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Chapter 12 - Recognizing Employee Contributions with Pay
Managing People:
ESOPs: Who Benefits?
This vignette describes employee stock ownership plans (ESOP’s). ESOP’s are being embraced
by smaller firms, especially those struggling to find buyers during the weak economy. Under
typical plans, an owner’s interest in a business is bought out, in part or in
whole—often through a bank loan—with the stock being held in trust. Employees then cash in
their shares as they retire. Critics believe these plans have employees gambling with their
retirement savings.
Questions
1. Is an ESOP good for employees?
This question will draw support from both sides of the philosophical aisle. Some
2. Does an ESOP motivate employees “better”?
3. What happens to employees’ retirement income if they are at an ESOP company that
runs into financial problems? What happens to the same employees, if instead, they
work at a non-ESOP company that runs into financial problems?
As with any investment or business, there is risk involved in these plans – it is the
HR in Small Business:
Employees Own Bob’s Red Mill
This vignette describes Bob’s Red Mill Natural Foods and the incentive plans they use.
Questions
1. Which types of incentive pay are described in this case? Are these based on individual,
group, or company performance?
The case indicates the company has an ESOP and profit-sharing plan. The ESOP plan
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Chapter 12 - Recognizing Employee Contributions with Pay
2. Would you expect the motivational impact of stock ownership or profit sharing to be
different at a small company like Bob’s Red Mill than in a large corporation? Explain.
Answers here will vary based on student experiences. However, smaller company’s like
3. Suppose Bob’s Red Mill brought you in as a consultant to review the company’s total
compensation. Explain why you would or would not recommend that the company add
other forms of incentive pay, and identify any additional forms of compensation you
would recommend for the company’s employees.
Answers here will also vary. At present, the company appears to only have
Additional Activities
Twitter Focus
Bob Moore, founder and president of Bob’s Red Mill Natural Foods, called together employees
on his 81st birthday to tell them he was giving them the company. Moore had set up an employee
stock ownership plan, placing company stock in a trust fund, and established a profit-sharing
plan. All employees with three years of service were immediately fully vested in the plans. As
they retire, employees will receive cash for their stock shares. Instead of selling the business to
one of many potential suitors, Moore gave the company to the employees because of their
commitment to the company and to its mission of providing foods that make consumers
healthier.
Question
What do you think about Bob’s decision? If you founded your own company, would you
consider giving to your employees upon your retirement?
Teaching Suggestions
Students will typically be quite interested in this chapter, since they tend to see significant
personal career implications. Beyond the discussion, research, and case suggestions below, an
instructor might use a problem solving approach by groups to discover what students would like
to learn about and design projects that evolve from such discussions.
1. Risk aversion was one factor discussed regarding agency theory. You might introduce a
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Chapter 12 - Recognizing Employee Contributions with Pay
discussion with students about individual perceptions regarding risk taking. They are
likely aware of the high failure rate of small businesses. What do they personally
consider "acceptable risk"? What factors would their personal perception of acceptable
risk depend on (e.g., spouse, children, etc.)? What type of employee do they believe a
high-risk possibility for a high-profit situation would attract, and what are the
motivational implications?
2. One student project would be for students to benchmark human resource strategies
through rewards. Student groups may each interview a manager responsible for
compensation to describe nontraditional rewards (those different from merit plans or
general increases). Groups could report back to the class the "benchmark" strategy they
discovered, as well as any evidence that may be available on its success (this will likely
provide an opportunity to discuss the difference between anecdotal and empirical
evidence).
3. A resource is the Harvard Business School case on Merck and Co., Inc. (9-491-005 and
teaching note 5-491-008) by K. J. Murphy. Merck and Co., Inc., a major pharmaceutical
company, is in the process of reviewing and evaluating its personnel policies and
practices. Employee interviews revealed that rewards for excellent performance were not
adequate: outstanding performers received salary increases that were, in many cases,
only marginally better than those given to average performers. In many cases,
outstanding performance was not even clearly identified. The objective is to have
students wrestle with a common malady of performance-appraisal systems: the tendency
of managers to assign uniform ratings to employees regardless of performance.
Alternative appraisal systems should be suggested and discussed.
Another resource is the case of Merck and Co., Inc. B (9-491-006) by K. J. Murphy,
teaching note (5-491-008) and supplement (9-491-007). In late 1986, Merck revised its
performance review and pay practices. The most important change was a shift from an
absolute rating system to a forced-distribution system in which managers were forced to
adhere to a given distribution of performance ratings. Other major changes included
revised rating categories, revised performance categories, and a shift in timing of
performance evaluations. A discretionary award program was also introduced. The
objective is to have students discuss the costs and benefits of the revised performance
plan, paying particular attention to the relative performance-evaluation aspects of the
new plan. Is it better than the plan it replaced? Is pay more closely related to
performance under the new plan?
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Chapter 12 - Recognizing Employee Contributions with Pay
Discussion Questions
1. Should the performance appraisal and salary administration system have been revised?
Why or why not?
2. Consider your student group to be the Employee Relations Review Committee. What
changes in the performance appraisal and salary administration system would you
recommend? How should changes be implemented? Carefully consider the
consequences of your recommendations.
3. What did you learn about managing human resources from reading and analyzing this
case?
4. Case: Direct Response Group Restructures. Direct Response Group (DRG) was a direct
response insurance company with work structured for the mass market. DRG competed
Currently, customer interactions suffered from the curse of departmentalization. The
business was handed off one stage at a time until someone got back to the customer.
The first CMT provides sales and service to a group of 40,000 customers from the
veterans' business in 16 states where DGR marketed life, health, and property and
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Chapter 12 - Recognizing Employee Contributions with Pay
You are overseeing the new CMT. You notice that employees tend to resist sharing
information with one another that could be helpful in serving customers. Some
employees are being too enthusiastic in trying to sell new products to customers who are
not interested. From a compensation perspective, what do you think needs to be done to
make the CMT work?
Suggested Approach: Students should focus both on individual incentives and group
5. Case: Wells Fargo Employee Recognition Program. Wells Fargo Bank had a year of
record-breaking profits in 1988. Throughout the company, bottom-line oriented
managers and their staffs were steeped in the importance of "return to the shareholder."
A renewed focus on the customer was evident in ambitious new customer service
standards. Extra effort and constant change became the norm. A decision was made to
implement an all-employee reward program for the final quarter of 1988. The objectives
of this program included the following:
To recognize contributions made by employees as a group.
To recognize individuals who had made exceptional contributions.
To reinforce the qualities most valued in Wells Fargo employees.
To have fun.
To retain an awareness and an appreciation for the program over an extended period
of time.
Wells Fargo developed a program with several elements phased in over about eight
months. The program involved three phases: all employees cash awards, peer
recognition through cash bonuses, and corporate recognition of those receiving the most
peer recognition. The theme of the program, "In Good Company," was chosen because it
was upbeat and positive and recognized the importance of the team effort as well as the
effort of individuals.
To recognize all employees as a group, the program design included a $550 pretax cash
award to be given to every salaried employee (16,000 employees) below the senior
vice-president level with at least one year of service. An award of $50 (pretax) was
given to 3,000 hourly employees with a year of service. The cash awards were
announced and given to employees by managers in staff meetings. Managers had no
prior knowledge of the event. Each employee also received the first issue of the "In
Good Company" newsletter with the check. The newsletter explained the $500 and
announced the peer recognition phase of the program. Most of the newsletter focused on
the qualities most valued in a Wells Fargo employee. To answer employee questions
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Chapter 12 - Recognizing Employee Contributions with Pay
about the awards, an "In Good Company" hotline took calls throughout the duration of
the program.
The peer recognition part of the program involved giving a coupon worth $35 to each
employee with a year of service. With the coupon were instructions for awarding $35 to
a co-worker. The rules provided were that an employee could not award the coupon to
themselves, no coupons could be given to employees who were senior vice-presidents or
above, and coupons could not be awarded to contract workers or temporaries. Any other
employee could be given a coupon, even those who did not have a year of service and
had not qualified for any other part of the program. On each coupon, employees were
asked to mark the valued quality that the awardee had demonstrated (e.g., "this coupon
is a way of saying thanks for inspiring me to excel"). Employees were given three weeks
from the date of distribution to return the coupons to payroll for payment. Coupons
received after that date were paid, but were not counted for the corporate recognition
part of the program. Coupon recipients were tracked by Social Security number to
calculate the number of coupons each received and to determine qualifications for
corporate recognition.
Employees who received the most coupons were singled out for additional recognition.
Most of those who qualified were from the administrative/clerical ranks of the company.
Employees who received the most coupons qualified to select a gift from "101 Awards."
The awards list was constructed to appeal to a wide variety of tastes, lifestyles, and
priorities. Examples of the awards included a week off with pay, payment of an
individual's mortgage for a month, grooming for a pet for a year, and four movie tickets
a month for a year. The "101 Award" winners were recognized at a cocktail party and
dinner hosted by the CEO, president, vice-chairman, and group heads in each winner's
reporting structure.
Questions
1. What are the strengths and weaknesses of the Wells Fargo recognition program?
What improvements would you suggest?
2. What part of the program has the strongest link to employee motivation? Why?
3. Assume Wells Fargo has now experienced a year of losses. Cash is not available
for the recognition program. How could the program be modified or changed to
continue to meet the program objectives?
(The example on ARPs may be very helpful for students in addressing this case).
Source: Adapted from J. McNitt, "In Good Company: An Employee
Recognition Plan with Staying Power," Compensation and Benefits
Management, Spring 1990, pp. 242-246.
6. Students may debate the issue of executive compensation with the additional
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Chapter 12 - Recognizing Employee Contributions with Pay
information provided. In addition, the following presents a position against executive
compensation as it is now managed:
The argument against the current system of executive compensation consists of two
points. First, American CEOs are paid too much and their salaries bear no relation to the
performance of their companies. Second, critics suggest that the irrational system of
executive incentives saps the competitiveness of U.S. companies and is a major
contributor to U.S. economic woes. The average pay of an American CEO is $2.4
million a year. Only a paltry 4 percent of the salary differential among executives can be
explained by the performance of their companies. Graef Crystal, author of In Search of
Excess: The Overcompensation of American Executives, says that CEOs get paid hugely
in good years, then merely wonderfully in bad years. For example, Crystal points to
option-repricing schemes in which the price at which an option can be exercised ("the
strike price") is lowered as the stock falls. These schemes reward managers even when
the performance of the company slips (Frank Lorenzo of Texas Air received this type of
option). In Crystal's view, American CEO compensation is an insider's game; everyone
wins except the shareholders. CEOs tend to control their compensation by appointing
friends to the board of directors, paying them handsomely, and having the favor returned
when it is time to ratify a compensation plan. The Business Week article cited did note
that there is now more resistance on boards to this sort of activity; however, this
resistance appears minimal when one views the 1993 salary increases.
1. What position do you hold about executive compensation? Why?
2. Formulate a "pro" position for current executive compensation.
3. What type of compensation plan should executives be provided that would
motivate them to do the best possible job for the shareholders? Do you believe
that this accountability is the only one that executives have?
Source: Adapted from A. R. Brownstein, and M. J. Panner, "Who Should Set
CEO Pay? The Press? Congress? Shareholders?" Harvard Business Review,
May/June 1992, pp. 28-32+.
7. Have students discuss the advantages and disadvantages of Employee Stock Ownership
Plans (ESOPs). One good source for reference is "Avis Employees Find Stock Ownership Is
Mixed Blessing" by J. Hirsch, The Wall Street Journal, May 2, 1995, p. B1.
HRM Failures
Top
1 Case 12: Equal Pay for Equal Performance
As Goodyear employee Lilly Ledbetter approached retirement from her plant-supervisor job
after 19 years of service, she discovered that she had been paid signicantly less than her
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Chapter 12 - Recognizing Employee Contributions with Pay
The high court said the statute of limitations had run out on Ledbetter and stated she
Other legal observers di-ered, saying the Court was interpreting the 180-day standard too
Congress reversed the Supreme Court ruling by passing the Lilly Ledbetter Fair Pay Act in
The law prohibits discrimination in both pay and benets and gives employees 180 days
after their last discriminatory paycheck to le a claim.
The law has implications for employers:
Maintain complete records on employee pay and benets
Question
Goodyear Tire & Rubber allegedly prohibited employees from discussing wages. As an HR
professional, what advice would you give regarding wage discussions?
Possible answers
Refrain from making a company rule prohibiting the discussion of pay (such a rule
could be viewed as barring free speech).
Case: Ledbetter v. Goodyear Tire & Rubber Co., Inc., 550 U.S. 618 (2007), Lexis 6295.
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