A Managerial Wage Structure? The first consideration is the question of whether to use
the general wage structure or to develop a separate managerial wage structure Many
organizations do have a separate wage structure for managerial employees. Some of
these structures include more than just managers: they include other groups, particularly
professionals. These wage structures often include all exempt employees. The main
rationale for this separation of wage structures is that the pay-policy lines for exempt and
nonexempt are so different that combining them leads to a false straight-line function, the
relationship between market wages and the job evaluation system being curvilinear in
this case.
Wage Level:
Pay Increases. The basis for managerial pay increases is most often some definition of
individual performance and is determined by a management by objectives (MBO)
program. The measurable standards that are developed are done jointly by the manager
and his or her supervisors. At the end of the time period, performance is evaluated by
both parties in a joint meeting in terms of how well the objectives were met. This system
can work well where each party respects the other and does not play power games with
the setting and evaluation of objectives. There are two main problems in MBO from the
standpoint of tying it into wage increases. The first is that there is not much comparability
between individuals, so that judgments about how much one person should receive
versus another are not clear. The second is that the world may be too dynamic to set
objectives and have them portend anything in a month, much less six months. Thus,
MBO may be restrictive and hold managers to objectives that are out of date.
Managerial employees represent the most common group to be identified as requiring special compensation programs. This is for a number of reasons.
1. Managers are a small part of the total number of employees in any organization but represent a disproportionately high percentage of total wage costs.
2. They are a group of vital importance to the operation of the organization, and it is important to attempt to individualize compensation for each manager.
3. It is possible to develop measures of individual performance such that incentives are appropriate and desirable, since it is of utmost importance that managers associate themselves with organizational success.
MANAGERIAL COMPENSATION SYSTEMS
Managerial compensation programs can be analyzed using the same categories as we have for other compensation programs but at times are administered differently. So this section examines managerial compensation in these categories:
The managerial group in the organization has a number of characteristics that affect the pay level decision in the direction of paying this group at or preferably above market. First, this group of jobs is very important to the organization. The people in these jobs are highly skilled and replacement can be difficult. These factors would call for a wage level decision that emphasizes being at or above market in order to be able to recruit and retain these employees. Tied to these factors is a second consideration, the sunk costs that the organization has in the manager. Ordinarily, the manager is a person who has worked for the organization for a number of years, and the odds are good that the organization has spent considerable money in training this person as he or she has moved up the managerial ranks. A third consideration that supports a high wage level decision is that this is a small group of employees. So even if wages are high for the group, their overall impact on total wage costs of the organization may be small. Fourth, managers are in contact with the outside world a great deal. This means that they are more likely to be aware of the market rates for their jobs than other employee groups and that they are visible to other organizations that would be inclined to make an employment offer to them. Any group that is both important and visible, as is this group, will have to be paid competitively in order to hold down turnover. A final consideration that calls for an aggressive pay level decision is the relatively small supply of managers as compared with other employee groups. There is evidence that although a large number of students are going on to college and obtaining degrees, many do not desire managerial positions as much as professional ones. Middle-management pay criteria are more likely to be influenced by internal organizational factors, particularly the organization chart and the salary of the top executives. The organization chart becomes a guide for determining the appropriate internal references-those at the same organizational level. The top executive's pay becomes a ceiling in the organization: all other managerial positions can be measured in terms of their percentage of that person's pay. This is a common way in which middle management pay is reported. For instance, ERI's Executive Compensation Assessor allows one to compare the top six levels of executive pay from which the percentage difference between the top executive's pay and other positions may be calculated.
Base Pay:Base pay of managers can represent as much as two thirds of their total compensation or as little as one third, in some executives. This percentage tends to vary with organization level; the higher the level, the lower the percentage of total pay represented by base pay. Generally, the base pay of managers is set using the model developed in this book. However, there are some special considerations for management pay which will be examined here.
Two concerns with pay for performance for managers are (1) is pay contingent on performance? and, (2) Does it make any difference in performance when pay and performance are connected? Lawler found almost no relation between pay and performance measures on a sample of 600 middle- and lower-level managers. However, those managers that were most highly motivated did exhibit two crucial attitudes. First, they felt that pay was important to them (the first condition in the performance-motivation model). Second, they did feel that good performance would lead to higher pay. So the perception is more important than the fact. Lawler went on to explain why it is hard for managers to always see the performance-reward connection. First, many of the rewards are deferred, so that the time frame is too long. Second, the goals are not always clearly expressed, so the manager does not know what he or she or the organization needs to achieve. Third, the secrecy that surrounds pay increases reduces the knowledge that the individual manager has as to how he or she has done comparatively.
The answer to the second concern may not be any more positive. In one of the few studies that examined an organization throughout a period of time in which a merit-pay system was installed, it was found that the system had no effect at all on organizational performance.26 Although there may be a number of explanations of these results, the fact is that we cannot take it for granted that paying for performance is worth doing.
Variable Pay: Everything discussed so far has indicated that managers have more-than-average ability to affect their performance. Further, there are measures that can be used to determine this impact on the job. Therefore, variable pay would seem to be highly appropriate for managerial positions. Most organizations indeed claim that they pay managers in terms of performance, both that of the individual and that of the organization. If there is a difference between variable pay systems for managers and those for non-managers, it lies in defining performance in organizational and not personal terms. This difference increases as the job moves toward the top of the organization. This emphasis on organizational measures of success is functional since managers feel that organizational success is their success. But as in most variable pay systems, the correct performance standards must be the focus of the system. Schuster found that those managerial pay systems that were ineffective were those that did not focus on critical organizational outcomes.
Short-Term Incentives. Base pay may represent almost all of total pay for lower-level managers to as little as a third of top middle managers' total pay. The difference is made up in incentive bonuses, associated with both short-term and long-term performance. This section discusses short-term managerial bonuses.
The use of bonuses varies greatly with industry, but more than 50 percent of organizations have some sort of managerial bonus plan. Those organizations with bonus plans tend to pay somewhat less in base pay than those without them. Bonus plans can be divided into immediate-cash plans and deferred plans. Since short-term plans are usually immediate-cash plans, they are covered here, and the deferred plans under the long-term plans are discussed in the next section.
Bonus Standards. The manager who receives a bonus receives it because some standard was met during the past time period, typically a year. As indicated, in pay for performance this standard may be either organizational or job-related. It is common for at least a portion of this bonus be based upon an organizational standard, like profits or cost reduction. But there are a number of other possible organizational measures, such as sales, productivity, or cost savings of one sort or another. Individual job-related standards may relate to job outcomes or to the performance of particular activities beyond minimum expectations. In addition, there is often a component of the quality of the manager's relationships with his/her subordinates. This is often measured by turnover in the organizational unit.
Bonus standards may be either single or multiple. Profit sharing is a single standard. Organizations may choose to focus managers on a number of variables that they feel are important measures of success. These may include combining organizational and job measures. Each variable must be weighted when multiple criteria are used. The problems with multiple plans are that they are more complex and therefore not as understandable, and the manager may have a hard time knowing what he or she will receive, since the factors may overlap or cancel each other out.
Bonus Formula. Most managerial short-term bonuses are established on the basis of a formula that operates at given levels of performance. It is possible, however, to establish a totally discretionary plan in which top management determines each year whether a bonus will be given for the past year's performance, and if so, how much. The arbitrary nature of this procedure and the lack of knowledge by managers of the effect of their actions ahead of time makes the incentive value of a discretionary plan low.
Ordinarily, a managerial bonus is based upon the base pay of the manager. When profit sharing is used, a percentage of total profits is placed in a fund, and each manager shares in the fund in the proportion of total managerial base pay represented by his or her base pay. When other measures are used, goals are established for each of the appropriate measures. If the organization achieves or exceeds the goal, the managers would receive a percentage of their base pay. For instance, assume that the organization wished to maintain a minimum return on assets of 10 percent. The managers may receive 20 percent of base pay if the organization achieves a 10 percent return on assets and an additional 5 percent of base pay for each 5 percent increase in return on assets over 10 percent. These calculations could be made for one measure or for a number of measures. Further, the measures could be independent, or any bonus at all could depend upon maintaining a minimum level of performance on all measures. Often limits are placed on the percentage above base pay that can be earned, such as 50 percent.
Eligibility. Bonus plans are usually based on a formula designed to reflect the participant's contribution to profits or other organizational measures of success. The motivational value of the plan depends in large part on whether the manager's actions do have an impact on these measures. The closer to top management, the more likely the manager is to meet these requirements, and thus such incentive plans would seem ideal for this group.
The lower the level of middle management, the less clear is the connection, but the possibility of earning a substantial amount over base pay may keep these managers' attention on and increase their interest in the organization's goals. For lower-level management, the case for incentives tied to organizational performance is hard to make. The amounts these managers typically receive are small and the connection of their actions to the performance standard nonexistent. Variable pay plans for lower-level managers should be based more upon establishing job-related measures of performance that the organization believes will also relate to organizational success.
Long-Term Incentives. The argument for long-term variable pay plans for managers becomes much stronger the further up the organizational chart one goes. The purpose of long-term incentives is to tie the manager into the long-term success of the organization. These plans usually involve the granting of rights to the manager to become a stockholder of the organization at a reasonable cost today so that if the organization does well in the future, the stock will be of significant value. Plans associated with long-term incentives are discussed in depth in the next chapter (19).
Benefits and Perquisites
Managers are often granted additional benefits. The rationale for additional benefits is that retention of this group of employees is very important to the organization, so enhancing the membership decision is an important compensation goal. These additional benefits are often termed golden handcuffs. Some of these extra benefits are increases in the benefits available to all employees and some are special benefits to this group. One particular group of the latter is called perquisites.
Managerial Benefits. Retirement benefits of managers tend to be the maximum available within the organization's plan since managers are usually the highest-paid employees and have long service--the two criteria that determine benefit levels. In addition, long-range incentives also provide the manager with a source of retirement income.
Insurance coverage for managers is high since, again, the criterion is most often salary. Top executives are often given additional life insurance and special types of insurance, such as travel insurance. Although their time-off provisions are the same or higher, managers tend not to take advantage of them as readily as other groups. It is sometimes necessary to insist that managers take the time off that is available to them, both because they need that time off and because a large liability can be created for the organization if a category such as vacations is allowed to accumulate.
Managerial Perquisites. This is a set of special benefits available to managers, primarily top managers, which are designed to satisfy the special needs of this group. There are a number of perquisites. The first category is internal. These perquisites consist of items that are part of the work setting of the manager, such as special offices and furniture that distinguishes the status of the manager. A second category, external perquisites, has to do with conducting business outside the organization, such as a car, entertainment expenses, and club memberships. The last category is personal perquisites. This category consists of a wide variety of items, such as free medical examinations, low-cost loans, and financial or legal counseling. The last group is distinguished from the first two in that it is usually taxable to the employee.
Managers are probably the most important group of employees in the organization. While they represent a small percentage of the workers, they represent a major portion of the cost of compensation. It is important to develop a compensation program for this group that both obtains the most from these employees and keeps the costs within reason. The managerial job is one of high stress, a great deal of variety, and the need to exercise considerable judgment. Managers are highly committed to the organization, have an action orientation, and a need to express their power motive.
Compensation programs for managers are a combination of base pay and incentive pay. Given the importance of this group, its high visibility, and easy movement to other organizations, it is usual to use a high-paying wage level strategy for this group. Individual pay determination is most typically dominated by pay-for-performance with management by objectives used as a basis for measuring performance. All organizations have a keen interest in the rewards being earned by similar individuals in similar positions.
Managerial incentive programs are divided into short and long range. Short-range programs are typically rewards for performance in a particular year based on how well the manager did in achieving his or her goals but with a measure of overall organizational performance forming the base of the bonus pool from which these funds emanate. Long-term managerial incentives are intended to tie the executive into the organization, both so the executive will stay with the organization and continue to perform highly. Most of these plans are a variation of a stock option plan that grants stock or money, based on overall organizational worth, to the executive over a long time period. These plans are typically deferred income. Managers are also granted a variety of benefits and perquisites that are not available to other employee groups.
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