i.e. employees and labor suppliers, i.e. workers form a supply-demand curve similar to that of a product or service. If a company pays the going rate of a job in the marketplace, then the workers are likely to accept job offer and an external equity is formed. A very basic difference between the social psychology view and the labor economics view is instantaneously observed; the former takes into consideration both internal and external equity, whereas the latter only cares about the external one.

2. Traditional Compensation Model The Traditional Compensation Model is constituted from three steps, namely Job Evaluation, Market Survey and Individual Pay Assignments.

Figure 1, Traditional Compensation Model Some jobs are paid more and compensation administration decides who gets what payment. They do this by using job evaluation. Job evaluation is the process whereby an organization systematically establishes its compensation program. In order to arrive at each jobs appropriate worth, jobs are compared (Cenzo & Robbins). The goals of compensation administration are to design a cost-effective pay structure that will attract, motivate, and retain competent employees, and this structure should be perceived as fair by the employees (Cenzo & Robbins). If any imbalance in the relation of their efforts, is perceived by employees, they would ask for adjustments, and this situation may create tension. The essence of compensation administration is job evaluation and the establishment of a pay structure. Job evaluation is using the information in job analysis to systematically determine the value of

each job in relation to all jobs within the organization. It seeks to rank all the jobs in the organization and place them in a hierarchy that will reflect the relative worth of each. However, this is not always the case because of external labor market conditions, collective bargaining, and individual differences require a compromise between the job evaluation ranking and the actual pay structure (Cenzo & Robbins). There are 4 basic methods, according to Cenzo and Robbins. These are: 1) Ranking method: A committee arranges jobs in a simple rank order, from highest to lowest. Large number of jobs is the limitation of that model. 2) Classification method identifies common denominator, such as skills, knowledge, responsibilities. Shop jobs and sales jobs are examples of that method. The same limitation of ranking method also exists in this method, and difficulty of writing classification descriptions can be added to its limitations. However, it also has a plus side: It has proved its success! 3) Factor Comparison Method: Key jobs, approximately between 15 and 50, are selected in the organizations as standards. Its complexity is its limitation. 4) Point method breaks down the jobs based on various identifiable criteria, such as skill, effort and responsibility, and allocates points to each of these criteria. In this method, appropriate weights are given, points are summed and jobs with similar point totals are in similar pay grades. Among these methods, point method is not only the most stable one but also the most-widely used (Cenzo & Robbins). Point method types are wage surveys, wage curves, and wage structure. Most commonly used Job evaluation system is the Hay System, which uses the following compensable factors, called factors: Know-how Problem solving Accountability

 Working Conditions These factors are subdivided into their basic components called 'dimensions' which vary for each factor. Below are the dimensions listed for all factors: Know-how:

1. Practical procedures, specialized techniques and knowledge within area of interest to work, commercial functions, and professional and scientific disciplines, also called technical know-how 2. Planning, organizing, coordinating, integrating, staffing, directing and or controlling the activities and resources associated with the function of the unit, position, section, etc; also called management know-how. 3. Face to face skills needed for various relationships with other colleagues, also called human relation skills

Problem Solving:

1. The environment in which the thinking takes place. 2. The difficulty of the thinking to be done; the originality and complexity of the thinking required.

Accountability:

1. "Freedom to Act" which is the extent of exclusive, procedural or systematic guidance and control on the job. 2. "Job Impact on End Results" which is the degree to which the job affects or brings about the results expected of the unit or function being considered. 3. "Magnitude" is the size of the function or unit measured in the most appropriate fashion.

Working Conditions:

1. "Physical Effort" - jobs, which may require levels of physical activity, which may produce physical, stress or fatigue. 2. "Physical Environment" - jobs which may include exposure to unavoidable physical and environmental factors which increase the risk of accident, ill health or discomfort to the employee. 3. "Sensory Attention" - jobs which may require concentrated levels of sensory attention (i.e. seeing, hearing, smelling, tasting, touching) during the work process. 4. "Mental Stress" - refers to exposure to factors inherent in the work process or environment, which increase the risk of such things as tension or anxiety.

This system is still the most widely used compensation system today although it was invented nearly 70 years ago by Ned Hay. Once the job evaluation is done, the data is used to develop a pay structure in the organization. As organizations are rapidly changing in the dynamic world, the compensation programs are, too. Organizations cannot continue to increase wage rates by a certain percentage each year without some comparable increase in performance (Cenzo & Robbins). Therefore, market surveys are conducted in order to make sure that external equity is achieved in the companys compensation system. Market surveys are done either by purchasing marketing info from HR consulting firms or by conducing in-house salary surveys. The ultimate objective of these surveys is to learn the market value of different jobs, and use them in internal job evaluation process. However, the surveys are only applicable to key or benchmarks jobs in the market. Positions that have company-specific job descriptions and specifications should have been treated differently. After the pay structure has been completed, the last step is to assign each individual a pay rate for his/her job, namely the individual pay assignment, which depends on a number of factors, which are:

 Experience Company tenure Assessed job performance Individual pay assignment is commonly considered to be providing individual equity as opposed to internal equity (via job evaluation) and external equity (via market survey) of the compensation systems. 3. Criticisms to Traditional Compensation Model Although being a widely used system throughout the world, the traditional compensation model is questioned in a number of ways. Lets talk about some of the criticisms in more detail. The deterministic nature of traditional models: The traditional model is heavily dependent on the two steps that weve spoken before. These are job evaluation and market survey. The compensation problems observed in each firm are typically unique and more complex than the process described in the traditional models steps. The firms must implement considerable amount of creativity in order to absorb large amounts of internal and external information and develop a sound plan aligned with the direction of the firms future pay policy. Off-the-shelf methods job evolution and market survey focuses on a universal perspective that may not be relevant to the firm. Moreover, firms are demanding more and more specialized human resources in this knowledge workers era and market surveys are simply not applicable to jobs other than key or benchmark jobs in the market. Inapplicability to Executive, Managerial and Professional Ranks: At the upper management and knowledge worker ranks, it is almost impossible to divide apart individual contributions from the work itself. Because contributions are results of personal characteristics rather than the tasks performed. In such a case, application of the traditional model can be destructive rather than productive. Moreover, the traditional model encourages the individualism via making rewards

contingent on the fine distinction in the nature of the task being accomplished, thus fostering competition but building artificial barriers between employees. This will not be likely to bring success in environments where intense team effort, integration of activities among individuals, exchange of tasks is more than necessary, such as R&D firms. Lack of flexibility: Since the traditional model relies on fixed salary and benefits associated by each rank in the hierarchy, as determined via job evaluation and market surveys, its reliable in industries where high stable markets and high continuity are experienced. However, when volatile economic conditions are present in the industry, the traditional model will struggle to find a fit. As we observed in the latest economic crisis which started in the US and spread to the Europe, few organizations were able to lower the costs by not firing off its employees. Micro & Macro Processes: The compensation topic and HRM is still considered as subdivision of Organization Behavior science. In that extent, compensation is included in the micro processes, along with all HRM activities, as opposed to macro processes such as strategic decisions. As the knowledge workers era is being experienced where easy traditional models will not produce successful results, the compensation systems should not be considered separate from strategic decisions, as the firms success heavily depends on finding and maintaining successful knowledge workers within the company. Taking into account the criticisms just mentioned above, an alternative compensation method should bear in mind the following nuances: The pay system must be an integral part of strategy formulation The CEO and top mgmt compensation design is likely to have a cascading effect in an organization Compensation plays a major role in strategic decision-making process

4. Types of Rewards and Organizational Incentives Some types of rewards are: pay, promotions, desirable work assignments, a smile, peer acceptance, a kind of word of recognition and even a professional massage. Among these, pay is the most obvious reward employees get from work (Cenzo & Robbins). Organizations use rewards to motivate people. Rewards are also used to motivate job candidates to join the organization and to get employees to come to work and perform effectively once they are hired (Cenzo &Robbins). Once an organization has made the investment and they developed the talent, holding the talent becomes priority. Competitors would be keeping an eye on those talents and would attempt to lure them away (Berger & Berger). Companies can take some defensive measures to retain valuable and desirable talents. Those measures are classified as financial incentives, which are handcuffs and other arrangements; psychological incentives. In where companies work to increase the personal job satisfaction; and organizational incentives, in which companies give those talents authority over their own company (Berger & Berger). Three of the most used organizational incentives are: Intrinsic vs. extrinsic rewards Financial vs. non-financial rewards Performance-based vs. membership-based rewards (Berger & Berger)

Intrinsic rewards are the satisfactions one gets from the job itself. Having a pride in ones work, or having a feeling of accomplishment is examples of this type of rewards. Extrinsic rewards, on the other hand, include money, promotions, and benefits. Among extrinsic rewards examples, we can count a salary increase or a write-up in the company magazine. They are external to the job and come from an outside

source. For instance, Apple gives a PC to all its employees after they are hired and after a year is completed, the PC becomes the employees own property (Berger & Berger). Sometimes rewards enhance the employees well-being, they can do this directly through wages, bonuses and profit sharing, or indirectly through supportive benefits such as pension plans, paid vacations, sick leaves (Berger & Berger). Nonfinancial rewards do not increase the employees financial position. They do not make the employees life better off the job, but they emphasize making life on the job more attractive. The old saying One mans food is another mans position states that it is important to provide the right reward, especially on nonfinancial rewards. One may find the reward helpful, whereas it would not make any sense to another (Berger & Berger). An example would be kindergarten at work. A person with a child would definitely benefit from this kind of reward, but it would not be perceived fair by a person who is single and not having a kid. Having a chance to work with favorite colleagues, achieving a desired work assignment or an assignment where the worker can operate without close supervision are among nonfinancial rewards, and is they are applied correctly, they provide stimulus for improved performance (Berger & Berger). By the use of commissions, piecework pay plans, stock options, career development, special work assignments, incentive systems, group bonuses, merit pay, or other forms of pay-for-performance plans, performance-based rewards are exemplified (Cenzo & Robbins). Some of membership-based rewards are profit sharing, employee stock purchase, job training, life insurance, company parties, etc. Performancebased ones are referred as ones to have, whereas membership-based rewards are referred as nice to have (Berger & Berger). Organizations are moving to varied themes of the pay-for-performance systems. Incentive compensation plans, competency, and team-based competitions are those systems that were mentioned in Cenzo and Robbins book.

Incentive compensation plans are given in addition to the basic wage. These plans are classified under three groups: a) Individual incentives: They are paid off for individual performances. Merit pay, piecework plans, commissions are popular approaches. Merit pay is an increase in ones pay, usually in annual basis. The problem with that pay is that pay increases are always expected and sometimes companies have hard times for various reasons such as economical crisis, rival effects, etc. However, not giving a pay increase can lead to decreased morale, and productivity problems. Piecework plan is the pay for the number of units employees actually produce. An employee is generally guaranteed a minimal hourly rate for meeting some preset standard output. When the employee exceeds this standard, the employee earns so much for each piece produced. There are generally two rates set, one up to standard, the other, which is higher, when the employee is over the standards. b) Group incentives: Two or more employees are paid for their combined performance. c) Plant-wide incentives: It is to direct the efforts of all employees toward achieving overall organization effectiveness. Or simply put, how well the entire group performed. Some of plantwide incentives are Scanlon plans, IMPROSHARE, and profit-sharing plans. All this kind of incentives suffers from a dilution effect. It is hard for employees to see how their efforts result in the organizations overall performance (Cenzo & Robbins). Competency based compensation questions whether paying jobs or people. Organizations view the people as an organizations competitive advantage, instead of thinking of the job as the most critical aspect to the organization. In this program, as it is noted on Human Resource Management, individuals progress through a four-staged model of development:

1- Apprentice: Dependent on assistance of others. Salaries are the lowest on this stage. 2- Doer: They begin to learn the job, contribute significantly to achieving unit goals. In this stage employees are empowered, in other words. 3- Mentor: They have greater responsibility for achieving unit goals. This may include developing others, setting unit goals, etc. 4- Strategic leader: They have organizational responsibilities. They establish organizations directions. The highest rate of pay goes to individuals possessing strategic leader competencies. Team based compensations are ties to team-based performance. Team members often share equally in the reward. For example, a relay team consisted of four people, may run a good time and when they will be rewarded, they get exactly the same amount no matter if ones split was, say, 50 seconds, whereas others was 57 seconds. It does not mean who contributed what, but instead, only the result matters. Teams must have a clear purpose and goals, they must understand what is expected of them, their effort is worthwhile, they must be provided the necessary resources to complete their tasks, and there must be mutual trust among the team members (Cenzo & Robbins). If these do not exist, serious obstacles to teams may exist.

5. CEO and Top Executive Pays in Organizations Top managers are expected to demonstrate good decision-making abilities. And since not everyone has these abilities, scarce source of qualified senior executives lead to big amount of money as their salaries. High pay encourages top=level managers to perform well to keep their jobs, and it also acts to stimulate lower-level managers to work hard in order to, one day, move up the ladder to the big money (Cenzo & Robbins).

In order for a company not to experience failures, CEO Incentives should align with Company's Long-Term Agenda. For an incentive system to usefully support a firm's long-term, society-focused agenda, companies need to: lessen their reliance on financial rewards to motivate top management strengthen share-ownership requirements and stock-vesting conditions for senior executives and board members change CEOs' perception of compensation as a tool to "keep score" vis--vis their peers and bolster their own egos Moreover, CEOs who are sincere about putting their companies on a path to maximize value for society should measure their achievements through impact in that arena rather than through quantum of pay. In that extent, many factors come into play when evaluating the CEO Performance with regard to that of the company. One of these criteria is the relationship between the environmental pollution performance and CEO pay. According to research conducted by Gomez-Mejia et al. (2009), in polluting industries: good environmental performance increases CEO pay environmental governance mechanisms strengthen this linkage; pollution prevention strategies affect executive compensation more than end-of-pipe pollution control; long-term pay increases pollution prevention success. Contrary to researchers expectations firms with an explicit environmental pay policy and an environmental committee do not reward environmental strategies more than those without such structures, suggesting that these mechanisms play a merely symbolic role.

In todays high technology environment, the High-Tech companies CEOs attract our attention on what kind of factors their pay should be based on. To illustrate this, a study was conducted to determine the relationship between innovation and the CEO pay in the High Tech companies. According the research conducted by Balkin, Markman, and Gomez-Mejia (2000) suggests: an empirical relationship exists between innovation and CEO short-term pay in the hightechnology firms There is also some mixed evidence to suggest an empirical relationship exists between innovation and long-term pay in the high-technology firms. There is no relation between innovation and CEO pay (either short-term or long-term) for non high-tech companies In the context of high discretion due to uncertainty, a characteristic of high-technology industries, CEOs are rewarded for taking risks, sucb as making investments in innovation. One other interesting topic would be the relationship between the CEO pay and ownership structure. The research conducted by Gomez-Mejia et al. (2005) suggests that: For owner controlled (OC) firms and owner-managed (OM) firms there is significant pay/performance sensitivity for all employees In management-controlled (MC)firms, changes in pay are related to changes in size of the firm Ownership structure not only affects upper managements pay, but also the pay of all employees through substantial differences in the firms compensation practices MC managers more likely to reward firm size, whereas OC managers more likely to reward firm performance (financial)

 Its interesting to find that owner-managed firms pay/performance sensitivity coefficients are slightly less than that of OCs, while the pay/size sensitivity coefficients in OM firms are less than in MC firms

6. Compensation in Non-Profit Organizations So far we have made analysis and interpretation about compensation in business firms, i.e. profit organizations. How about the compensation implemented in non-profit organizations? According to the definition of non-profit or not-for-profit organizations (Bottiglieri et al., 2011), these organizations do not issue stock to the public and therefore ownership cannot be traded, bought or sold. Research (Frumkin & Elizabeth, 2010) revealed that: Nonprofit CEOs are paid a base salary, and many CEOs also receive additional pay associated with larger organizational size While pay-for-performance is a factor in determining compensation, it is not prominent. CEO compensation is significantly higher in the presence of free cash flows The non-distribution constraint appears to limit incentive-based compensation To attract and retain good management, nonprofits may compensate more entrepreneurial managers that generate substantial commercial revenues and higher levels of liquidity

Figure 2. Median Annual Incomes in Non-Profit Organizations

7. Supplemental Financial and Nonfinancial Compensation There are also supplemental financial compensation types that are worth mentioning. Bonuses and stock options dramatically increase the total compensation that executives receive. Even though bonus is earned in the current period, it is distributed over several future periods. For example, an executive may have earned $1 million bonus but have it paid $100,000 a year for ten years. The major purpose is to increase the cost, so called opportunity cost, to the executive of leaving the organization. Those employees who are willing to leave must forfeit their deferred bonuses (Cenzo & Robbins). Another form of bonus, that is becoming popular, is hiring bonus. It is purposely designed to help senior executives defray the loss of deferred income. Stock options are commonly offered to executives to make them more attached to the company (Cenzo & Robbins).

In addition to supplemental financial compensation, there is also supplemental nonfinancial compensation. Some benefits are reserved for privileged executives only. These benefits may range from an annual physical examination, which is worth few hundreds of dollars, to interest-free loans of millions of dollars. Some popular perks are the payment of life insurance premiums, club memberships, and company automobiles (Cenzo & Robbins). It is not that easy to design and implement international compensation system. In the United States, international compensation packages consider 4 factors, as Cenzo and Robbins put: 1) Base Pay: The range of pay in other countries may be different that it in U.S. For example, a middle manager in U.S. may earn $60,000 and same position in Germany gets $90,000. However, the U.S. higher-level executive might earn $500,000, whereas her counterpart in Germany earns only $150,000. Taxation is a major factor in calculating equitable base pay rates. 2) Differentials: The cost of living is not same around the world. They intend to offset the higher costs of overseas goods, services, and housing. 3) Incentives: Not everyone is willing o be separated for a long period of time from their families, friends; so mobility inducements to go on foreign assignments are regularly offered. They may be monetary payments, or services as housing, car, etc. 4) Assistance Programs: The overseas transfer requires a lot of expenditures and effort for the employees family. Therefore, some programs are offered, such as household good shipping, major appliances, automobile protection, education allowances for their children.

8. Compensation Plans and Total Rewards Element Compensation plans need to be tailored to the specific needs and unique characteristics of the organization to create value. They also need to be expanded and integrated with programs, tools, and practices that impact the actions of people (Rosen & Wilson).

Rewards need to be meaningful to the individual and directly relate to the strategy and key drivers of the organizations success. To make reward more meaningful, organizations segment the internal market both in macro level, in which different talent populations are searched, and in micro level, in which managers understanding of what motivates his staff members (Rosen & Wilson). Rewards also need to directly support the creation of magnetic cultures. This terms suggests that an environment that draws people in, and gives them good reasons for staying. Magnetic cultures are characterized by employees who are proud of their workplace, recommending its products and services to others and their organization as one of the best places to work in the community (Rosen & Wilson). Compensation and total reward systems that foster such environments must mix both extrinsic and intrinsic rewards effectively to meet the needs of employees (Rosen & Wilson). Traditional approaches to rewards are salary, bonuses, stock options, employee benefits as we already mentioned. Other practices that may have a greater meaning to the individual and reduce costs to the organization: skill development, working closely with a team to accomplish an important mission, having the flexibility to address personal work/life issues

Rosen and Wilson defined the elements of total rewards, in addition to those above: Salaries and other forms of secured compensation Variable pay and the opportunity to share in the success of achievements A stake in the long-term growth and future of the organization through equity participation, career opportunities, or job security The investment in ones development and increasing competencies

 The opportunities to have challenging and meaningful work The appreciation and recognition of ones contributions to the organization The involvement in decisions that impact ones work and career The ability to make meaningful decisions The confidence in the leadership, mission, and importance of the organization The pride that accrues from being part of a winning organization (Rosen & Wilson). There are not only positive things about rewards, but, there are also problems with rewards. When one group complains about the rewards provided to another, their concerns may come from 2 different motivations: 1- They are expressing a need for new, more meaningful rewards and their concerns may be legitimate 2- They may be seeking to receive the goodies of others without having to perform differently (Rosen & Wilson). To get peoples attention, increasing the amount of money is not always the best answer, as Rosen and Wilson noted. If companies make rewards more personally significant, contingent on performance and contributions, and aligned with the strategy and individuals roles within the organization, compensation will have the impact desired. People work for more than pay, so companies must cover all the bases to get the best ones! (Rosen and Wilson). There are two emerging reward trends, mentioned in Rosen and Wilson:

1- Customize Rewards: Enable business unit managers to customize reward and talent strategies to match the local needs. An example of this is Toyota. Toyota uses rewards and punishment for its employees. Their criteria is the attendance to work and those, who did not miss any day has a right to be in a lottery to get a chance to win many awards, including a car! But those, who make unexcused absences get fired. For instance, a flat tired is considered as an unexcused absence when missing the whole day (Toyota). 2- Delegate Reward Accountability: Make managers at the business unit level responsible for effective reward budget management in their area of responsibility. a. Managers must be responsible for pay and reward expenditures. b. From the career management standpoint, the best managers manage pay and other rewards to maximize business results c. Some people are more valuable than others to the company and the managers job is to make sure the company is able to get and keep the best possible employees (Rosen & Wilson). Rosen and Wilson mentioned four total reward components: 1. Individual Growth: involves career preparation and enhancement so people keep fresh and current in the areas of expertise the company needs 2. Compelling Future: The most essential employees want a company with growth in the future. Employees want to work in a company that they are proud of. People want to work in ethical and trustful companies. 3. Positive Workplace: People want to work for leaders they respect and with colleagues who inspire them to do better and who are excellent team members. Interesting and challenging work is critical. It is better when there is more trust and commitment from top to bottom in the organization. Open communication is also essential to understanding and acceptance.

4. Total Pay: When a CEO was asked if the pay was that important, he responded: If you dont think pay is important, stop paying your people and see how long they continue to come to work. The use of variable pay and incentives for performance has grown in volume and variety. Variable pay is an essential total pay tool, because it rewards performance that can vary from performance period to performance period Acknowledging accomplishments through nonfinancial recognition and celebration has grown in importance The primary total reward challenge is making your company attractive to the best people (Rosen & Wilson). There are long-term incentive plan types that companies use as their compensations: Stock options : a right to purchase a specific number of shares of stock at a predetermined price. It usually takes 3-4 years. Performance plans: a reward is contingent upon how well performance objectives are achieved over a given performance cycle. Approximately 3-5 years is needed. Restricted stock: Recipient must fulfill a vesting schedule to fully earn the reward. When the vesting schedule lapses (3-5 yrs), recipient can sell or retain his/her shares Phantom stock The objectives high-performing companies are seeking to address are to attract top talent, engage and motivate employees, retain top performers, create succession plans, lengthen the performance horizon and creating line of sight.

9. What could be done for high attrition companies In our previous sections, we mentioned that achieving internal and external equity in compensation systems directly affects the employees enduring career in the company. What could be done in order to prevent to keep attrition rate smaller? Detmer (2007) puts that: The manager should share opportunities for advancement for certain employees The companies should have an effective training program. Effective training and a real program for progress are essential to having employees view your company as a good place to invest years of their lives. Diagnose training needs and provide appropriate training. Remember, training is motivational It's shocking and discouraging for an employee to be super-achieving and grossly underappreciated. It's important that management be trained in how to properly conduct performance reviews. The managers should always spell out their expectations and talk to their employees through the steps to success Some employees are content with what they are doing and would not be happy to be pushed down a path. Be sensitive to their needs and to what they don't want. The importance of a job title should not be discounted. We all have egos - and even humble people like to have this need fulfilled

10. Summary The interface of compensation system with career management can be summarized as follows: Closed bracket: including recruitment and firing. From the beginning, compensation is important because this is the stage where companies use compensation as cheese to catch the mice! If companies want to have good, qualified people, they have to have good compensation system. Progress of that employee (his/her development): Training is important! As a part of compensation, companies pay for training. There is also an opportunity cost involved in training employees because instead of keeping the employee at work, the employees send them to the training and cannot use the employee. Training is very costly, hiring a coach to train, renting hotel or a place that the training will take place, sending the employees are all factors for cost. Retaining employees: The compensation system definitely has to be attractive that the company does not miss its qualified and prepared employee to another company. Compensation is necessary to make people do something, although that thing is not that interesting! For example, in good old days, the area of marketing was the rising star and nobody wanted to be in the area of operations. To make people want to be in operations field, the company should have an attractive compensation system. Compensation is higher when ones career develops. The higher the position, the higher the compensation is. Performance evaluation can be utilized to find out potential individuals for future.

References: Berger, Lance A. annd Berger, Dorothy R. The Talent Management Handbook, McGrawHill.(2004). BERRONE, PASCUAL, and LUIS R. GOMEZ-MEJIA. "ENVIRONMENTAL PERFORMANCE AND EXECUTIVE COMPENSATION: AN INTEGRATED AGENCYINSTITUTIONAL PERSPECTIVE." Academy of Management Journal 52.1 (2009): 103-126. Business Source Complete. EBSCO. Web. 16 Oct. 2011. "Compensation in Nonprofit Organizations." Nonprofit World 19.1 (2001): 32. Business Source Complete. EBSCO. Web. 16 Oct. 2011. DeCenzo, David A. and Robbins, Stephen P. Human Resource Management Fifth Edition. John Wiley &Sons, Inc. (1996). Dick Detmer. "Beyond compensation. " Rental Product News 1 Jun 2007: ABI/INFORM Trade & Industry, ProQuest. Web. 16 Oct. 2011. Frumkin, Peter and Keating, Elizabeth K., The price of doing good: Executive compensation in nonprofit organizations, Policy and Society, Volume 29, Issue 3, August 2010, Pages 269-282, ISSN 1449-4035 Gomez Mejia, L.R., & Berrone, P., Franco-Santos, M. (2010). Compensation, organizational strategy and firm performance. New York: M.E. Sharpe, Inc, 2010. Print Liker, Jeffrey K. and Meier, David P. Toyota Talent: Developing Your People The Toyota Way McGraw-Hill. Krell, Eric. "2006 CAREER & COMPENSATION SURVEY. (cover story)." Business Finance 12.5 (2006): 19-30. Business Source Complete. EBSCO. Web. 16 Oct. 2011. Mayo, Andrew. Managing Careers: Strategies for Organizations. Institute of Personnel Management (1994). Rosen, Andrew S. and Wilson, Thomas B. Integrating Compensation with Talent Management in The Talent Management Handbook. McGraw-Hill (2004). WALLACE, M. J., Jr., & FAY, C. H. Compensation theory and practice. Boston: Kent Publishing Company, 1983 Werner, Steve, Henry L. Tosi, and Luis Gomez-Mejia. "ORGANIZATIONAL GOVERNANCE AND EMPLOYEE PAY: HOW OWNERSHIP STRUCTURE AFFECTS THE FIRM'S COMPENSATION STRATEGY." Strategic Management Journal 26.4 (2005): 377-384. Business Source Complete. EBSCO. Web. 16 Oct. 2011. What Is Compensation?, Penn Human Resources.

 Bottiglieri, W., S. Kroleski, and K. Conway. "The Regulation Of Non-Profit Organizations. " Journal of Business & Economics Research 9.9 (2011): 51-60. ABI/INFORM Global, ProQuest. Web. 23 Oct. 2011. http://www.hr.uwaterloo.ca/staff/hay_evaluation.html