978-1259532726 Chapter 2 Solution Manual

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XI. Your Turn: Merrill Lynch

Summary of Case

The case profiles the financial crisis at Merrill Lynch at the end of the last decade, which was

acquired by Bank of America for $50 billion. B of A received government assistance during the

Another initial reaction was an increase in base pay levels and a decrease in bonus levels,

apparently in response to all of the negative publicity bonuses had received and as a way to get

However, now, that some time has passed, the economy has recovered (somewhat), and the stock

market has bounced back, Merrill Lynch and other financial services companies are making

them to move? By offering unusually high up-front signing bonuses and decentralizing authority

to make such offers. Traditionally, top brokers from other firms can receive 1.5X their pay at the

Learning Objective

Analyze the decision to provide higher base salaries instead of bonuses.

Discussion of Case Issues

At Merrill, there are some concerns among financial advisors. First, in the non-Merrill part of

brokers at B of A are expected to cross-sell—in other words, to push products sold by other parts

of the bank. The opportunities for such synergies are typically seen as a source of competitive

Teaching Guidelines

Use this case to stimulate a discussion assessing the compensation implications of providing

higher base salaries instead of bonuses.

Student answers may vary. Students can consider the following inputs in constructing their

answers.

1. What is the likely result of bidding wars of this type for top brokers? Will most firms

benefit? Who will be the winners and losers? What about the brokers?

The brokers will also secure gains from the bidding war because every big firm is

obsessed with offering huge bonus amounts to brokers as they are very eager to manage

Source:

http://www.reuters.com/article/2012/04/10/us-bonusbubble-brokers-idUSBRE8391EV20

120410

2. Explain why there is such a strong relationship between pay and performance for

brokers. Why isn’t this true of many other jobs?

This is not true of many other jobs because if a certain broker does not perform well and

Source:

http://www.reuters.com/article/2012/04/10/us-bonusbubble-brokers-idUSBRE8391EV20

120410

3. Should Bank of America change its compensation strategy to include more subjective

assessments of performance and a greater emphasis on cross-selling? What effect might

this have on its success in the bidding war for top brokers?

A subjective assessment of performance refers to evaluation of intangible qualities of

employees and is based on subjective feedback from supervisors instead of objective,

Merrill brokers appear to be opposed to cross-selling, both because they are concerned it

Source:

http://smallbusiness.chron.com/subjective-performance-evaluation-20453.html

http://en.wikipedia.org/wiki/Cross-selling

4. In chapter 1, we talked about incentive and sorting effects of pay strategies. Describe

the incentive and sorting effects at Merrill Lynch and how changes to the compensation

strategy might affect them.

Incentive effect refers to the degree to which pay influences individual and aggregate

structure/level, it may be that higher pay levels help organizations to attract more

high-quality applicants, allowing them to be more selective in their hiring. Similarly,

higher pay levels may improve employee retention. Less obvious perhaps is the fact that

it is not only how much, but how an organization pays that can result in sorting effects.

XII. Still Your Turn: Mapping Compensation Strategies

Summary of Case

Using the concept of strategic mapping, students should describe the compensation strategy

Learning Objective

Utilize the concept of strategic mapping to provide a picture of a company’s compensation

strategy (involves the five decisions contained in pay model).

Discussion of Case Questions

1. Summarize the key points of your company’s strategy.

Alternatively, ask several managers in the same organization to map that organization’s

3. Summarize the key similarities and differences.

5. How can maps be used to clarify and communicate compensation strategies to leaders?

To employees?

Teaching Guidelines

Use this case to analyze and understand the differences between the compensation strategies of

different companies using strategic mapping as a tool.

The best way to approach this case is to coordinate the discussion based on the dimensions and

concepts presented in Exhibit 2.8. The information provided in Exhibit 2.1 is also useful in

discussing this case. Then, spend some time comparing and contrasting the differences between

Microsoft and SAS with respect to the five dimensions: objectives, alignment, competitiveness,

employee contributions, and management.

Objectives: Prominence—how important is total compensation in the overall HR strategy? Is it a

catalyst, playing a lead role? Or is it less important, playing a more supporting role compared to

other HR programs. At Microsoft, compensation is rated highly prominent, while at SAS it is

more supportive.

Alignment: This is described in terms of flexibility, degree of internal hierarchy, and how well

compensation supports career growth. Both Microsoft and SAS use pay to support flexible work

design and promotions. Differences occur in the area of internal hierarchy—Microsoft is more

individual-oriented compared to SAS, whose focus is on teams and the philosophy of “everyone

is part of the SAS family.”

Competitiveness: This is described as total pay relative to what competitors offer (how much?)

and the importance of incentives relative to base pay (what forms?). The importance of work/life

balance achieved via benefits and services is also included. Microsoft’s competitiveness position

is critical to its pay strategy. While it emphasizes both base pay and bonuses (base pay and

bonuses are pegged to the 65th percentile of competitors), it is less concerned with policies

related to work/life balance. SAS competes on factors other than total pay. While it uses options

and bonuses tied to performance, the amounts are smaller than those at Microsoft. SAS’s strategy

emphasizes a greater balance among cash compensation, options, and a generous package of

work/life balance programs.

Contributions: This dimension focuses on the basis of pay increases—individual and/or team

performance—and the mix of pay forms (base pay, incentives, merit, bonus, and stock options).

The two companies take a very different approach to performance-based pay. Microsoft is a

heavy user of pay based on individual performance while SAS emphasizes team- and

group-based success sharing. It does not offer individual incentives except for a few

extraordinary contributors

Management: This is described in terms of ownership (non-HR managers’ role in managing pay),

transparency (openness and communication about pay), technology (software support to

administer pay), and the degree of employee choices and customization. Both Microsoft and

SAS rate high on the use of technology to manage the pay system, and Microsoft offers greater

choices in their health care and retirement investment plans. In Microsoft, total compensation is

prominent, with a strong emphasis on market competitiveness, individual accomplishments, and

performance-based returns. In SAS, total compensation supports its work/life balance.

Competitive market position, companywide success sharing, and egalitarianism are the

hallmarks.

The above discussion of the differences and similarities between Microsoft and SAS can serve to

provide a framework for the responses to questions 1 and 2 under both potential assignments for

this case assignment. Once they understand the dimensions of strategic mapping, they should

apply this knowledge to the company selected in either assignment.

In response to question 3 under the second assignment (how can maps be used to clarify and

communicate compensation strategies to leaders and employees?), it should be pointed out that

strategic maps provide a visual reference. They are useful in creating a compensation strategy

that is focused and clearly understood by employees and managers. They can be used to achieve

consensus on what the pay strategy should be.

Answers to Review Questions

1. Select a familiar company or analyze the approach your college uses to pay teaching

assistants or faculty. Infer its compensation strategy using the five dimensions

(objectives, alignment, competitiveness, employee considerations, and management).

How does your company or school compare to Microsoft and Merrill Lynch? What

business strategy does it seem to “fit” (i.e., cost cutter, customer centered, innovator, or

something else)?

Student answers may vary.

The best way to organize the answer to this question is to construct a table similar to the one

in Exhibit 2.1. Then, spend some time comparing and contrasting the differences between

since the types of skills it employs require a longer lead-time for training and are also more

competitiveness, Merrill Lynch is competitive with the market in base and benefits, and is a

market leader in bonus and stock. Microsoft has made changes in its approach to external

2. Contrast the essential differences between the best-fit and best-practices perspectives.

The best-fit strategic approach proposes that pay programs, in combination with other HR

programs, should be based on the unique characteristics of the company, its employees, and

The best-practices approach suggests that certain pay practices and programs are superior,

regardless of the organization’s internal or external conditions; best practices are not

3. Reread Exhibit 2.7. Discuss how those values might be reflected in a compensation

system. Are these values consistent with “Let the market decide”?

Medtronic’s statement (Exhibit 2.7) lauds stability, so its likely emphasis would be placed on

substantial relational returns from work. External competitiveness and market issues may be

dealt with through employees “sharing in the company’s success.”

4. Three tests for any source of competitive advantage are align, differentiate, and add

value. Discuss whether these tests are difficult to pass. Can compensation really be a

source of competitive advantage?

Alignment of a pay strategy involves three aspects: (1) aligned with the business strategy; (2)

aligned externally with the economic and sociopolitical conditions; and (3) aligned internally

benchmarking and following best practices amounts to trying to stay in the race, not winning

it.

A compensation system adds value if it allows the company to attract, retain, and motivate

forms of pay. Trying to measure ROI for a compensation strategy implies that people are

“human capital,” a view that some people find dehumanizing. Viewing pay as an investment

base pay, benefits, stock options, etc.). However, as the strategic perspective implies, it is the

way pay practices fit together, fit the organization’s strategy, and are managed that may result

in a sustained competitive advantage.

5. Set up a debate over the following proposition: Nonfinancial returns (great place to

work, opportunities to learn, job security, and flexible work schedules) are more

important (i.e., best practice) than pay.

Arguments against the topic:

Money or pay is the fundamental motivator or work performance.

one of the major reasons for high attrition.

Evidence suggests that the trend of doing an MBA, especially an Executive MBA, is

regulations on compensation) just to avoid higher taxes.

Arguments in favor of the topic:

Pay, when used as the only motivating factor, prompts employees to put in just the

making and is supported by major companies around the world that strive to provide

industry standards.

Essentially, the quality of work-life balance is stressed upon by employees seeking to

The conclusion to this debate would be a neutral stand where pay and nonfinancial returns

provided nonfinancial returns as well. In short, pay makes employees ‘work’ and

nonfinancial returns make them ‘perform.’