Firms must decide whether to place most of their employees under the same compensation plan—an egalitarian pay system —or to establish different compensation plans by organizational level and/or employee group—an elitist pay system . For example, in some firms only the CEO is eligible for stock options.43 In other companies, even the lowest-paid worker is offered stock options. Some companies offer a wide menu of pay incentives only to specific employee groups44 (such as salespeople), whereas others make these available to most employees. At the Vermont-based ice cream company Ben & Jerry’s Homemade Holdings, Inc., the compensation system is linked to company prosperity. When the company does well, everyone does well. The profit-sharing plan awards the same percentage to all employees, from the top to the bottom.45

Some top executives have recently tried to reinforce an egalitarian perspective by pegging their fortunes to those of employees. For instance, at Synovus, a large financial firm with almost 12,000 employees, executives have forfeited their bonuses in order to provide employees higher pay.46 At SEI Investments, with close to 2,000 employees, workers own nearly half of SEI stock. Whole Foods Market limits the maximum compensation anyone can receive (including top executives) to 14 times the average pay of its full-time workers (this ratio often exceeds 300 to 1 across different organizations in the United States). As we will discuss in Chapter 11, t hese egalitarian policies are probably the exception rather than the norm; pay differentials between upper echelons and lower ranks have steadily increased during the past 25 years. As another sign of how globalization is creating diffusion in compensation practices, internal pay differentials are becoming increasingly similar when comparing the United States to other Western nations.

Most compensation experts would agree that both systems have their advantages and disadvantages. Egalitarianism gives firms more flexibility to deploy employees in different areas without having to change their pay levels. It can also reduce barriers between people who need to work closely together. Elitist pay structures tend to result in a more stable workforce because employees make more money only by moving up through the company.

Elitist compensation systems are more prevalent among older, well-established firms with mature products, a relatively unchanging market share, and limited competition. Egalitarian compensation systems are more common in highly competitive environments, where firms frequently take business risks and try to expand their market share by continually investing in new technologies, ventures, and products.

Employees’ pay relative to alternative employment opportunities directly affects the firm’s ability to attract workers from other companies. Pay satisfaction is very highly correlated with pay level, and dissatisfaction with pay is one of the most common causes of employee turnover. The decision to pay above market for all employee groups also allows the firm to hire the “cream of the crop,” minimize voluntary turnover, and create a climate that makes all employees feel they are part of an elite organization.47 This has traditionally been the choice for “blue-chip” firms such as IBM, Microsoft, and Procter & Gamble. However, few companies can afford such a policy. Instead, most firms recognize the importance of certain groups explicitly by paying them above market and cover these costs by paying other groups below market. For example, many high-tech firms compensate their R&D workers quite well while paying their manufacturing employees below-market wages.

Companies that are trying to grow rapidly in a tight labor market must consider paying above-market wages. For instance, Goldman Sachs increased its workforce by 42 percent within a two-year period in the late 1990s. Its pay is at the top of the scale, with executive secretaries, for example, earning $50,000 a year.48 Unions, which we discuss in detail in Chapter 15, also contribute to above-market pay. Unionized workers receive approximately 9 to 14 percent higher wages than similar nonunionized workers do.49

A recent trend, even among firms that traditionally have paid high wages, is to provide a base salary pegged to the market median, combined with more aggressive incentives. According to one expert, “While it is difficult to cut base salary levels, the salary can be frozen for several years until the competitive market catches up.”50 In the meantime, more incentives are given so that total direct compensation (salary plus incentives) may position the firm at a higher percentile in the relevant labor market.

One thing that should be made clear is that firms enjoy a great deal of latitude as to how much they will pay a specific employee relative to the market, even when compensation surveys for most jobs are readily available at the local, national, and international levels. As noted earlier, pay dispersion gets larger for professional and managerial jobs, giving the company more discretion as to how much it will pay “John Doe” to perform a particular job. For instance, say a firm is trying to set a salary for an HR manager. In 2015, the firm may choose a range of base pay from $50,000 to over $500,000 after consulting salary survey data. How much the firm decides to pay the HR manager within that huge market range depends on the importance of the position to the organization as well as individual characteristics (past experience, education, performance appraisal ratings, and the like).

One of the oldest debates about compensation concerns monetary versus nonmonetary rewards. Unlike cash or payments that can be converted into cash in the future (such as stocks or a retirement plan), nonmonetary rewards are intangible. Such rewards include interesting work, challenging assignments, and public recognition.51

Many surveys have shown that employees rank pay low in importance. For example, a large-scale survey found that only 2 percent of Americans declared that pay is a very important aspect of a job.52 This finding should be viewed with skepticism, however. Most people may find it culturally desirable to downplay the importance of money. Two well-known commentators say, “pay may rank higher than people care to admit to others—or to themselves. In practice, it appears that good old-fashioned cash is as effective as any reward that has yet been invented.”53

The relative importance of monetary and nonmonetary rewards is illustrated by an annual study of more than 1,000 large-to-midsized firms conducted by Fortune magazine to identify the 100 best places to work and how they got that way. For instance, winners during the past three years include:

• ▪ eBay The company offers perks such as golf lessons, bike repair, dental services, and prayer and meditation rooms. Four-week paid sabbaticals every five years are also offered.

• ▪ Google The firm allows engineers to devote 20 percent of their time to projects of their choosing. In addition, it offers on-site child care, an on-site fitness center, subsidized gym membership, and telecommuting.

• ▪ General Mills The company allows women to phase back into work after maternity leave on a part-time basis. It also offers paid sabbaticals, on-site child care, and an on-site fitness center.

As we already noted in some of the company examples drawn from the Fortune best-company-to-work-for list, one type of nonmonetary reward that is becoming more common falls under the umbrella of “family-friendly policies” or “work–life balance programs.” It includes flexible work hours, personal time (not to be confused with sick time), fitness centers, day care, backup care when children are sick, and the like. Other examples of smaller firms offering these nonmonetary awards include A.G. Edwards, a brokerage firm that provides its employees an indoor walking track, yoga classes, running clubs, and more, and First Horizon National (formerly known as First Tennessee), which offers its employees time off during the school year for parents to visit their children’s classrooms.54

In general, companies that emphasize monetary rewards want to reinforce individual achievement and responsibility. Those that emphasize nonmonetary rewards prefer to reinforce commitment to the organization. Thus, a greater emphasis on monetary rewards is generally found among firms facing a volatile market with low job security, firms emphasizing sales rather than customer service, and firms trying to foster a competitive internal climate rather than long-term employee commitment. A greater reliance on nonmonetary rewards is usually found in companies with a relatively stable workforce, those that emphasize customer service and loyalty rather than fast sales growth, and those that want to create a more cooperative atmosphere within the firm.55 Several other recent examples of organizations that emphasize nonmonetary rewards and that tend to fit this profile are described in the Manager’s Notebook, “Rewarding Employees with Nonmonetary Compensation.” One important issue here is that organizations should be realistic about how employees feel about nonmonetary rewards. In a recent survey of 1,400 firms, the investigators concluded that “when budgets are tight, nonmonetary perks such as time off or a departmental celebration can be valuable tools to acknowledge employee accomplishments. But employees also expect financial compensation for their efforts.”56

A related trend is to offer high performers tangible incentives rather than cash. For instance, each Four Seasons Hotel location provides its “employee of the year” with an all-expense-paid trip for two and an extra week’s vacation. Recreational Equipment (REI) provides top performers with up to $300 per year to tackle an outdoor goal.57

One important nonmonetary reward for many employees—particularly those with families—is being allowed to work from home . In recent years technology has made this possible by enabling employees to be fully functional from a distant location. Perhaps for this reason (as discussed in the Manager’s Notebook “Telecommuters No Longer at a Pay Disadvantage”) telecommuters are no longer underpaid relative to their counterparts at the office.

MANAGER’S NOTEBOOK Rewarding Employees with Nonmonetary Compensation

Emerging Trends

Money isn’t everything, and in difficult times it might be hard for cost-cutting firms to shower employees with regular raises, bonuses, and other forms of monetary compensation. However, many companies are finding that employees value more than money on the job and often respond well to other forms of rewards. Public recognition, for instance, goes a long way toward building loyalty and multiplying the positive effects of one employee’s stellar performance.

A recent poll asked Canadian executives what they are doing to recognize staff without spending extra funds, and 9 in 10 reported using morale-boosting strategies. “People just want to feel valued,” said a management science professor at the University of Waterloo. Other managers suggest strategies such as negotiating employee discounts at local merchants. Cut rates at hotels and restaurants can make it easier for workers to afford family vacations, for instance. Small incentives such as gift cards also make employees feel appreciated. Offering membership in a credit union is another plus; these organizations encourage savings and offer lower loan rates than most banks. Flex time, telecommuting, job sharing, and other family-friendly benefits are widely popular. Time—whether extra time off (with pay) or more face time with managers—is highly valued and seldom costs the company real money. Epcor Utilities Inc., which builds power plants in Canada and the United States, gives its 3,000 employees an extra Friday off every month to use as they wish. Some firms give paid time off for volunteering and community work.

But not even the most generous nonmonetary rewards can make up for inequitable or noncompetitive salaries or for expectations that employees will “pay” for such benefits with long hours and unreasonable workloads. As one company’s compensation director put it, “Everybody needs to feel they’re being paid fairly. You really have to be within 5 percent of the market—otherwise, these things will niggle at them.”

Sources:Based on Aguinis, H., Joo, H., Gottfredson, R. K. (2013). What monetary rewards can and cannot do: How to show employees the money. Business Horizons, 56(2), 241–249; Sowanane, P. (2013). Non-monetary rewards: employee choices and organizational practices. Indian Journal of Industrial Relations, 44(2), 256–272; www.writeforhr.com . (2011). Can’t afford to boost your employees’ salaries? Think creatively; www.glenture.com . (2011). Compensation solutions. Compensation solutions; Grant, T. (2009, March 21). “Thanking staff without a fistful of dollars,” Globe and Mail, [no longer online] http://business.theglobeandmail.com; Bergfeld, C., and Calabrese, P. (2009, February 1). Recession-friendly employee perks. [no longer online] Portfolio.com, www.portfolio.com, February 1, 2009; Paul B. Brown, “Making Hard Times Work for Your Business,” New York Times, www.nytimes.com▪▪

Firms vary widely in the extent to which they communicate openly about worker’s compensation levels and company compensation practices. At one extreme, some firms require employees to sign an oath that they will not divulge their pay to coworkers; the penalty for breaking the oath is termination. At the other extreme, every employee’s pay is a matter of public record (for instance, Whole Foods Market); in public universities, this information may even be published in the student newspaper. Many organizations are somewhere in between: they do not publish individual data, but they do provide information about pay and salary ranges.

Open pay has two advantages over secret pay.58 First, limiting employees’ access to compensation information often leads to greater pay dissatisfaction because employees tend to overestimate the pay of coworkers and superiors. Second, open pay forces managers to be more fair and effective in administering compensation because bad decisions cannot be hidden and good decisions can serve as motivators to the best workers.

But open pay forces managers and supervisors to defend their compensation decisions publicly. Regardless of good-faith attempts to explain these judgments, it may be impossible to satisfy everyone (even those who are doing very well may feel that they should be doing better). To avoid time-consuming and nerve-wracking arguments with employees, managers may eliminate pay differences among subordinates despite differences in performance levels. The result may be turnover of the better performers, who feel underpaid.

Recent research suggests that greater pay openness is more likely to be successful in organizations with extensive employee involvement and an egalitarian culture that engenders trust and commitment.59 This is so because open pay can foster perceptions of fairness and greater motivation only in a climate that nurtures employee relations. In more competitive climates, it may unleash a destructive cycle of conflict and hostility that is difficult to stop.

MANAGER’S NOTEBOOK Telecommuters No Longer at a Pay Disadvantage

Technology/Social Media

It used to be that employees working from home were at a major disadvantage relative to those who work at the office. However, technology has created a level playing field as companies realize that by allowing employees to “telework,” they can save on real estate costs and at the same time offer a reward that most employees value. A recent survey shows that 9 out of 10 parents place a higher value on workplace flexibility than higher pay. And fortunately telecommuters are now receiving salaries comparable to in-office employees, so that employees “do not necessarily have to choose between the convenience of working from home and the size of their paycheck.” On top of that, telecommuters enjoy substantial cost savings in transportation, wardrobe, cleaning bills, eating out, and day care.

Sources:Based on Fell, S. S. (2013). Do work-at-home jobs pay less than office jobs? www.salary.com ; [no longer online] https://mobileworkexchange.com . (2013). The telework revolution; [no longer online] https://telework2013.com . (2013). Working from home.▪▪

In a centralized system, pay decisions are tightly controlled in a central location, normally the HR department at corporate headquarters. In a decentralized system, pay decisions are delegated deep down into the firm, normally to managers of each unit.

Centralized pay is more appropriate when it is cost-effective and efficient to hire compensation specialists who can be located in a single place, and made responsible for salary surveys, benefits administration, and recordkeeping.60 If the organization faces frequent legal challenges, it may also be prudent to centralize major compensation decisions in the hands of professionals.

A centralized system maximizes internal equity, but it does not handle external equity (market) concerns very well. Thus, large and diverse organizations are better served by a decentralized pay system. For example, Mars, Inc., a worldwide leader in the candy market with estimated annual revenues of $11 billion and 30,000 employees, has only two HR people at corporate headquarters. Each Mars unit is responsible for its own pay decisions.61

Compensation is a complex topic that has a significant impact on organizational success. The good news is that there are not as many separate compensation systems as the nine criteria options might suggest. The bad news is that none of these options is a simple either/or decision. Rather, each pair of criteria defines two end points on a continuum, with many possibilities between them.

One final point: compensation policies that apply to a unionized workforce are subject to negotiation and bargaining. Thus, managers in union shops are often severely restricted in what they can and cannot do with regard to compensation issues.