Chapter Fourteen: Compensation of Special Groups 14 – 16
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CEOs are conflicted about stock options, tempted to both be risky to
accumulate future wealth but also tempted to be conservative to protect
current wealth.
• As evidence of this self-motivated behavior, consider the following description of
how executives ensure themselves high compensation:
o If the CEO is truly underpaid
▪ A compensation consultant is hired to survey actual competitors of the
o If the CEO is not underpaid and the company is doing well
▪ A compensation consultant is hired.
▪ Specific companies are recommended to a consultant as appropriate for
surveying.
o If the CEO is not underpaid and the company is doing poorly
▪ A compensation consultant is hired.
o In each scenario CEO pay increases.
• Despite this jaundiced view of the compensation determination process, agency
theory argues that executive compensation should be designed to ensure that
executives have the best interests of stockholders in mind when they make
decisions.
o Almost all companies now design executive compensation plans so that the
majority of pay is tied closely to performance through short-term and long–
term incentive plans.
E. Scientists and Engineers in High-Technology Industries
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• Scientists and engineers are classified as professionals.
o According to the Fair Labor Standards Act, this category includes any person
• To restore the lead in the generation of scientific knowledge, more attention needs
to be paid to knowledge workers who should be paid for their special scientific or
intellectual training.
o Here, though, lies one of the special compensation problems that scientists
and engineers face.
▪ For the first few years after graduation an engineer’s (for example)
• Partly because salary plateaus arise, many scientists and engineers make career
changes such as moving into management or temporarily leaving business to
update their technical knowledge.
o In recent years some firms have tried to deal with the plateau effect and also
• Dual ladders provide two different ways of progressing in an organization, each
reflecting different types of contributions to the organization’s mission.
▪ The managerial ladder offers a promotion path with increasing
responsibility for management of people.
• A second problem in designing the compensation package of scientists and
engineers centers on the question of equity.
o The very nature of technical knowledge and its dissemination requires the
Chapter Fourteen: Compensation of Special Groups 14 – 18
for equity purposes with graduates who entered the labor market when they
did.
o Partially because of this and partially because of the volatile nature of both
• Maturity curves reflect the relationship between scientist/engineer compensation
and years of experience in the labor market.
o Surveys measure the half-life of technical obsolescence.
o A plot of this data shows curves that are steep for the first 5-7 years and then
• Organizations have devoted considerable creative energy to development of perks
that satisfy the unique needs of scientists and engineers.
o These perks include flexible work schedules, large offices, campus-like
F. Sales Forces
• The sales staff spans the all-important boundary between the organization and
consumers of the organization’s goods and services.
o To meet this need in an increasingly complex environment, the sales job has
morphed into a variety of forms.
▪ The job can be outsourced and called either indirect sales force or
• The role of interacting in the field with customers requires individuals with high
initiative who can work under low supervision for extended periods of time.
o The standard compensation system is not designed for this type of job.
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there is always a motivation to perform.
o If the product is in high demand, and the “sales ability” isn’t a difference
Designing a Sales Compensation Plan
o Six major factors influence the design of sales compensation packages:
▪ The nature of people who enter the sales profession.
▪ Organizational strategy.
The Nature of the People
▪ Popular stereotypes of salespeople characterize them as being heavily
motivated by financial compensation.
o One study supports this perception, with salespeople ranking pay
significantly higher than five other forms of reward.
Organizational Strategy
▪ A sales compensation plan should link desired behaviors of salespeople to
organizational strategy.
o This is particularly true in the Internet age.
▪ Salespeople must know when to stress customer service and when to stress
volume sales.
o When volume sales are the goal, strategic plans signal which behaviors
are important and which products should be pushed hardest.
• For example, emphasis on customer service to build market share
or movement into geographic areas with low potential may limit
Chapter Fourteen: Compensation of Special Groups 14 – 20
sales volume.
▪ Salespeople who are asked to forgo incentive income for low-sales tasks
should be covered under a compensation system with a high base pay and
small incentive component.
▪ Exhibit 14.17 outlines the strategy as a function of type of buyers.
▪ Alternatively, an organization may want to motivate aggressive sales
behavior.
o A straight commission-based incentive plan will focus sales efforts in
this direction, to the possible exclusion of supportive tasks such as
o Typical performance measures include:
• Overall territory volume
• Market share
• Number of product placements in retail stores
o Each measure, of course, corresponds to a different business goal.
• For example, an organization might use a volume measure such as
number of units, orders, invoices, or cash received if the business
goal is to increase sales growth.
▪ Generally, there are two types of compensation plans: unit rate plans and
14 – 21 Compensation – Thirteenth Edition Gerhart │Newman │Milkovich
add-on plans.
o Unit rate plans differ by the amount they pay for each unit of sales.
▪ Flat commissions have the same rate for each unit sold.
o Add-on plans try to get sales staff to focus on specific types of sales.
▪ The sales staff gets an extra incentive for each sale of that line.
Market Maturity
▪ As the market of a product matures, the sales pattern for that product will
change, and companies need to adapt the compensation for their sales
force accordingly.
o A recent study showed that with maturing markets, companies move
toward a more conservative sales pattern, focusing even more on
▪ In maturing markets, companies focus both on performance-based pay tied
to customer satisfaction and on greater base salaries to retain conservative
salespeople.
Competitor Practices
▪ In selecting an appropriate pay level, organizations should recognize that
Economic Environment
▪ The economic environment also affects the way a compensation package
is structured.
o In good economic climates with roaring sales, companies can afford to
Chapter Fourteen: Compensation of Special Groups 14 – 22
and rewarding those that achieve high levels of sales despite the
economic downturn.
Product to Be Sold
▪ The nature of the product or service to be sold may influence the design of
a compensation system.
o For a product that, by its very technical nature, is difficult to
understand, it will take time to fully develop an effective sales
presentation.
▪ At the opposite extreme are products with lower barriers to entry, where
the knowledge needed to make an effective sales presentation is relatively
easy to acquire.
▪ Products or services that sell themselves, where sales ability isn’t as
crucial, inspire different compensation packages than do opportunities
▪ Figuring out what the sales target should be is a major challenge.
▪ The second biggest challenge is making the forecast of expected sales as
accurate as possible.
▪ The linkage between these two issues is clear.
o Bad forecasts lead to inaccurate goals.
▪ Most jobs do not fit the ideal specifications for either of the two extremes
represented by straight salary or straight commission plans.
o A combination plan is intended to capture the best of both these plans.
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to ensure that both types of activities occur in the organization.
▪ Salespeople are famous for finding loopholes in sales incentive plans and
“milking” them for personal profit.
o If you design a sales plan based on unit sales, and don’t prioritize
G. Contingent Workers
• A contingent worker is defined as anyone hired:
o Through a temporary-help agency
• Workers in the first two categories typically earn less than workers in traditional
arrangements; those in the latter category earn more.
• Because the employment status of contingent workers is temporary and employee
benefits are less or nonexistent, wages at times tend to compensate by being
somewhat higher.
o Employers must be sure to follow the rules about when workers are
independent contractor/ consultants and when they are common law
employees.
• Why the move to contingent workers?
o One answer may signal a permanent change in the way business is done.
▪ As the U.S. comes out of the “Great Recession” companies are not hiring
o Temp workers afford a level of flexibility that allows expansion and
contraction of the workforce in response to market changes.
▪ Contingent workers showed lower levels of job satisfaction for part-timers
Chapter Fourteen: Compensation of Special Groups 14 – 24
• A major compensation challenge for contingent workers is identifying ways to
deal with equity problems.
• Employers deal with this potential inequity on two fronts, one traditional and one
that challenges the very way people think about employment and careers.
o One company response is to view contingent workers as a pool of candidates
for more permanent hiring status.
o A second way to look at contingent workers is to champion the idea of
boundary-less careers.
▪ At least for high-skilled contingent workers, it is increasingly popular to
view careers as a series of opportunities to acquire valuable increments in
• There are also high-paid “gig” workers.
o A gig describes a single project or task for which a worker is hired, often
through a digital marketplace, to work on demand.
o A gig can be a short-term job as an employee, and some gigs can be self-
employment.
III. Your Turn: A Sports Sales Plan
Summary of Case
The Buffalo Bisons are a Triple A affiliate in New York Mets. In the early 90’s when the
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stadium was still new and the team was a perennial contender, filling out 20,900 seats
was fairly easy and sell-outs were very common. In the recent years the selling effort has
Learning Objective
Analyze the factors that influence a sales compensation package.
Teaching Guideline
Use this case to address the challenges faced while, designing a sales compensation
package for the sales team.
Discussion of Case Issues
1. Of the above information, what is most important in your design of a sales incentive
plan for the three sales staff? How does this information affect your plan design?
Students could consider the following general recommendations:
• The sale of tickets and advertisements require interacting with the customers—such
role requires individuals with high initiative who can work under low supervision for
• While designing the sales compensation plan, the six major factors that influence the
design of sales compensation plan should be considered:
o The nature of sales people
Buffalo Bisons may want to motivate aggressive sales behavior to boost its low sales
count. A straight commission-based incentive plan will focus sales efforts in this direction,
Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
2. Your book talks about unit rate plans. Which of these types of plan would you use for
sales of tickets? Which plan might be appropriate for sales of advertising? Why?
Students could consider the following general recommendations:
• Generally, there are two types of sales compensation plans:
o Unit rate plans
o Add-on plans
3. What factors influence the dollar amount you can pay for increases in ticket sales?
Students could consider the following general recommendations:
• Six major factors influence the design of sales compensation packages, i.e., the
incentives that can be paid for increases in ticket sales:
o The nature of people who enter the sales profession—popular stereotypes of
salespeople characterize them as being heavily motivated by financial
14 – 27 Compensation – Thirteenth Edition Gerhart │Newman │Milkovich
Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
customer retention plans.
o Competitor practices—in selecting an appropriate pay level, organizations should
recognize that external competitiveness is essential. The very nature of sales
positions means that competitors will cross paths, at least in their quest for
potential customers. This provides the opportunity to chat about relative
compensation packages, an opportunity which salespeople will frequently take.
o Economic environment—the economic environment also affects the way a
compensation package is structured. In good economic climates with roaring
sales, companies can afford to hire mid- and low-level sales personnel to capture
the extra sales.
o Product to be sold—the nature of the product or service to be sold may influence
the design of a compensation system. For a product that, by its very technical
nature, is difficult to understand, it will take time to fully develop an effective
sales presentation. Such products are said to have high barriers to entry, meaning
considerable training is needed to become effective in the field.
In the case study the factors that affect the compensation packages mainly are the:
• Nature of the sales people
• Organizational strategy
• Economic environment
• Product to be sold
Answers to Review Questions
1. We read an article the other day that said it’s getting harder to find good people
willing to serve on a corporate board of directors. Given what you learned in this
chapter, speculate on why it’s hard to attract good people to this job.
Boards of directors face the possibility that disgruntled stockholders may sue over
corporate strategies that don’t “pan out.” Because directors usually assume a major role in
setting executive compensation, they are also lightning rods for complaints about CEO
Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
2. What makes professional/scientist jobs different, such that they qualify for special
group status in many companies? Why is the compensation of knowledge workers so
frequently linked to the amount of time these workers have been out of school?
The compensation of scientists and engineers focuses on rewarding them for their special
scientific or intellectual training. Due to this, a freshly graduated engineer/scientist with all
the latest knowledge in the field will prove to be valuable resource on projects requiring
3. The differential between the salary of top executives and the lowest paid workers in
the same country is quite small in Japan, at least in comparison to the United States.
The same is true in unions (president of union versus union workers). Explain why
the differential might be small in Japan and in U.S. unions but much larger in
private U.S. corporations.
One approach to explaining why executives receive such large sums of money involves
social comparisons. Executive salaries bear a consistent relative relationship to
compensation of lower-level employees in this view. With a rise in salary of lower-level
employees in response to market forces, a corresponding rise in top executive salaries’
14 – 29 Compensation – Thirteenth Edition Gerhart │Newman │Milkovich
Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
However, there tends to be a gradual increase in the spread between executives’
compensation and the average salaries of their employees.
A second approach to understanding executive compensation focuses less on the
difference in wages between executive and other jobs and more on explaining the level of
executive wages. The premise in this economic approach is that the worth of CEOs, or
their subordinates, should correspond closely to some measure of company success, such
as profitability or sales. Numerous studies over the past 30 years have demonstrated that
executive pay bears some relationship to company success. A recent article analyzing the
results from over 100 executive pay studies found empirical evidence that firm size (sales
or number of employees) is by far the best predictor of CEO compensation. Size variables
are nine times better at explaining executive compensation than are performance measures.
Some evidence contradicts this, though. Research has shown that executive compensation
in some firms was highly related to company value, while at others there was no
relationship whatsoever. Worse yet, the present value of future compensation (mostly
stock options, which account for about 75% of executive pay packages) showed very little
sensitivity to company value.
A third view of CEO salaries, called agency theory, incorporates the political motivations
that are an inevitable part of the corporate world. This argument states that CEOs make
decisions that aren’t in the economic best interests of the firm and its shareholders. One
variant on this view suggests that the normal behavior of a CEO is self-protective—CEOs
will make decisions to solidify their positions and to maximize the rewards they personally
receive. It is possible to state that the CEO will increase their wages in all of the following
three situations:
• If truly underpaid
• If the CEO is not underpaid in a company that is performing well
• If the CEO is not underpaid bin a company that is performing poorly
Agency theory argues that executive compensation should be designed to ensure that
executives have the best interests of stockholders in mind when they make decisions.
4. Romance Novels, Inc, located in Cheektowaga, NY, has gradually increased the
number of contingent workers (full-time, temporary) from 10 percent of the
workforce to about 28 percent today. Why might they do this? Also, what equity
problems can arise from hiring contingent workers, especially when they work
alongside regular employees?
Hiring contingent workers has proven to be the major source of savings in the area of
employee benefits. Another reason why Romance Novels, Inc could have increased its
workforce mix of contingent workers to 28 percent is the added flexibility such
Copyright © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
5. Why is it easier to explain a $2 million payout to Jordan Spieth for working four days
to win a Masters Championship than it is to explain why William Clay Ford made
$30 million as CEO of Ford Motor Company?
Empirical research points out that executive pay bears some relationship to company
success. According to a recent article analyzing the results from over 100 executive pay
studies, the evidence suggested that firm size (sales or number of employees) was by far
the best predictor of CEO compensation. The economic approach also states that the worth