Executive Pay and Compensation, Golden Parachutes and Incentives

Abstract

This research paper explores executive’s pay and compensation and the impact of golden parachutes and incentives within the workplace. Specifically, this paper homes in on the various types of compensation and how each organization determines pay rates and salaries. This paper also details persons in U.S history who have received significant amounts of golden parachutes. I will examine the validity of incentives in the workplace and present pros and cons of an incentive program. Lastly, I will discuss how to achieve an effective incentive program and possible pitfalls of the program.

Incentives and compensations are the roots of employee work morale. It is the reason behind why work exists in the first place. In the economy, the firm has goals to accomplish and require human capital to do so. In the household, people require work to earn money to survive. Essentially, there lies an exchange of labor for compensation. Compensation can be defined as cash or benefits earned by an employee from an employer in exchange for labor or human capital. Incentives drive work in that they offer motivation for extraordinary work. The notion behind employee incentives is to give employees possession over their performance. Employee feel valued when compensation packages match their qualification and feel appreciated when awarded incentives. These, in turn, boost self-esteem and job satisfaction and ultimately increase employee work morale.

When discussing compensation, it is important to note that compensation can be divided into several different categories. Categorically, financial compensations or direct compensation ranks the highest. Direct financial compensation is the most prominent and known method of compensation. Direct compensation is the money which is paid directly to employees in exchange for their labor and is most sought after by workers. Included in this category is everything from hourly earnings, to established salaries, bonuses, tips, and commissions. (The Canadian Professional Sales Association, 2018). Financial compensation for a particular job is multifaceted. Primarily, the business should understand what a particular job is worth paying an employee for, as well as how to make the compensation competitive in the industry. The amount can also come down to the specifics about each employee. Let's look at these factors in a bit more detail.

One might pose the question, ‘how might does a firm decide what an executive should be paid’? The answer to that question is simple; according to salary.com, the CEO’s rate of compensation sets the ceiling pay for the company. They further state that when companies set payment structures, they outline payment for the maximum and minimum paying professions before dealing with the compensation for the jobs that are in the middle. In the old-fashioned ‘internal equity method’ of setting a compensation structure, the CEO’s pay establishes a ceiling for the company, and each level below is compensated at a comparably lower level. If you know how well the CEO is compensated, you can get a sense for how generous the company is likely to be toward other employees as well.

The second type of compensation is regarded as indirect financial compensation or non-financial awards. This portion involves all dues compensated to a worker that is not inclusive indirect compensation. Normally, this method of payment is frequently accepted as the part of a worker’s agreement that covers items such as temporary leaves of absence, benefits and retirement plans. Health Insurance is one of the important methods of indirect financial compensation. Employers are responsible for the vast majority of health insurance coverage. Knowing which policy to select is critical since price can be a factor. Group coverage is seen as the lower end of the spectrum while single policies can leave a dent in one’s pocket. Group insurance is beneficial since workers usually pay toward their own coverage, they, however, profit through considerably condensed medical expenditures. There are also a lot of workplaces that offer disability and life insurance coverages to protect workers and foster worker loyalty.

With flex time, employees are able to receive payment. Flextime provides workers with the opportunity to work hours beyond the usual 9-5 work schedule. This can be extremely advantageous for parents who are charged with the responsibility of picking up children or meeting appointment times. Furthermore, it can be advantageous for workers who perform best during the wee hours of the morning or late in the evening, and those who have personal things to attend to without having to take sick days. This works for a few firms over others. Bank offices, for instance, are less adaptable on the grounds that they are usually open during business hours. In any case, organizations that are not as familiar with customary business hours can choose to not conform to regular employee schedule hours. Being stuck in traffic and driving up stress before setting foot on the corporate grounds every morning can place can leave employees with a terrible attitude. Allowing them to work from home once is beneficial for the employee since it provides a peace of mind. Credit is given to the Internet and innovative advances in corporate communications, workers can, in any case, handle their obligations regardless of whether they don't travel more remote than from their room to their home office. The keys to making this work are a dependable team and a superb and effective IT department.

Organizations are aware that a solid workforce is more beneficial and takes less sick days. So past medical coverage scope, numerous organizations offer gym memberships, on-site recreation centers, and normal health screenings. Organizations like this, also supply representatives with cafeterias with free meals, and babysitting services to mitigate some parental strains. Management can expect different advantages, for example, luxurious living arrangements, dry-cleaning services, nation club enrollments, season tickets to social and formal occasions. Some organizations it as far as providing these benefits through golden parachutes.

Meg Whitman is an American business executive, political activist, and philanthropist. Whitman served as President and Chief Executive Officer of Hewlett Packard Enterprise. She is one of the top executives with a world record of a significant amount of golden parachute benefits totaling 9 million dollars should a merger occur, and 51 million dollars should she be fired. On November 20, 2017, she announced that she would resign from her role as CEO effective February 1, 2018. Golden parachutes are on the rise. (See Appendix A)

People everywhere are alarmed by golden parachutes except for the people receiving them. Why do they exist? According to Investopedia, golden parachutes exist with key executives as a type of anti-takeover strategy, also mutually denoted as poison pills. They consist of substantial benefits given to top executives if the company is taken over by another firm or if the executives are terminated as a result of the merger or takeover. The notion of golden parachutes began in late 1970, whereby extreme takeovers trailed behind. Since junk bonds became a thing, takeovers became likely and even the wealthiest of Fortune 500 Companies were deemed unsafe. By the year 1896, one-third of United States firms implemented the golden parachute concept. Some speculate that golden parachutes exist because of insecurity of corporations. There existed even more dissimilarity in things provided by golden parachutes. The simplest, “bare bones” parachutes might provide only a lump sum cash payment. On the other hand, the highest golden parachutes may comprise of stock grants and options, and dental insurance. (Fiss, P. 2016)

Another aspect that drives employee work morale, are incentives. According to the BusinessDictionary, incentives are the thing that encourages or supplement a reward that serves as an inspirational device for a desired action or performance. It is almost safe to say that everyone loves incentives. Incentives are a critical piece to life. Identifying and rewarding employee performance and contributions are a key factor in creating workplace culture or morale. Employee job satisfaction and self-confidence are boosted when they know that their contributions are valued and appreciated. (Strategic Incentives, 2014) The Huff Post argues that there are numerous other ways to reward an employee then cash. Once such example is building a corporate culture that identifies good work and performance with perks and words of encouragement and providing a setting where people have a voice and ownership of their work.

Employers have a wide variety of incentives to choose from. Incentives can be separated into two categories; monetary and non-monetary. Monetary incentives can be a very powerful factor for employee motivation and performance which, sequentially, can lead to important revenue in terms of organizational performance. ( Herman A., Harry J., Gottfredson R. 2012) Pay and allowance is the primary and basic type of monetary incentive for employees. This kind of incentive also includes stipends, traveling allowance and other allowances. From time to time, there may be pay increases; monetary incentives are also inclusive of this. A bonus is a kind of monetary incentive whereby employees are offered extra cash during celebrations such as Christmas. Profit share is another major source of incentivizing in the workplace. Profit sharing is when employees are offered shares in the company. This particular aspect of monetary incentive aids in inspiring employees to contribute their utmost since their profits their gains are linked directly to the organization’s profit. Retirement benefits are also monetary incentives where provident funds, pension plans and gratuity Lastly, perquisites and fringe benefits such as education for the children and auto plan allowances are included in monetary incentives.

On the other hand, non-monetary incentives are those incentives that help to satisfy an employee mentally, socially and emotionally within the workplace. The first kind of non-monetary incentive can be described as status. Status is an employee’s position in the organization in regard to authority, duties, rewards, respect, and acknowledgment. These help to satisfy the mental, social and emotional state of an employee. Organizational climate is another kind of non-monetary incentive. When an organization allows freedom of work, is considerate toward employees, employees behaviors are majorly impacted. When an employee is promoted, it can also be regarded as a non-monetary incentive. Although the employee will be earning more, promotions inspire employees to improve workplace performance. The job enrichment segment of non-monetary incentives refers to creating jobs with more diversity and a demand for a high level of aptitude. Additionally, employee recognition is a major source of morale in the workplace. It is considered an incentive since it is given after an employee has performed well.

An effective incentive program should have all of the following attributes.

• Employee Morale- Employee contribution is an integral piece of an effective plan. Including the workers in incentive, makeup gives them a sense of belonging and knowledge of company regulations and how their contribution affects the end product.
• S.M.A.R.T - These are objectives that are motivated what the company needs. SMART goals are Specific, Measurable, Attainable, Relevant and Time structured.
• Reliable Supervision of Incentives- Many incentives flop since management does not allocate sufficient time, or disbursements are not on time,
• Ensuring Employee understand payout -Frequently, incentives fail before they even get a chance to start since employees do not understand how they earn rewards. Payouts, accomplishments, and awards should be clarified, and details about how they are earned should be made known to workers.
• Competitiveness-These are related to employee buy-in but eventually, an incentive needs to be enjoyable! Making results visible, and acknowledgment festivities are some ways to encouragement competitiveness in the workplace.

Although incentives can have a positive outcome, it can also contribute to a negative work culture. Primarily, incentives can create tension or conflict within the workplace since it is a source of competitiveness. Employees can become jealous or envious of other employees who are constantly receiving recognition for their outstanding performance, which may lead to physical acts of hatred. Surprisingly, incentives can eradicate efficiency from low-level performers. Naturally, top performers acquire organizational incentives. There exist workers with a steady performance, and possibly their God-given aptitudes are not as distinct as other workers. As a result, they are placed on the back burner when incentives are being handed out. When that steady performance is not recognized, these employees lose confidence in themselves, grow weary, and eventually leave the job since they feel that they are not valued.

Furthermore, incentives must have tiers to considered operative. Sooner or later, a thank you card or letter gets old. A want for candy may develop. Then, an additional vacation or sick leave. “When you give a mouse a cookie, as Ayn Rand once famously commented, then he’s going to ask for a glass of milk. If you run out of milk, you might run out of top performers.” (Gaille, B., 2015)

Also, incentives can change the focus of work into competitiveness instead of quality. When employees are focused on competition rather than quality, then the value of work diminishes since employee seek to ‘outdo’ their ‘contenders.’ In a study conducted by psychologists, the behaviors of children in preschool, between the ages of three and four were analyzed. The children particularly had an interest in drawing and were separated based on three differentiating conditions. The first group was told they would receive an award if they partook in the drawing test. The second group was not informed about the award until after the drawing activity and the final group did not receive an award. The study displayed that children who were expectant of a reward had less creativity during the drawing activity, versus the others who received the award after or no award at all. This study is indicative of the importance of how managers should deliver incentives, even if they are an effective means of encouraging extraordinary performance within the workplace.

To conclude a director at a product organization needed to discover and settle programming bugs efficiently. He devised a plan that paid $20 for each bug the Quality Assurance individuals found and $20 for each bug the developers resolved. Since the developers who made the bugs were also accountable for resolving them, they reacted to the plan by making more bugs in software programs. This activity expanded their payoffs under the arrangement—there were more bugs to recognize and resolve. The arrangement was eradicated in one single week after one worker got $1,700 under the new plan. As a result, incentives should a clear plan and should be monitored.