You can’t read a news article or blog today without someone talking about compensation (wages/salaries, but also benefits like health care and retirement). Compensation is uniquely important in organizations because it typically represents the single largest operating cost, especially where employee skills or human capital are the source of competitive advantage (e.g., Google/Alphabet, Facebook; investment banking, law,accounting, and consulting firms; professional sports teams; universities).
Compensation is also important because employees regularly report it as the most
important factor that goes into their decision of whether to take a job or stay in a job.
Compensation also plays a major role in what employees choose to do on the job: their
effort level, where they direct their effort/what goals they pursue, how cooperative
they are, how flexible they are, how ethical they are, and so forth. These all add up to determine how efficient, innovative, customer-oriented and (in the case of for-profit) how profitable an organization is over time. Profits, in turn, create jobs. In the absence
of profits, jobs disappear. An organization that pays too much, pays too little, ties too much compensation up as fixed costs, and/or pays for the wrong things puts the company, its investors, and its employees at risk. On the other hand, designing and executing an effective compensation strategy can play a key role in great shared success.
Compensation challenges ebb and flow with changes in the economy. The Financial Crisis of 2008 and the related Great Recession brought job cuts (with the national unemployment rate rising to 10 percent, the highest since 1983), reduced hours, reduced employer contributions to 401(k) retirement plans, reduced bonus/profit-sharing payments, and some wage cuts. With revenue and profits down and with labor costs often the single largest operating cost, employers cut labor costs in these ways. The Great Recession also focused attention on executive compensation. As the government bailed out the financial industry, newspapers were reporting large bonuses going to the very executives who helped cause the financial disaster. Eventually, as company revenues picked up again, we gradually saw employers put less emphasis on cutting labor costs and more emphasis on hiring. However, job growth was initially quite modest. At the beginning of 2013, the unemployment rate was still at 8 percent. Why? Employers have become increasingly careful about adding new workers because they want to keep costs under control and they don’t want to have to reduce the workforce if they guess wrong about increasing revenue growth/product demand (and the need for more workers). But competition for some types of workers has increased and wages, salaries, and benefits have likewise increased for such workers, meaning that employers must continually evaluate and benchmark their pay to be competitive. As economic growth has continued, competition for employees has increased and the U.S. unemployment rate is now under 4 percent, the lowest it has been since 1969. However, as we will see, wage gains remain modest. That is because employers are careful not only about hiring, as we have noted. They are also careful about giving wage/salary increases because once those are added to base pay, “they are there forever.” Increasingly, employers seek to make labor costs variable, which means greater reliance on bonuses and/or profit sharing, where payments to employees go up during good times, but automatically go down during bad times when profits and revenues are down.
This book focuses on the strategic choices in managing compensation. We introduce
these choices, real-world issues that managers confront from New York to New Zealand
and all points between, in the total compensation model in Chapter 1. This model pro
vides an integrating framework that is used throughout the book. Major compensation
issues are discussed in the context of current theory, research, and practice. The practices illustrate new developments as well as established approaches to compensation decisions.
We live in interesting times. Anywhere you look on the globe today, economic and
social pressures are forcing managers to rethink how people get paid and what differ
ence it makes. Traditional approaches to compensation are being questioned. But what is being achieved by all this experimentation and change? What is merely fad and fashion,
and what, instead, is supported by the evidence? In this book, we strive to separate beliefs from facts, wishful thinking from demonstrable results, and opinions from research.
Yet when all is said and done, managing compensation is part science, but also part art. Each chapter contains at least one e-Compensation box to point you to some of
the vast compensation information on the Internet. Real-life Your Turn cases ask you
to apply the concepts and techniques discussed in each chapter. For example, the Your Turn in Chapter 9 draws on Professor Newman’s experience when he worked undercover for 14 months in seven fast-food restaurants. The case takes you into the gritty details of the employees’ behaviors (including Professor Newman’s) during rush hour, as they desperately worked to fill customers’ orders and meet their own performance targets set by their manager. You get to recommend which rewards will improve employees’ performance (including Professor Newman’s) and customers’ satisfaction. We tackle major compensation issues from three sides: theory, research, and practice―no problem can survive that onslaught！
