978-0538468077 Chapter 4 Solution Manual Part 2

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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:

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

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

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

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.