Scholarship on labor force compensation has departed from the micro-oriented, bureaucratic focus on tools and techniques for designing a compensation system to focus on fit, congruency and linkages of a payment system with business strategy. The new approach to compensation rests on the scholarly emphasis on the predictive influence of the pay system in the integrative direction of individual employee’s effort towards the strategic objective of the organization. In particular, latest scholarship on compensation underscores the relationship between an organization’s pay system and its effectiveness or ineffectiveness.
Business policy research affirms the relationship between pay system alignment to technology, formal organizational structure, and environment, and a company’s performance. In particular, evidence-based business policy research shows that matching or coherent types of strategies predicts the future performance of a business.
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Today, compensation goes beyond payment of fixed salary for executives and staff to total compensation packages that additionally include benefits such as security-oriented benefits like golden parachutes, employment contracts, and supplemental retirement plan for executives. Pragmatically, total compensation incentives have instantaneous payment guarantees to companies as reflected by internal financial measures and rise in price of publicly traded shares.
The link between total compensation and a firm’s performance has been contentious among management scholars. On one hand, management scholars point out the benefits of total competition in the development and maintenance of a company’s competitive edge, especially in the high-technology industry as reflected in the obscenely high remuneration of Chief Executive Officers of some of the global top high-tech giants.
Several literatures underscore the relationship between CEO pay and the performance, value and behavior of companies publicly traded on the stock market. For instance, Makri, Lane, and Gomez-Mejia (2006) evidence-based research shows that high-tech companies that implement behavior-based and outcome-based performance protocol to compensate executives demonstrate better performance in the market compared to those implementing a generalized pay system. In particular, Makri, Lane, and Gomez-Mejia study of the innovation CEO pay relationship within the high-tech industry underscored alignment of pay and innovation outputs quantity in the global most successful high-technology companies. The authors, particularly revealed the significance of the innovation CEO pay relationship with the innovation output quality. Halls and Liebman (1998) study affirms Makri, Lane, and Gomez-Mejia positivist approach to CEOs total compensation by associating high compensation of CEOs to firm performance rather than their bureaucratic positions in the company.
Although CEOs annual bonus contract payment is at the discretion of the Boards, discretion only determines individual allocations of a CEO rather than his/her overall payouts. Furthermore, the board predicates a share of the CEOs payment on some performance measures in terms of strategic milestones or pre-determined objectives. Also, the non-financial performance measure employed by the board to determine the CEOs annual incentive package uses individual performance measures predicated on pre-established objectives and subjective evaluation of his/her performance. The CEOs annual incentive package further reflect non-financial measures of a company’s progress in terms of operational and strategic objectives as well as customer satisfaction.
On the downside, total compensation translates to additional overhead costs to businesses. Business policy research shows that total compensation ranks second or third highest form of expenditure only rivaled by marketing cost and product costs. In the service sector, total compensation roughly ranks first or second highest expenditure by a service-provider firm. For instance, the Hewitt Data Company reported an increase in a bonus share of the company’s overall expenditure from 4 percent in 1991 to 11 percent in 2006. In comparison, the base salary share of the company’s expenditure dropped to 3.5 percent from 5 percent over the same period. Consequently, the company’s bonus plan, budget shot to 80 percent from 51 percent over the same period. As the labor force gobbles up the company’s resources in terms of total compensations, the company is left with few resources to finance its research and development progresses. Total compensations therefore in the long-run compromises a firm’s competitiveness from the delicate balance of resource allocation between compensation and research and development prospects of a company. The situation is analogous to the government’s struggle between allocations of the scarce budgetary resources between payments of recurrent expenditures and financing of development prospects.
As exuded by skeptics of agency theory justifications of high CEO compensations, total compensations sometimes reflect an abuse of power by a company’s executives in awarding themselves huge payments rather than their performance accomplishments. For instance, Bebchuk and Fried attributes the latest escalation in executives’ compensation perks to the growing pervasiveness of managerial power. Support for Bechuk and Fried argument reflects in the association between the relative power of executive and their compensation irrespective of their performance outcomes. The demise of companies run by some of the world’s most highly remunerated executives demonstrates the insensitivities of powerful executives to a firm’s performance. Similarly, the fixed compensation of global leaders irrespective of the performance of their countries' economies also reflects the negative impact of a fixed rather than performance-based total compensation.
Total compensation strategically helps in attraction, retention, and motivation of talent as well as implementation of the business strategy and improvement of its productivity. However, exploitation of a total compensation system to improve an organization’s effectiveness requires its alignment with the external and the internal organizational environment as well as consideration of union influence on the compensation. Furthermore, the total compensation should be tailored to the company’s culture, the size of the organization, and business strategy as well as recruitment, training and development, competency modeling and job analysis, and performance management.
Effective exploitation of total compensation to steer a company’s productivity requires the employment of the human resource triad. Human resource triad encompasses line managers, human resource professional, and employees whose individual responsibilities in total compensation help with alignment of the organizational characteristics and needs with employee behaviors and motivation while guaranteeing fair payment for employees. Total compensation also requires job evaluation of the internal value of jobs as reflected by occupational environment, associated responsibilities, task, knowledge requirement and required competence. Market-based pay levels are also determined through external market rates, and establishment of market pay policy before the establishment of the organizational pay policy. Then, employers can select a policy that matches, leads or tags the compensation paid by rival players.
Most companies implement a job-based pay system that states the minimum and maximum compensation across all the job categories. For realization of total compensation benefits, the payment system should guarantee internal and external equity. Furthermore, adjustments to the payment system and individual compensation are necessary for internal and external equity balance, for adaptation to time changes, and for the realization of individual equity.
Design of total compensation presents an overwhelming challenge for multinational companies in the balance between global consistency advantage and local environment sensitivity. In such scenario, multinationals establish consistency through centralization of the payment system with consideration of cultural norms and laws for enumeration. Multinationals also grapple with total compensation during economic downturns and with government regulatory oversight of compensation.
