978-0538468077 Chapter 4 Solution Manual Part 2

subject Type Homework Help
subject Pages 9
subject Words 3487
subject Authors Myron D. Fottler, R. Bruce McAfee, Stella M. Nkomo

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68. EXERCISE: EXECUTIVE BONUSES AND INCENTIVES
I. OBJECTIVES:
1. To help students understand the complexi&es involved in designing an execu&ve
compensa&on system that will reward execu&ve performance in ways that lead to long term
organiza&onal success and sustainability.
2. To demonstrate the necessity to balance financial and non financial criteria for execu&ve
compensa&on in both the short term and the long term.
II. OUT OF CLASS PREPARATION TIME: 1hour
III. IN CLASS TIME SUGGESTED: 1 hour
IV. PROCEDURES: See text
V. DISCUSSION:
Execu&ve compensa&on is one of the most controversial issues emana&ng from the financial
collapse of 2008-2011. Over the years, corporate boards have approved larger and larger
bonuses for execu&ves while average earnings in their company, stock prices, and market
shares either stagnated or declined. Execu&ves who u9erly failed in guiding their companies
to posi&ve outcomes for investors, customers, and employees have been given outlandish
severances packages that could not even pretend to be a “reward for excellent
performance.” As a result, CEO salaries in the US are the highest in the world rela&ve to the
salaries for the average worker in the same companies. Indeed, current CEO salaries are the
highest in the history of the US rela&ve to average wages. When it was revealed that many
of these highly-rewarded execu&ves took ac&ons that resulted in the outsourcing of jobs to
third world countries and/or designed or approved financial instruments which contributed
to our financial collapse, the public was outraged.
In this exercise, students are asked to form small groups to address the appropriateness and
relevance of possible short term and long term execu&ve bonuses and incen&ves. They are
not required to recommend any par&cular combina&on of short term bonuses or long term
stock incen&ves. They could choose to propose only one of these or neither. In the la9er
case, they would be recommending only a base salary. In that case, they would need to
address how they would expect to attract and retain execu&ve talent needed to plan and
implement growth strategies for Internet Applica&ons.
The teams are then asked to address each of the criteria and metrics outlines on Form 4.2.
These criteria should be specified as determinants of the specific percent of compensa&on
which should be dependent on each criterion. Again, the student groups are not required to
recommend either short term or long term incen&ves. But if they do, they need to specify
on Form 4.2 what criteria should be used to determine the incen&ve for a given year. These
criteria reAect the goals of major company stakeholders (stockholders, employees, and
customers). At the bottom of Form 4.2, they are asked to specify their target ra&o of CEO
pay to that of the average employee of Internet Applica&ons. For purposes of the Exercise,
they should assume the average employee’s salary is $75,000 per year.
There are no right and wrong answers here. However, the student groups should consider
informa&on on pp. 208-209 regarding current execu&ve compensa&on prac&ces, impacts,
and poli&cal considera&ons (i.e., most companies would prefer to avoid federal government
regula&on of execu&ve compensa&on).
AJer all groups have met and developed their plans, each group will have a spokes person summarize
the group’s proposed plan as outlined on Forms 4.1 and 4.2 for the class. The instructor will ask
ques&ons concerning ra&onale for what was included as well as what was not included for the plans.
69. EXERCISE: ALLOCATING MERIT RAISES
I. OBJECTIVES:
1. To make students aware of the concepts or theories related to the issue of making
merit raise decisions and to the problems that relate to implemen&ng these
concepts or theories.
2. To familiarize students with possible criteria a manager can use in making merit raise
decisions.
3. To enhance students’ problem solving and decision making skills.
II. OUT-OF-CLASS PREPARATION TIME: 10-20 minutes to read exercise and decide each
professor’s merit raise.
III. IN-CLASS TIME SUGGESTED: 30-40 minutes
IV. PROCEDURES: See text
V. DISCUSSION
In debrie/ng this exercise, we recommend that the instructor begin by examining the completed
raise chart on the blackboard and describing the diLerences in raises given by each team for each
professor. To facilitate this, it may be helpful when the instructor writes a grid on the blackboard, that
he/she shows the name of each professor across the top and an assigned group number on the leJ axis.
This will allow for a quick comparison of the raises given by each team for each professor.
A comparison between the high and low raise amounts for each professor can easily be calculated as can
the high and low raise amount between all professors. These amounts are usually quite large which
raises the issue of why teams that are given the same informa&on with the same instruc&ons reach
diLerent pay conclusions. In one of our classes having seven teams, the diLerence in high versus low
merit increases for Prof. Housman was substan&al. Three teams gave Prof. Ma9hews no raise at all. This
raises the further issue of whether the merit increases granted are primarily a func&on of a professor’s
actual job performance or the team’s (Department Head’s) de/ni&on of job performance/merit.
Next, a comparison can be made between the diLerent criteria and procedures used by the
various student teams. Since each group was required to present this informa&on at the end of the
exercise, it is now possible to examine similari&es and diLerences between groups. This discussion oJen
reveals why the raises are so diLerent between student groups.
Finally, this exercise can be debriefed in terms of current wage and salary theories and issues.
From a merit raise perspec&ve, the exercise can serve as the basis for discussing what a “fair” merit raise
is. The exercise asks employees to be “fair” in the distribu&on of raises (equity theory). This raises the
issue of what is “fair” when the concept is applied to raises. Some groups may think that all professors
should receive the same dollar amount of raise money. Other groups may suggest that all professors
should receive an equal percentage increase in pay. S&ll other groups may try to look for diLerences in
job performance between the professors and a9empt to give raises accordingly.
One issue that all must face is whether merit raises need to be considered in light of the
professor’s current salary. In this regard, one perspec&ve would be to look solely at job performance
(teaching, research, and service) and base raises accordingly, irrespec&ve of a professor’s current salary.
Another perspec&ve would be to look at each professor’s total pay and a9empt to achieve equity by
distribu&ng raises based on a combina&on of each professor’s current salary and her/his job
performance. Under this later approach, Prof. Ricks, who currently earns $135,000 might not receive
any raise whatsoever given that his/her current pay is so much higher than others. Regardless of which
approach is used, students can be challenged by asking: “Is that fair?” followed by “Why?” The
instructor may want to stress here that what is “fair” is in the eye of the beholder and that there are no
firm rules that one can apply to determine what is fair.
In this exercise, students are required to determine which of many variables (e.g., teaching,
research, service, length of service at the university, number of students taught) should be included in
determining merit raises and how each should be weighed. The concept of merit raises argues that
rewards should be based on job performance. Yet, how does one de/ne “job performance”? Students
can be challenged to defend their de/ni&ons and weights. This exercise demonstrates the diOculty of
applying the merit pay concept to prac&cal situa&ons.
This exercise also relates to other wage and salary administra&on issues besides merit pay. Most
HR textbooks argue that organiza&ons should establish a &er of pay grades, each of which should be
based on the skills, knowledge, and abili&es required to perform a job. Then, within each pay grade, pay
is determined by the job performance and, perhaps, length of service of each individual. In this exercise,
the university does not appear to have developed a series of pay grades for professors. Rather, Assistant
Professors, Associate Professors, and Full Professors all seem to be lumped together into one grade, if
indeed, any grades exist at all. This raises the issue of whether the university should develop diLerent
du&es and pay grades for each rank. Also, the exercise raises the issue of what salary should be given to
an individual who steps down from a former administra&ve job. In this case, Prof. Ricks has stepped
down from the posi&on of Dean of the College and is s&ll receiving a salary that reAects those old job
du&es, not the ones associated with a professor’s job. Should the University change its pay policy so that
this does not happen in the future? Should Prof. Ricks s&ll receive raises given his/her high salary or
should no raises be given un&l other professors catch up? The exercise also raises the issue of pay
inversion. Prof. Ma9hews is receiving a higher salary that Prof. Housman even though the later has a far
superior record. The university probably jus&/es this on the basis that in order to attract new
professors, it must pay market rate. In addi&on, it would argue that it can’t aLord to raise the pay of all
the other faculty who are aLected. This raises the ques&on of what is “market rate”. It also raises the
issues of whether it is fair, ethical, and in the best interests of the university to follow this policy? What
alterna&ves does it have? What are the possible nega&ve long-term outcomes of this policy?
70. EXERCISE: WAGESIM—A COMPENSATION ADMINISTRATION EXERCISE
I. OBJECTIVES:
page-pf5
1. To familiarize students with some of the problems involved in building and
maintaining a compensa&on system.
2. To provide students with alterna&ve approaches for solving some typical
compensa&on-related problems.
3. To give students prac&ce in wri&ng memos to employees regarding compensa&on
issues.
4. To familiarize students with job evalua&on procedures.
II. OUT-OF-CLASS PREPARATION TIME: 20 minutes for students to read exercise plus one hour to
complete E-Mail items either individually or in groups and write responses.
III. IN-CLASS TIME SUGGESTED: 45 minutes to discuss all E-Mail items.
IV. PROCEDURES: See Text
V. ANSWERS TO E-MAIL ITEMS:
Item 1
Senior Secretaries are required to be pro/cient with Adobe InDesign. Since Susan Anthony is not
pro/cient in this, she fails to meet the requirements and therefore should not receive the promo&on at
One ques&on that could be asked here is whether the Adobe InDesign is a realis&c requirement.
Item 2
The exercise states that the company's pay scales are compared to other companies' to help
At present the Mack Organiza&on has no openings for an Execu&ve Secretary. Most companies
probably would not grant Kelly's request at this &me. However, they might encourage her to stay with
page-pf6
One issue which s&ll needs to be addressed is whether Kelly quali/es for an Execu&ve Secretary
Item 3
Most companies believe jobs are only worth so much to them and hence have a maximum salary
level for each job. When employees reach this level, as M. O. Sco9 has done, it is important that they
understand this. They should also understand that when an employee is at the top of a pay scale it
Another issue that could be discussed with regard to this item is that of wage compression.
When new employees join a firm, it is not uncommon for them to be paid compe&&ve salaries. The end
This item points out the problems that develop when employees reach the top of a pay grade. It
Item 4
This item is designed to demonstrate the cri&cal role assump&ons play in developing a payroll (or
any) budget. Many answers are possible depending upon the assump&ons one makes. Hence, student
answers will vary. Instructors may want to use this item to discuss the pros and cons of making diLerent
OOce Services Aide Midpoint (29,260.50) x 40 = 1,170,420
OOce Services Assistant Midpoint (30,962.50) x 30 = 928,875
Monthly Budget = Yearly Budget = $5,371,545 /12= $447,628.75
Item 5
page-pf7
Bob needs to be told that there are salary ranges that overlap for all jobs. A highly pro/cient
Item 6
It is not uncommon for supervisors to show support for their employees by reques&ng that an
employee be given a promo&on or raise. They write these glowing letter knowing that the request is
The Compensa&on Sec&on must decide if it should create a vacancy and agree to the promo&on
or deny the request. In all likelihood the request will be denied, for to do otherwise would create a
Item 7
New employees oJen don’t understand how a point system of compensa&on works so someone
in HR needs to explain the basics to Chris. The point system is quite complex which is one of its
Item 8
There are two issues here that need to be addressed. The fact is that the employee leJ work
without permission. This suggests that some disciplinary ac&on may be in order, either for
insubordina&on or unexcused absenteeism. The second issue is whether Mary should be paid for the
Item 9
It is commonplace for companies to assign du&es of one employee to another when vaca&ons,
etc., occur. They ask others to assume greater responsibili&es without an increase in pay. Perhaps Julie
page-pf8
Some firms handle situa&ons like this one by having employees rotate from one posi&on to
Item 10
In this e-mail, a supervisor is asking whether the pay of an employee will change if the employee
works four days at home and one in the oOce vs. /ve days in the oOce. One would suspect that the pay
71. EXERCISE: ETHICAL AND PRACTICAL COMPENSATION DILEMMAS
I. OBJECTIVES:
1. To familiarize students with a variety of diLerent compensa&on dilemmas and
possible solu&ons to them.
2. To make students aware that some compensa&on decisions involve ethical issues.
3. To familiarize students with various criteria that can be used to dis&nguish between
ethical and unethical behavior.
II. OUT-OF-CLASS PREPARATION TIME: 5 minutes to read all or some of the Compensa&on
Dilemmas below, as assigned by the instructor.
III. IN-CLASS TIME SUGGESTED: 20-75 minutes, depending on how many of the dilemmas below
are assigned by the instructor.
IV. PROCEDURES: See Text
V. DISCUSSION:
Much has been discussed about the ethics of adver&sing, product quality, employee safety, stock
trading, and environmental management. However, li9le a9en&on has been given to ethical issues
related to compensa&on management. In actual work seSngs, many compensa&on decisions may be
made without a thought given to professional and ethical standards; indeed, decisions are frequently
based solely on past prac&ces and con&nued because "everyone else is doing it" or out of "business
necessity." Yet, many past common business prac&ces such as not gran&ng employees family leave and
not allowing women to work over&me are now considered by many to be unethical.
VI. DEBRIEFING THE EXERCISE:
The exercise can be debriefed at both the end of discussing each dilemma and aJer all dilemmas
have been discussed. AJer each group presents its solu&on to the dilemma and other students cri&que
it, the instructor can add his/her evalua&on and raise other ethical issues not considered by the group.
At the end of the exercise, the instructor may want to present the following major points:
Most compensa&on decisions have ethical components because they involve issues of fairness
and because if compensa&on is given to one person or group, it can't also be given to others
(win-lose situa&on).
Ethical choices are based on the values of the individuals who make the choices. These values
are oJen aLected by the firm's ethical climate.
Compensa&on dilemmas don't just happen. They are oJen a result of prior decision making
mistakes. Today's mistakes will lead to tomorrow's dilemmas.
Compensa&on managers may /nd it useful to establish pay ethics policies that provide
guidelines to reduce unethical acts. A comprehensive ethics policy has at least several parts. First, the
firm needs to make general statements about its commitment to ethical compensa&on prac&ces.
Second, the policy should develop a list of behaviors deemed unethical. However, a code of ethics alone
will not insure proper behavior. Employees must be given a procedure to report unethical behavior or to
discuss ethical problems. Merely sugges&ng that employees report problems to their immediate
supervisor may be ineLec&ve because the boss may be the source of the problem. Thus, a con/den&al
ethics hotline may be warranted. To avoid the nega&ve connota&on of "hotline," firms have adopted
names such as "Helpline" (Waste Management, Inc.), "We Care Hotline" (American Gree&ngs
Corpora&on), and simply "the 800 number" (Raytheon Company). A hotline has the added advantage of
puSng everyone on no&ce that ethical behavior is expected and that wrongdoing will lead to disciplinary
ac&on.
A more recent development is the posi&on of an ethics oOcer who is responsible for the
crea&on and maintenance of a firm's ethics program. Her or his du&es include mee&ng personally with
employees or top management, dissemina&on of a code of conduct, crea&on of an anonymous
con/den&al service to answer ques&ons about ethical issues, and inves&ga&ng adherence to laws and
internal codes.

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