06 - WorldatWork...By Pankaj M. Madhani, ICFAI Business School (IBS) The salesforce is a critical...

06 The Well-Being in Performance Management

By Sherjuana Davis, Ph.D., CCP, GRP, SPHR

15 Salesforce Configuration: A Key Driver for Effective Compensation Planning

By Pankaj M. Madhani, ICFAI Business School (IBS)

27 Effectiveness of Management Approaches

By Edward E. Lawler, Ph.D. and John W. Boudreau, Ph.D., University of Southern California

34 Risks and Returns of Relative Total Shareholder Return Plans

By Andy Restaino, Technical Compensation Advisors Inc.

45 Job Satisfaction Deserves a Fresh Look

By Frank Giancola

57 Creating a Suggestion Program as Part of a Continuous Improvement Initiative

By James Chapados and Kerry Desmond, Stowe Consulting Co.; and Christiana Schlett

65 Perception is Reality: The Importance of Pay Fairness to Employees and Organizations

By Rena Rasch, Ph.D., and Mark Szypko, CCP, GRP, Kenexa High Performance Institute

75 Published Research in Total Rewards

3Q | 2013

Mission

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2013 WorldatWork Association Board

Lead Director I David Smith, CCP, CBP, CECP

Secretary/Treasurer I Jeff Chambers, WLCP

Director I Karen Ickes, CBP

Director I Margaret Gagliardi, CCP

Director I Michael Davis, CCP

Director I Sara McAuley, CCP, WLCP

2013 WorldatWork Society of Certified Professionals Board

Lead Director I Sara McAuley, CCP, WLCP

Secretary I Nathalie Parent, CCP, CBP, GRP, CECP, CSCP

Director I Trevor Blackman

Director I Carrolyn Bostick

Director | Alan Gardner

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Director I Tracy J O Kofski, CCP, CBP, GRP

Director I Kumar Kymal

Director I Brit Wittman, CCP, CECP

Executive SummariesThird Quarter 2013 | Volume 22 | No. 3

The Well-Being in Performance ManagementBy Sherjuana Davis, Ph.D., CCP, GRP, SPHR

This article reviews WorldatWork’s “2012 Total Rewards and Employee Well-Being”

survey and examines how integrating well-being into performance management prac-

tices can improve productivity and the work environment. The impact of an employee’s

well-being is not confined solely to workers. Instead, the result of an employee’s well-

being has an effect on their family, work environment and society at large.

Salesforce Configuration: A Key Driver for Effective Compensation PlanningBy Pankaj M. Madhani, ICFAI Business School (IBS)

The salesforce is a critical component to the overall success of the sales organization.

Salesforce configuration refers to the formation of an ideal design for the organi-

zation from the perspectives of the sales strategy, the salesforce structure and the

salesforce size. This article shows that the successful operation of the salesforce in

terms of efficiency and effectiveness is affected by salesforce configuration design.

A sales organization that does not link evolving salesforce configuration as it passes

through different stages of the business cycle is placing itself at considerable risk in

implementing an effective compensation plan. All components of salesforce configura-

tion are interrelated and directly influence the compensation cost of the organization.

Salesforce configuration decisions strongly influence return on the salesforce invest-

ment and are directly linked to the profitability of the organization.

Effectiveness of Management ApproachesBy Edward E. Lawler, Ph.D. and John W. Boudreau, Ph.D., University of Southern California

The results of the authors’ study of five management approaches strongly suggest that

the majority of organizations should use some combination of the high-involvement and

sustainability management approaches. Even though sustainable and high-involvement

management are the most frequently used approaches in the United States, there is

still considerable opportunity for additional adoption. This is an area where HR leaders

can play a major role. The effectiveness of these approaches requires HR policies and

practices that support talent management practices that attract, retain and develop

individuals who can, and will, execute them.

06

15

27

© 2013 WorldatWork. All Rights Reserved. For information about reprints/re-use, email [email protected] | www.worldatwork.org | 877-951-9191

Third Quarter 2013

5 Third Quarter | 2013

Risks and Returns of Relative Total Shareholder Return PlansBy Andy Restaino, Technical Compensation Advisors Inc.

When determining or evaluating the efficacy of a company’s executive compensa-

tion program, it is essential to consider whether it meets certain pay-for-performance

criteria. The dominant approach is comparing a company’s total shareholder return

(TSR) relative to an index or a group of peer companies. Companies, compensation

committees and their advisers should not ignore relative TSR, even if they believe

there are other, perhaps more relevant, ways to measure performance. This article

demonstrates how some concepts from Modern Portfolio Theory can be applied to

analyze two examples of relative TSR plans.

Job Satisfaction Deserves a Fresh LookBy Frank Giancola

This article identifies and connects research findings to show why job satisfaction is

an important concept that HR practitioners should understand and be able to apply

in their work. Compensation and benefits professionals, in particular, need to give

this matter attention since pay, benefits, work-life programs and job design are often

identified as key drivers of job satisfaction.

Creating a Suggestion Program as Part of a Continuous Improvement Initiative By James Chapados and Kerry Desmond, Stowe Consulting Co.; and Christiana Schlett

An employee suggestion system works only if it is part of an integrated effort to create a

continuous improvement culture. It identifies common pitfalls companies fall into trying

to create suggestion systems. This article discusses the inter-relationship between

continuous improvement efforts and suggestion systems, and outlines steps to take to

align a suggestion system with an organization’s core values of continuous improvement.

Perception is Reality: The Importance of Pay Fairness to Employees and OrganizationsBy Rena Rasch, Ph.D., and Mark Szypko, CCP, GRP, Kenexa High Performance Institute

This article discusses why fair pay is important and presents steps compensation

specialists, HR practitioners, and managers can take to ensure they are promoting

perceptions of fair pay. Assisting employees in understanding how their pay is deter-

mined, how they can maximize their pay, and how their pay is tied to their performance

can help practitioners and leaders fully use compensation as a driver of organizational

success, not just a cost.

Published Research in Total Rewards

Executive SummariesThird Quarter 2013 | Volume 22 | No. 3

5

34

45

57

65

75

Sherjuana Davis, Ph.D.,

CCP, GRP, SPHR

The Well-Being in Performance Management

Imagine working in a high-performing organization

that has elevated employee engagement, satisfac-

tion and productivity while experiencing low stress

and turnover levels. By integrating employee well-being

into performance-management practices, organizations

have an opportunity to change the daily work envi-

ronment for leaders and employees. The WorldatWork

“2012 Total Rewards and Employee Well-Being” research

examines well-being using these dimensions: physical

health; mental/emotional health; financial health; and

spiritual health. (See Figure 1.) The study indicates that

54% of respondents have a strategy in place to support

employees’ well-being (WorldatWork 2012).

Some organizations provide multiple types of well-

being programs for workers that expand beyond the

customary realm of cost avoidance into elements

that impact numerous dimensions of employees’ lives

within and outside of the workplace. An analysis of the

spectrum between traditional wellness and integrated

well-being programs shows that 45% of respondents use

an integrated well-being strategy (WorldatWork 2012).

This presents a significant opportunity for total rewards


Third Quarter 2013


professionals to integrate well-being programs in more organizations. One prac-

tical vehicle to help with this integration is performance management.

HISTORICAL MOTIVATIONAL THEORIES

Motivation is an intrinsic emotional, cognitive and biological state that drives

human performance. While a leader can provide external inspiration for workers

to pursue their performance goals, the actual motivation to achieve them is a direct

result of an internal decision that employees make. Aligning the components of

employee well-being with performance-management practices provides leaders

with a way to tap into internal drives and achieve a higher level of contribution

from workers.

There is a long history of psychological theories about motivation that are similar

to elements of well-being. Many present day motivational theories are a modern

outgrowth of Maslow’s Hierarchy of Needs (1943) and Herzberg’s two-factor theory

(1968). These popular historical theories recognize that although individuals are

multidimensional, they have similar shared needs.

FIGURE 1 Employee Well-Being Components

Physical Health*: “Enhancing One’s Physical Fitness” (WorldatWork 2012, 3)

Financial Health*: “Tools to attain financial freedom and success” (WorldatWork 2012, 3)

Mental/Emotional Health*: “Resources to balance one’s self, situations and others” (WorldatWork 2012, 3)

Spiritual Health*: “One’s strong sense of self or purpose through beliefs, principles, values and ethical judgments” (WorldatWork 2012, 3)

*Physical health, financial health, mental/emotional health and spiritual health were identified as employee well-being components in the “Total Rewards and Employee Well-Being” survey.

FIGURE 2 Dimensions of Well-Being Aligned with Maslow’s Hierarchy

Self-Actualization (Spiritual Health)

Esteem (Mental Health)

Love/Belonging (Emotional Health)

Safety (Financial Health)

Physiological (Physical Health)

8 WorldatWork Journal

The employee well-being components offer some interesting sources for exploring

needs. While the survey data did not explore a sequential order of employee well-

being, the terms used to define the components align to the descriptions Maslow

developed for his hierarchy of needs. (See Figure 2 on page 7.) Before workers

can perform their job, it is important that they have the physical capability to

perform the job’s essential requirements. Through the attainment of financial

health, employees are able to achieve the resources necessary to purchase safety

elements for their family (e.g., mortgage, food, clothing, health-care insurance

and education). The fulfillment of love/belonging needs occur when people

experience emotional health while the acquisition of esteem needs take place

through achieving mental health. Afterward, they are able to seek self-actualization.

Spiritual health acts as a source for obtaining self-actualization because of its focus

on purpose. When individuals achieve a sense of purpose, they are able to have

a clear sense of their position in the organization and in broader society.

The employee well-being survey results show 89% of respondents indicate that

having an integrated well-being program has a positive effect on employee satisfac-

tion (WorldatWork, 27). Given this result, it is important to explore the historical

context of satisfaction. Herzberg’s two-factor theory proposes two different types

of elements that have an impact on workers. It examines hygiene factors and moti-

vator factors. From a workplace perspective, hygiene factors align with elements

external to the work, while motivators are those items that are internal (Herzberg).

The hygiene and motivator factors impact employees in different ways. Hygiene

elements impact workers’ dissatisfaction level, while motivators influence their

satisfaction level (Herzberg). Examples of hygiene factor elements are compen-

sation, health-care insurance, retirement plans and workplace safety. Motivator

examples include job enrichment, work-life balance and learning opportunities.

While Maslow’s hierarchy of needs and Herzberg’s two-factor theory provide an

interesting framework, these theories are still being debated by scholars about their

use in the workplace. The employee well-being research moves beyond historical

theories and offers some practical modern concepts for total rewards professionals

to consider integrating into their performance-management practices. One reason

organizations have well-being programs is that they believe it will ultimately result

in higher worker output. The survey results show that 73% of respondents offer

well-being programs because they think it will increase employees’ productivity

(WorldatWork, 6).

PERFORMANCE MANAGEMENT PRACTICES AND EMPLOYEE WELL-BEING

Organizations that implement employee well-being solutions experience a direct

positive impact on key performance-management indicators. Specifically, the

survey results shows a positive impact on: employee engagement (87%); satisfac-

tion (84%); and productivity (76%) (WorldatWork, 17). Given the encouraging

influence on those key indicators, it is important that organizations incorporate


dimensions of employee well-being into more of their standard employment

practices. Performance management is one of those practices touching every

worker in most organizations. As a result, incorporating the well-being concepts

into performance management provides an opportunity to shift the practice from

being solely a leadership function. By embedding the concepts, organizations

can directly engage workers and empower them to take more accountability for

putting forth an effort to produce results and improve the work environment.

This transforms workers from being an instrument in the performance process to

active participants in shaping their work experience.

Typical performance management practices consist of goal setting, assessment,

feedback discussions, continuous learning and performance recognition. They

concentrate on “what” and “how” outcomes get produced. However, incorporating

an employee well-being strategy into those practices requires a deliberate focus

on understanding who performs the work. (See Figure 3.)

Goal Setting

Commonly, leaders collaborate with employees to set goals in support of the

organization’s strategic objectives by establishing expectations about “what” and

“how” to perform. While this approach will generate goals, it does not focus on

deliberately translating those goals into meaningful work (i.e., the “who” aspect).

Goal setting provides leaders with a chance to better understand what truly

matters to workers and it allows employees to get clarification on the company’s

key priorities.

In essence, incorporating the well-being dimensions into performance manage-

ment offers insight into workers’ view of their roles and the meaning they derive

from them. It starts by leaders simply asking employees: “What is important to

you?” By uncovering the answer to this question, leaders can engage workers

in a dialogue that reveals their well-being needs. However, the survey results

indicate that only 20% of respondents’ organizations strongly support employees

in defining their purpose (WorldatWork, 13). This presents an opportunity for

leaders to engage in a holistic conversation about goals with employees to make

them purposeful. For example, an assembly line worker at an automaker, whose

purpose is derived from family, may find meaning in the work by linking the

achievement of goals to helping families have a safe driving experience. In addi-

tion, the well-being conversation about total rewards is reciprocal. Thus, while

FIGURE 3 The What, How and Who of Performance Management

“What”Quantitative Results

“How”Behavioral Results

“Who”Employee Well-Being Results

Examples: Revenue, Expenses, Sales and Costs

Examples: Accountability, Flexibility, Initiative and Results Orientation

Examples: Physical Health, Mental/Emotional Health, Financial Health and Spiritual Health*



uncovering what matters to employees is essential, it is equally vital that workers

clearly understand what is most important to the organization and set expectations.

Then, leaders can help employees understand how their performance mutually

benefits the organization and workers. Once this occurs, it becomes easier for

workers to make a commitment to achieving their goals.

Assessment

In conventional performance-management appraisal practices, leaders carry the

sole responsibility of assessing employees’ results and behaviors demonstrated in

the achievement of goals. This approach places employees in the role of reactive

receivers in the process and delays their performance improvement. Also, the

use of this narrow assessment approach prevents organizations from proactively

identifying the full range of internal and external obstacles to high performance.

An important element of integrating well-being into performance management

involves self-awareness. Through self-awareness employees are able to identify

needs and make choices that will create and sustain their well-being. Employees’

ability to conduct self-assessments is a useful technique in performance manage-

ment. For example, if an employee responds that the most important thing is

attending each one of a child’s baseball games, then the leader knows anything

that interferes with attending those games could pose a risk to the worker’s morale.

By emphasizing the need for ongoing employee self-evaluations, responsibility

for performance assessment shifts from solely being a leader’s duty to a shared

experience that actively engages employees. This places greater accountability on

workers to have an awareness of their own performance along with any internal or

external components that impact final results. Consequently, this shifts employees

from a passive assessment receiver role into a more assertive role that is account-

able for delivering high performance.

Performance Feedback Discussions

Embedding employee well-being concepts into feedback discussions provides

organizations with a way to improve the awareness of its existing program offer-

ings. Currently, 69% of organizations continually share information about their

well-being programs (WorldatWork, 22). By incorporating the employee well-

being dimensions into feedback discussions, organizations can provide a practical

ongoing method for leaders to regularly link existing well-being programs to the

specific needs of employees.

Traditional performance feedback conversations focus primarily on employees’

outcomes. They center on performance gaps, strengths or a combination of the

two. By limiting discussions to those elements, leaders miss an opportunity to

proactively drive higher performance and minimize burnout. By broadening the

conversation, leaders can create a culture in which inclusive and empowering

dialogues continually flourish.


To have a richer feedback discussion, leaders can ask employees performance

management questions based on the employee well-being components. (See Figure

4.) During the feedback sessions, employees and leaders can engage in candid

conversations about performance outcomes and any key contributing factors that

either positively or negatively affect their performance. These contributing factors

may take the form of skills (e.g., time management), behaviors (e.g., tardiness) or

the work environment (e.g., relationships with other co-workers). This inclusive

approach to feedback discussions is applicable to all spectrums of performance

levels and occurs throughout the performance year. As a result, leaders and

employees have an opportunity to make individual and work environment correc-

tions at any point.

Upon hearing the employees’ answers during feedback discussions, it is vital that

leaders make workers a part of the solution process for any issues raised. Also, the

leader needs to paint a realistic picture about how the organization will address

their feedback. For example, if a worker says that a recent software upgrade is

causing low productivity because workers are learning a new process, the leader

could engage in a conversation with the worker to help brainstorm solutions for

resolving the issue. By having open dialogues, leaders can create effective solu-

tions that directly increase productivity and workers will feel like they are an

empowered partner in creating their own workplace experience.

FIGURE 4 Application of Employee Well-Being Dimensions to Performance Management Practices

Physical Health*: “Enhancing One’s Physical Fitness” (WorldatWork 2012, 3)

❙❙ Performance Management Practice: Candid feedback conversations about the work environment and employees’ needs.

❙❙ Questions for Leaders to Ask Employees: “What elements of the work environment help you achieve your goals?” “What changes in the work environment would help increase your performance?”

Financial Health*: “Tools to attain financial freedom and success” (WorldatWork 2012, 3)

❙❙ Performance Management Practice: Rewards and recognition aligns with employees’ needs and values.

❙❙ Questions for Leaders to Ask Employees: “What was the best reward you ever received for achieving your goals?” “What made that reward special to you?” “What type of recognition do you prefer to receive after achieving your goals?”

Mental/Emotional Health*: “Resources to balance one’s self, situations and others” (WorldatWork 2012, 3)

❙❙ Performance Management Practice: Holistic ongoing performance feedback discussions.

❙❙ Questions for Leaders to Ask Employees: “What part of your job brings you the most joy?” “What is the biggest obstacle impeding you from achieving a higher level of performance?” “What learning opportuni-ties (e.g., classroom or experiences) would help you close the performance gaps?”

Spiritual Health*: “One’s strong sense of self or purpose through beliefs, principles, values and ethical judgements” (WorldatWork 2012, 3)

❙❙ Performance Management Practice: Create a meaningful work experience by linking workers’ well-being goals to organization’s goals.

❙❙ Questions for Leaders to Ask Employees: “What is important to you?” “What is the most important part of your job?” “What results mean the most to you?” “Why is this outcome important?”

*Physical health, financial health, mental/emotional health, and spiritual health were identified as employee well-being components in the “Total Rewards and Employee Well-Being” survey.


Continuous Learning

In some organizations, learning opportunities focus only on specific work-related

activities. However, to support employees’ well-being, an offering of learning

options that will holistically educate workers is important. Barriers to employees’

job performance exist within and outside the workplace. As a result, learning

opportunities can include items that support employees professionally and person-

ally. For example, an employee who is close to retirement divorces and is worried

about how to live on a fixed income may become distracted and be less produc-

tive. A financial management course could restore the person’s sense of economic

power. There are many organizations that provide financial education courses. For

instance, the survey results indicate that 57% of respondents currently support

workers’ participation in retirement financial education (WorldatWork, 9). By

creating a culture that fosters continuous learning and supports workers’ learning

needs, organizations have an opportunity to equip employees with the knowledge

to resolve their challenges and avoid distractions that minimize productivity.

Performance Recognition

The purpose of recognizing employees is to acknowledge their contribution and

motivate them to continue producing at a high level. A well-being approach to

performance management not only considers those components but also seeks

to understand the unique needs of employees and configures a form of recogni-

tion that aligns with their values. Recognition could take the form of a monetary

reward, public recognition or skill-building opportunity. It may even take the form

of something that enhances an employee’s work-life balance. The survey results

indicate that flexible schedules are one of the top five well-being components that

workers consume the most (WorldatWork, 5). As a result, for some workers, the

monetary forms of recognition may only address their financial health and still

leave a gap in other components of their well-being. For instance, recognizing

high performance could mean offering work-life balance items to an employee

who works long hours (e.g., some extra days off or an opportunity to have a

flexible work arrangement).

IMPLICATIONS FOR LEADERS, EMPLOYEES AND

TOTAL REWARDS PROFESSIONALS

By integrating well-being dimensions into performance-management practices,

leaders can build a deeper partnership with employees. It challenges them to

uncover the needs and motivations of their workers. This requires leaders who

are skillful at not only managing the work but also establishing co-creative

relationships with employees by actively listening and collaborating with them

to develop an engaging work environment. To accomplish this, leaders will

need to assume the role of supervisors of the work and performance coaches

to employees.


A well-being approach to performance management requires effort from

leaders and employees. It will require workers to become self-aware of their

own well-being needs and feel comfortable articulating them. To accomplish this,

employees will need the confidence and communication skills to convey ideas so

they can play an active role in partnering with leaders to construct an engaging

work environment. Also, the well-being approach to performance management

shifts some of the responsibility for initiating work environment changes from

solely being a downward activity to one that also flows upward and across the

organization. In addition, employees need a level of self-confidence that will

allow them to proactively contribute toward creating a work experience that is

productive and meaningful.

Total rewards professionals can support the integration of well-being into

performance management by systematically educating people on the different

dimensions; creating a culture that empowers employees to co-create their work

experience; updating performance management artifacts with well-being language;

and creating processes that engage workers. (See Figure 5.) For some leaders who

are only comfortable with supervising the work and not serving as performance

coaches to employees, a well-being approach to performance management can

present a challenge. To overcome this resistance, it is important for total rewards

professionals to use senior leaders within the organization who can sponsor the

approach and attest to its benefits. Most importantly, these senior leaders need

FIGURE 5 Process for Integrating Well-Being into Performance Management

Build AwarenessEducate leaders and workers on the employee well-being components (i.e., physical health*, financial health*, mental/emotional health* and spiritual health*).

Goal SettingSet goals that encompass quantitative (what), behavioral (how) and employee well-being components (who). Help learners know the achievement of goals mutually benefits company and workers.

Continuous LearningProvide learning options that address the employee well-being components.

Cultural ExpectationsSet expectations with workers and leaders about their co-creative role in the performance management experience.

AssessmentEncourage proactive self-assessment along with the identification of internal and workplace barriers to high performance.

Performance RecognitionRecognize learners based on what they value and leaders for supporting employee well-being.

Change Cultural ArtifactsEmbed employee well-being concepts into presentations, resources and tools.

FeedbackPromote candid conversations about performance outcomes and contributing factors (including well-being components) that have an impact on performance.



to model the behavior with their direct reports and set the expectation that they

must demonstrate an inclusive approach to performance discussions. Also, leader-

ship training needs to include coaching modules as a part of the curriculum that

focuses on how to develop and engage talent.

CONCLUSION

Employees’ level of engagement, satisfaction and productivity are key differen-

tiators in any organization’s performance levels. By incorporating the concept

of well-being into performance-management practices, organizations have an

opportunity to foster an engaging work environment while enabling employees

to produce high results. The impact of an employee’s well-being is not confined

solely to workers. Instead, the result of an employee’s well-being has an effect

on their family, work environment and society at large. z

AUTHOR

Sherjuana Davis, Ph.D., CCP, GRP, SPHR ([email protected]) specializes in the field of performance management, change management, organizational development and executive coaching. She earned a Ph.D. in Industrial Organizational Psychology. Davis is also a regular article reviewer for WorldatWork publications.

REFERENCES

Herzberg, Frederick. 1968. “One More Time: How Do You Motivate Employees?” Harvard Business Review 46(1): 53-62.

Maslow, Abraham, H. 1943. “A Theory of Human Motivation.” Psychological Review 50(4): 370-396.

WorldatWork. 2012. “Total Rewards and Employee Well-Being: A Report by WorldatWork.” Scottsdale, Ariz.: WorldatWork.

Pankaj M. MadhaniICFAI Business School (IBS)

Salesforce Configuration: A Key Driver for Effective Compensation Planning

The salesforce is a critical component to the overall

success of the organization’s goals and objec-

tives. Organizations in different sectors of the

economy spend as little as 1% to as much as 22% of

sales revenue on the salesforce; the average organization

spends 10% of sales revenue on the salesforce (Zoltners,

Sinha and Lorimer 2004). As selling costs continue to

dramatically increase, the efficient use of an organi-

zation’s available resources, mainly the salesforce, to

maximize its contribution to profit becomes increasingly

important.

Within the context of this article, the term “salesforce

configuration” refers to the formation of an ideal design

for the organization from the perspectives of the sales

strategy, the salesforce structure and the salesforce size.

Specifically, sales organizations must alter the three key

variables of salesforce configuration over time, as shown

in Figure 1 on page 16.

These variables are critical as they determine how

quickly the salesforce responds to market opportuni-

ties; how they influence salesforce performance; and

how they affect sales revenues, compensation costs and


Third Quarter 2013


overall profitability of the organizations. Salesforce configuration starts with sales

strategy as it is the primary building block. The sales strategy focuses the organi-

zation’s resources and selling processes on customers and product offerings that

have strategic importance and good profit potential. The operating plan for the

salesforce identifies effective types of selling approaches and the mix of these

approaches by efficiently allocating sales resources to drive selling costs down

and sales revenue up.

The structure of the salesforce defines how the sales department is organized.

This structure directs selling effort to the most strategically important marketing

dimensions, such as the right products, markets, territories, functions, customer

accounts and selling activities. Therefore, salesforce structure is used to classify

such marketing dimensions and develop the right size and shape of the sales terri-

tory. Each salesforce structure has its own set of advantages and disadvantages;

organizations need to periodically review their choices during different stages of

the business cycle (Madhani 2012a).

After the sales organization determines the sales strategy and salesforce struc-

ture, it focuses on salesforce sizing based on the number of customers it wants

to reach. Salesforce sizing focuses on salesforce deployment decisions, which

are related to determining the selling effort needed to adequately cover sales

accounts. Based on the desired amount of selling efforts, the size of the sales-

force is calculated and territories are designed to ensure the proper coverage

of accounts and to provide each salesperson with a reasonable opportunity for

success. Determining the proper size of the salesforce is a strategic management

issue because it has an important impact on the sales organization’s overall

revenue and profits. A properly sized selling organization assures that customers

and prospects receive appropriate coverage; that the sales organization’s products

FIGURE 1 Salesforce Configuration: Key Variables

Salesforce

Sales Strategy

Structure Size


get proper representation; that the salesforce is stretched but not overworked;

and that the organization makes an appropriate investment in its sales resources.

Appropriately sized salesforces maximize the economic return on investment of

the selling resources.

STRATEGY: COST CONTAINMENT VS. PROFIT MAXIMIZATION

Sales organizations often need to choose between increasing profits and containing

sales expenses. During the start-up and decline stages of the business cycle, the

cost containment approach is more suitable. While, in the growth and maturity

stage, the profit maximization approach is preferred. During the growth stage, a

larger salesforce can reach more customers and prospects, can sell more products

and can create more sales and gross contribution margins for the organization

than a smaller salesforce.

Most organizations invest conservatively in the salesforce during the early growth

stage because they don’t realize that increasing the size of the salesforce has short-

term as well as long-term consequences. When new salespeople are added, they

initially generate small increases in revenue as well as profit. However, as time

goes by, their impact gets bigger for the following reasons:

❙z Newly hired salespeople are not as effective as they will be when they become

veterans.

❙z For products requiring long selling cycles, considerable effort is required before

sales is realized.

❙z Many product sales, especially in industrial markets, are not onetime orders but

multiyear contracts.

❙z Carry-over sales vary across products and markets, but they generally represent

a significant portion of every sales organization’s long-term revenues. Therefore,

over time they will make more profit than if they had started with a smaller

salesforce (Zoltners, Sinha and Lorimer 2006).

Similarly, a gradual salesforce reduction works well when the market is disap-

pearing at a modest rate. But this is a poor strategy when the market opportunity

and sales are declining quickly because, in that case, rapid salesforce reduction

is required.

Many times organizations expanding into new markets increase the salesforce

size when the sales opportunity is realized, as opposed to investing in the prospec-

tive opportunity. However, by understaffing the salesforce during growth stage,

sales organizations are unable to capitalize on all of the opportunities. Therefore,

they need to expand by hiring more salespeople. During the growth stage, profits

are usually maximized if all the required salespeople are hired at once because

they will be fully trained when they are needed, morale will be higher and there

will be less disruption. Because salesforce effort has a cumulative effect, the impact

of the new salespeople’s effort will accumulate from the day of hire.


Illustration

The difference between the cost containment and the profit-maximization approach

of a sales organization is illustrated in Table 1. Assume that a sales organization

in the early growth stage has 80 salespeople and a fully loaded salesforce cost

(including salary, benefits, taxes, bonuses, travel, call reporting, administrative

support and field support) of $225,000 per salesperson. This represents a salesforce

cost ratio of 14.1%, as calculated in Table 1.

Suppose 40 additional salespeople were added to the existing salesforce,

increasing its size to 120. The new salespeople must generate $64 million in sales,

or $1.6 million each, to maintain the original 14.1% ratio of salesforce costs to

revenue. However, it rarely happens that a new sales employee will generate the

same revenue as a veteran salesperson, though it may occur in a rapidly growing

business or in the organization that is severely undersized. A more realistic expec-

tation is that the new sales employee will generate perhaps $500,000 in revenue

for the first year. Accordingly, the final salesforce cost ratio will be 18.29%, much

higher than the targeted 14.1% of sales. As a result, a sales organization relying

on the percent of sales rule (cost containment approach) for budgeting salesforce

costs will only reluctantly increase salesforce size.

However, with salesforce additions, net contribution also increases by $3 million.

Therefore, salesforce costs as a percentage of sales have increased, but so have

profits as a result of increasing the salesforce size (profit maximization approach).

The main problem with the cost containment approach is that it misconstrues the

salesperson’s role. A salesperson should be viewed as causing sales not as being

caused by sales (Lodish 1974).

TABLE 1 Cost Containment vs. Profit-Maximization Approach

(A) Cost Containment Approach Base Sales (A)

Incremental Sales (B)

Total Sales (C) = (A) +(B)

(1) Next year sales ($) 128 million 20 million 148 million

(2) Number of salespeople 80 40 120

(3) Average sales per sales employee ($) = (1)/(2)

1.6 million 0.5 million 1.23 million

(4) Fully loaded cost per sales employee ($) 225,000 225,000 225,000

(5) Salesforce cost ratio (%) = (4)/(3) 14.1 45 18.29

(6) Increase in salesforce cost ratio (%) = (C5) – (A5)

- - 4.19

(B) Profit Maximization Approach

(7) Contribution margin rate (%) 60 60 60

(8) Contribution margin ($) = (1) x (7) 76.8 million 12 million 88.8 million

(9) Contribution per sales employee ($) = (8)/(2)

960,000 300,000 740,000

(10) Total salesforce cost ($) = (2) x (4)

18 million 9 million 27 million

(11) Net contribution after salesforce expenses ($) = (8) – (10)

58.8 million 3 million 61.8 million

(12) Increase in net contribution ($) = (C11) – (A11)

3 million


STRUCTURE AND SIZE: AN OPTIMAL BALANCE BETWEEN EFFICIENCY

AND EFFECTIVENESS

The successful operation of the salesforce in terms of efficiency and effectiveness

is affected by strategy, structure and the size of salesforce. The right salesforce

structure balances the need for efficiency and effectiveness. To arrive at the

most appropriate salesforce structure, several sales organizing principles might

be applied, such as product-focused, customer-focused, geographic-focused,

functional or task-focused. Whether a salesforce is deployed by product, by

customer segment or geographically, it is important that sales territories are

designed to enable the salesforce to cover its accounts and prospects efficiently

and effectively. A salesforce that focuses its time, efforts and emphasis on the

most appropriate products, customers, geography and selling activities creates

more sales in the long term and successfully executes the strategies of the sales

organization.

Sales organizations need to redesign the salesforce structure according to busi-

ness cycle stages to ensure that it supports the salesforce strategy and organization’s

strategic goals. This involves finding the right balance between generalized and

specialized sales roles. The generalist salesforce is typically deployed in organiza-

tions that are either in their start-up stage of the business cycle establishing their

presence in the market or trying to cut costs in the decline stage (Madhani 2012b).

In a generalist sales organization, each representative or account manager sells an

organization’s entire, but usually limited, product line to customers who typically

are all in the same industry, thus providing a single point of business contact to

customers. The generalist salesforce would be expected to engage in all types of

sales activities for all of the products and to sell to all of the customers; a specialist

salesforce would be expected to engage in a limited set of selling activities for only

a portion of the organization’s products, and would be selling only to a certain

group of customers. The specialist salesforce is normally deployed by organiza-

tions during the growth and maturity stages of the business cycle.

Salesforces specialize in different ways, such as by product, customer, geog-

raphy or function within the sales process and industry vertical. Specialization by

industry vertical is recommended when a salesforce with deep industry knowl-

edge represents a competitive advantage over a generalist salesforce with similar

offerings. Product specialization is most effective when vast product knowledge

is required to sell the product in the market. Product specialists are technical

experts who know the products inside and out. In addition, customer specializa-

tion makes salesforce structure more market driven and focused on select groups

of customers. Specialization by geography is the least complicated specialization

and focuses on geographic territories. And salesforce specialization by function

is illustrated by the delineation between the “hunter” and “farmer” roles of the

salesforce. Hunters typically focus on new sales, while farmers cultivate current

customer relationships to drive revenue growth (Madhani 2010).


Salesforce size also varies with the salesforce structure, reflecting tradeoffs the

sales organizations must make between selling efficiency and effectiveness. Sizing

is not a simple task for organizations, because the primary goal of sizing strategy

was not simply to reduce or minimize salesforce capacity, but also to build a more

productive and effective organization. Most organizations appear not to size their

salesforce effectively and tend to be short-term oriented and risk averse when

a salesforce size increase is warranted; they are protective when downsizing is

necessary. During the growth stage of the business cycle, risk aversion causes them

to stop adding salespeople before they reach the long-term profit maximizing size.

Similarly, in the decline stage, organizations require only a marginal incremental

return and they stop cutting salesforce size even when they reach the peak size.

A sales organization should determine the most appropriate size for its salesforce

by evaluating the probable size of the opportunity and assessing the potential

risks of pursuing an aggressive or conservative sizing approach. An aggressive

salesforce strategy is appropriate when the sales organization has a high likeli-

hood of success and when management has confidence in the sales projections. A

more conservative strategy works when growth opportunity is small and greater

uncertainty surrounds the sales organization’s success.

Two types of salesforce sizing errors are common in sales organizations. First, if

salesforce growth is aggressive, but the market opportunity is moderate, oversizing

occurs. To rectify this sizing error, the sales organization will have to reduce its

salesforce to increase efficiency. Second, if salesforce growth is conservative, but

the market opportunity is large, undersizing occurs. This type of sizing error can

result in significant loss of market opportunity, a substantial forfeiture of sales and

profits, and in the long term, reduced growth opportunity of the sales organiza-

tion. With this type of sizing error, the sales organization will need to enhance

salesforce size to increase effectiveness of the salesforce; otherwise, it may forfeit

its best chance to become a market leader. The sales and market loss suffered

when a sales organization initially undersizes its salesforce has a lasting impact

on its ability to grow its sales and reach peak market share.

A larger salesforce comprised of salespeople who specialize by product or market

is more effective and creates higher revenues, but costs more than a smaller,

generalist salesforce. However, high returns can justify the high cost of specialists.

More complex sales processes usually require more specialization and, as such,

strengthen salesforce effectiveness. However, specialists will have to cover larger

distances than generalists did in order to call on the same number of customers

and will, therefore, lose considerable time in travel. Such increase in travel time

decreases the time available to spend with customers. Hence, sales organizations

require a larger specialized salesforce. A specialized salesforce is the most effective,

but also the least efficient.

Salesforce efficiency is a function of how the salesforce is able to use its avail-

able time. Hence, specialization of the salesforce enhances its effectiveness at the


cost of efficiency. As shown in Figure 2, oversized or larger salesforces result in

higher effectiveness, but lower efficiency. Similarly, undersized or smaller sales-

forces enhance efficiency at the cost of effectiveness. Depending on the stages

of the business lifecycle, a salesforce may contain a mixture of a generalist and

specialist salesforce.

Every sales organization in the growth and maturity stage of the business

cycle, when it prefers to deploy a direct salesforce, should conduct a break-even

methodology to determine whether its salesforce is the right size. The right-sized

salesforce has an optimal balance between efficiency and effectiveness. (See

Table 2 on page 22.)

Illustration

A sales organization calculates return on investment (ROI), as shown in Table 2, for

different break-even ratios. In addition, different levels of sales carry over. Sales

carry-over refers to the process in which a significant portion of the given year’s

sales volume is not due to efforts of the salesforce in a given year, but is a function

of the prior year’s selling efforts and other factors (Madhani 2011). Sales carryover

impacts salesforce structure resource planning in terms of salesforce sizing.

FIGURE 2 Salesforce Territory Alignment - Efficiency vs. Effectiveness

High

UndersizedSalesforce

Suboptimal

Right-SizedSalesforce

Optimal

Effi

cien

cy

Wrong-SizedSalesforce

Not optimal

OversizedSalesforce

Suboptimal

Low

Low Effectiveness High


Calculation

Break-even ratio and ROI are calculated by the following formulas:

Break-even ratio = I/B

Where (I) = The incremental sales revenue per additional salesperson

And, break-even sales (B) = Cost of a salesperson/gross contribution margin

rate

And, gross contribution margin = Gross contribution/Total sales

And, gross contribution = Total sales – Variable product costs

Three-year ROI for salesforce =

(Break-even ratio) x (1 + sales carry-over + (sales carry-over) x (sales carry-over) -1

The calculation of three-year salesforce ROI for different break-even ratios and at

different sales carry-over rates is calculated in Table 2. This relationship provides

a valuable criteria check of whether a salesforce may be too small, too large or

the right size. In Table 2, the percentage numbers in each cell represent three-year

returns on salesforce investment. The optimal salesforce size for the organization

is when the ROI for salesforce investment is between 75% and 150%. If the ROI

TABLE 2 Salesforce Size — Impact on ROI Calculation

Break even- ratio (I/B)

<------------------------------------- Sales Carry-Over ------------------------------------->

0% 5% 10% 15% 20% 25% 30% 35% 40%

0.2 -80% -79% -78% -77% -75% -74% -72% -71% -69%

0.4 -60% -58% -56% -53% -50% -48% -44% -41% -38%

0.6 -40% -37% -33% -30% -26% -21% -17% -12% -6%

0.8 -20% -16% -11% -6% -1% 5% 11% 18% 25%

1 0% 5% 11% 17% 24% 31% 39% 47% 56%

1.2 20% 26% 33% 41% 49% 58% 67% 77% 87%

1.4 40% 47% 55% 64% 74% 84% 95% 106% 118%

1.6 60% 68% 78% 88% 98% 110% 122% 136% 150%

1.8 80% 89% 100% 111% 123% 136% 150% 165% 181%

2 100% 111% 122% 135% 148% 163% 178% 195% 212%

2.2 120% 132% 144% 158% 173% 189% 206% 224% 243%

2.4 140% 153% 166% 181% 198% 215% 234% 253% 274%

2.6 160% 174% 189% 205% 222% 241% 261% 283% 306%

2.8 180% 195% 211% 228% 247% 268% 289% 312% 337%

3 200% 216% 233% 252% 272% 294% 317% 342% 368%

3.2 220% 237% 255% 275% 297% 320% 345% 371% 399%

3.4 240% 258% 277% 299% 322% 346% 373% 401% 430%

3.6 260% 279% 300% 322% 346% 373% 400% 430% 462%

3.8 280% 300% 322% 346% 371% 399% 428% 460% 493%

4 300% 321% 344% 369% 396% 425% 456% 489% 524%

Effe

ctiv

enes

sE

ffici

ency

Op

timal

S

ales

forc

e

Where:

Italic = Oversized Salesforce

= Optimal Salesforce Size

___ = Undersized Salesforce


is below 75%, the salesforce is too large; if it is more than 150%, the salesforce

is too small. However, in reality, sales organizations can set their own criteria for

ROI based on forecasting, market research and sales response analytics.

STRUCTURE AND SIZE DURING TIMES OF UNCERTAINTY AND GROWTH

Usually, a salesforce is structured in a way that will benefit the salesforce, customers

and, ultimately, the sales organization. Not all salesforces are highly structured.

The best path depends on the sales strategy of the organization, the context of

market and how strategy of the organization meets its objectives. Choosing the

proper salesforce channel of direct salesforce vs. representatives or choosing the

appropriate salesforce structure of generalist vs. specialist depends on customer or

product characteristics as well as stages of business lifecycle. Sales employees who

are employed directly by the organization are part of a direct salesforce; whereas,

those who contract their services are called representatives. Outsourcing of sales

function turns largely fixed costs into mostly variable cost because representatives

are paid on commission.

In the start-up stage of the business cycle, there is lot of uncertainty. As busi-

ness risk is high during this stage, sales organizations should keep low operating

leverage. Operating leverage is the extent to which fixed costs are used in a

firm’s operations. Operating leverage is a measure of risk and opportunity. If a

high percentage of the firm’s total costs are fixed, then the firm is said to have a

high degree of operating leverage. Deployment of representatives will decrease

operating leverage for sales organizations because representatives work on a

commission-only basis.

In the growth stage, the sales organization’s operating income is increasing at

an increased rate; whereas, uncertainty and business risk is moderating. Similarly,

during maturity stage, uncertainty is low, free cash flow is high and business risk

is low. While in the decline stage, uncertainty and business risk is high. Therefore,

during times of low business risk, high operating leverage is preferred, while

during times of high business risk, low operating leverage is preferred. Accordingly,

representatives are preferred in the start-up and decline stages, while direct sales-

forces are preferred in growth and maturity stages of the business cycle.

During the start-up and decline stages, products are more efficiently handled by

representatives because their costs are lower, less fixed and result into higher cash

flow and profitability. In these stages, companies can’t afford fixed costs of a larger

direct salesforce to give intensive coverage in all geographic markets. Similarly,

during the growth and maturity stages of the business cycle, a direct salesforce is

preferred by companies because they can afford large fixed costs of the salesforce

and the focus is more on customer service. As direct salesforce represents fixed

costs for a sales organization, its deployment will increase operating leverage. Direct

salesforce also generates higher ROI in growth and maturity stages compared with

the start-up and decline stages, as explained with the following illustration.


Illustration

During the start-up stage of the business cycle when a new sales organization is

conservative about selling a new product in a new market, it is estimated that a

fully effective salesforce produces about $1.5 million in revenue annually. Based

on marginal contribution analysis as calculated in Table 3, this would lead a sales

organization to conclude it needs 55 salespeople, and the corresponding ROI will

be low. Here, the sales organization in the start-up stage would be swamped if all

55 salespeople were hired from the outset, when the product awareness would still

be at the low end, the sales organization would be facing negative cash flow and

revenues would be coming in slowly. As cash flow would be strained during the

start-up stage, excessively high salesforce capacity would send the organization

further into the red and disappoint investors. Hence, in this stage of the busi-

ness cycle, representatives are the preferred option instead of a direct salesforce.

Similarly, during the decline stage, product demand is diminishing and cash flow

is drying out. Hence, in this stage, representatives are a better choice compared

with the direct salesforce.

TABLE 3 Salesforce Size During Different Stages of Business Cycle

No.Product Cycle

CalculationNew Product Introduction

Established Product

Mature Product

Declining Product

(1) Stages of business cycle Start-up Growth Maturity Decline

(2) Annual sales quota per sales employee ($)

1.5 million 2.1 million 2.0 million 1.6 million

(3) Loss in sales due to attrition of sales-force and uneven performance (%)

- 20 - 20 - 20 - 20

(4) Change in sales quota (%) 40 (5) (20)

(5) Average revenue per sales employee ($) = (2) – ((2) x (3))

1. 2 million 1.68 million 1.60 million 1.28 million

(6) Gross contribution margin rate (%) 60 60 60 60

(7) Contribution per sales employee = (5) x (6) ($)


(8) Total loaded cost of a sales employee ($)


(9) Marginal contribution per salesforce ($) =(7)-(8)


(10) Total fixed cost of sales organization ($)

12 million 12 million 12 million 12 million

(11) Break-even sales ($) = (8)/(6) 0.833 million 0.833 million 0.833 million 0.833 million

(12) Break-even ratio = (5)/(11) 1.44 2.02 1.92 1.54

(13) Salesforce size at break-even point (BEP) = (10)/(9)

55 24 27 45

(14) ROI (%) = (12) –1) x 100 44 102 92 54

(15) Business risk High Low Low High

(16) Choice of sales channel Independent Reps

Direct Sales-force

Direct Sales-force

Independent Reps


However, during the growth stage of the business cycle when the sales organiza-

tion is aggressive about selling an established product, it increases the standard

quota by 40%. That enhances the marginal expected contribution per salesperson

to $500,000 and 24 salespeople are required. Similarly, during the maturity stage,

27 salespeople are required. Therefore, in these stages, direct salesforces are

preferred over representatives.

MAJOR CHALLENGES

It is hard for sales organizations to isolate the effect of the salesforce from all the

other effects in the marketplace that might have an impact on sales. These effects

include pricing, advertising, and sales promotions, along with changes in distribu-

tion, market needs and competitive behavior. However, the salesforce is a strategic

lever of the sales organization for improving sales growth, market share and

profitability. The salesforce represents expensive and important HR assets for the

sales organization, just as plant and machinery represent expensive and important

fixed assets for the manufacturing organization. Both require full productivity to

be competitive in the marketplace. Changing the salesforce configuration is also

challenging for the sales organizations because of unfavorable impact on individual

salespeople in terms of a change in responsibilities. Sometimes such changes also

have a direct effect on customers as they may have to adjust to a new sales process,

salesperson or sales team. Because of the adverse impact on the salesforce and

customers, changes in salesforce configuration during different stages of the busi-

ness cycle can be difficult to make and are typically hard to reverse.

CONCLUSIONS

A sales organization that does not link evolving salesforce configuration as it

passes through different stages of the business cycle is placing itself at consider-

able risk in implementing an effective salesforce management and compensation

policy. Salesforce configuration decisions provide an ideal design for the organiza-

tion from the perspectives of the sales strategy, salesforce structure and salesforce

size. Salesforce configuration decisions strongly influence the efficiency and the

effectiveness of the salesforce investment and are directly linked to the profitability

of the sales organization. All components of salesforce configuration, such as

sales strategy, salesforce structure and salesforce size, are interrelated and directly

influence the compensation cost of the sales organization. z

ABOUT THE AUTHOR

Pankaj M. Madhani ([email protected]) earned his master’s degree in business administration from Northern Illinois University and master’s degree in Computer Science from Illinois Institute of Technology in Chicago. He has more than 26 years of corporate and academic experience in India and the United States. He is working as an associate professor at ICFAI Business School (IBS). He received The Best Teacher Award from IBS Alumni Federation in 2012. He has published various management books and more than 145 book chapters and research articles in several academic and practitioner journals such as Compensation & Benefits Review and The European Business Review. His main research interests include salesforce compensation and business strategy.


REFERENCES

Lodish, L.M. 1974. “Vaguely Right Approach to Sales Forces Allocations. Harvard Business Review. 52(1): 119-124.

Madhani, P. M. 2012a. “Managing Sales Force Compensation: The Strategic Choice Between Direct Sales Force and Independent Reps.” Compensation & Benefits Review. 44(2): 86-99.

Madhani, P. M. 2012b. “Managing Sales Force Compensation: A Life Cycle Perspective.” Compensation & Benefits Review. 44(6): 315-326.

Madhani, P. M. 2011. “Reallocating Fixed and Variable Pay in Sales Organizations: A Sales Carryover Perspective.” Compensation & Benefits Review. 43(6): 346-360.

Madhani, P. M. 2010. “Realigning Fixed and Variable Pay in Sales Organizations: An Organizational Life Cycle Approach. Compensation & Benefits Review. 42(6): 488-498.

Zoltners, A. A., Sinha, P. and Lorimer, S. E. 2006. “Match your Sales Force Structure to Your Business Cycle.” Harvard Business Review. 84(7/8): 81-89.

Zoltners, A. A., Sinha, P. and Lorimer, S. E. 2004. Sales Force Design for Strategic Advantage. New York: Palgrave Macmillan.

John W. Boudreau, Ph.D.University of Southern California

Edward E. Lawler, Ph.D.University of Southern California

Effectiveness of Management Approaches

F or decades, the organizational effectiveness

literature has focused on the strengths and weak-

nesses of different management approaches. Each

management approach has associated with it a variety of

management and reward system practices that are said

to be key determinants of how effectively organizations

perform (Beer 2009; Birkinshaw 2010). It is possible to

identify five approaches: bureaucratic, low-cost operator,

high involvement, global competitor and sustainable.

They all have some features in common, but as overall

all-management approaches, they differ significantly in

their assumptions about how people should be managed

and in many of the practices used by organizations that

adopt them.

The bureaucratic and low-cost operator approaches are

the oldest and most frequently used worldwide. The low-

cost operator approach is particularly likely to be used in

third-world countries by companies looking for low labor

costs. The bureaucratic approach is used worldwide and

has a history that can be traced back to scientific manage-

ment and F.W. Taylor. Indeed, some would argue that it can

be traced back to the beginning of corporations.


Third Quarter 2013


The high-involvement approach has its roots in participative management and

employee involvement. It calls for organization designs that empower lower-level

employees and give them interesting work. It calls for rewards that are based on

their skills and organizational performance. In the past several decades, there

has been a growing focus on the sustainability and global competitor approaches

(Lawler and Boudreau 2012). They have evolved as a result of organizations having

to operate in a rapidly changing global business environment. The global compet-

itor model in particular advocates organization-design features that support agility.

Its key features include low job security, high variable pay and challenging work.

The sustainable management approach focuses on the environmental and social

impact of organizations. It calls for measuring the environmental and social impact

of organizations and having reward and information systems that are based on

them (Lawler and Worley 2011).

USE OF MANAGEMENT APPROACHES

Generally lacking in the literature on management approaches are data on the

frequency with which they are adopted and their effectiveness. As part of an

extensive study of HR management and organizational effectiveness, the authors

collected survey data from more than 200 large U.S. corporations on their manage-

ment approaches, strategic initiatives and organizational effectiveness (Lawler

and Boudreau 2012). The data provide valuable information about the use of

management approaches and their effectiveness, information that can help HR

professionals decide what practices their organizations should adopt.

The survey asked senior HR executives to describe how their organizations

are managed. The five management approaches offered ranged from traditional

bureaucratic to sustainable management. The HR executives surveyed were asked

to report on how well each approach describes the way their organizations are

managed. (See Table 1).

TABLE 1 How Organizations Operate

Management ApproachesLittle or

No ExtentSome Extent

Moderate Extent

Great Extent

Very Great Extent

Mean

Bureaucratic (hierarchical structure, tight job descriptions, top-down decision making)

12.8 29.9 24.6 27.8 4.8 2.82

Low-cost operator (low wages, minimum benefits, focus on cost reduction and controls)

40.0 29.2 21.6 7.6 1.6 2.02

High involvement (flat structure, participative decisions, commitment to employee development and careers)

9.1 25.7 26.2 29.4 9.6 3.05

Global competitor (complex, interesting work; hire best talent; low commitment to employee development; and careers)

20.4 28.5 23.1 21.0 7.0 2.66

Sustainable (agile design, focus on financial performance and sustainability)

4.8 18.2 27.8 38.0 11.2 3.33


The sustainable management approach was rated as best describing how their

organizations are managed. Second best was high involvement and third was

the traditional bureaucratic. Given the relatively recent focus on sustainable

management in management literature, one may be surprised that it was rated

as the best descriptor of how these organizations operate. Indeed, it raises the

question of whether the executives who responded to the survey were accurate

in their reporting.

The least frequently used is clearly the low-cost operator approach. In most cases,

the low-cost operator approach’s emphasis on low wages and minimum benefits

does not fit well in the United States. Data are from U.S. firms. Given all the criti-

cisms of the bureaucratic approach, it is somewhat surprising that it is rated as

highly as it is. It comes in third, behind high involvement and sustainable, even

though it has been criticized for years as leading to inefficiency and low levels of

employee involvement and engagement, not to mention a lack of organizational

agility (Lawler and Worley 2006).

The correlations among the different approaches to management show some

interesting relationships. The bureaucratic and the high-involvement approaches

have a strong negative relationship (r= -.40, p≤ .001). They clearly are different

orientations and do not fit well together as management approaches in an orga-

nization. On the other hand, there is a moderately strong relationship among

the sustainable and high-involvement management approaches (r=.31, p≤.001).

Organizations that had the characteristics of one of these management approaches

tended to have the other. They both emphasize a focus on human capital and orga-

nizational agility, and as a result, they can be integrated into an overall congruent

management approach (Lawler and Worley 2012).

STRATEGIC INTIATIVES

A series of questions in the survey asked about what strategic initiatives are

present in the respondents’ organizations. The results from this question help

explain why the sustainable management approach has such high use. The most

popular initiatives tend to be used with the sustainable management approach.

The strategic initiatives that were most frequently combined with the sustainable

management approach were: talent management (r= .30, p≤ .001); technology

leadership (r= .31, p≤ .001); innovation (r= .40, p≤ .001); knowledge management

(r= .36, p≤ .001); and, of course, sustainability itself (r= .51, p≤ .001).

The high-involvement management approach had the second-highest set of

correlation with the strategic initiatives. It was strongly associated with talent

management (r=.54, p≤.001) and all the other strategic initiatives except for acquisi-

tions and building a global presence. These approaches to growth do not require

a high level of employee involvement.

All of the strategic initiatives showed a negative relationship with the use of

the low-cost operator approach to management and the bureaucratic approach


to management. This supports the point that these often-criticized approaches

to management do not fit well in today’s business environment. They simply do

not support the kind of strategic initiatives that are adopted by most businesses.

ORGANIZATIONAL PERFORMANCE

The strategic initiatives and management approach of an organization are ulti-

mately only as valuable as their impact on organizational performance. Rating

data were collected from the respondents on the performance of their companies

relative to their competitors. Table 2 shows the relationships between the strategic

initiatives and organizational performance. Overall, the correlations are not high,

but they are generally statistically significant.

In many respects, it is not surprising that the correlations with performance are

relatively low because the effectiveness of a strategic initiative varies greatly with

the kind of business an organization is in and the environment in which it oper-

ates. For example, building a global presence may be a particularly appropriate

strategic initiative for some companies. Thus, the degree to which all the compa-

nies in the sample are building a global presence should not be strongly related

to their performance. Similarly, although technology leadership may be a very

important strategic initiative in a knowledge-work technology firm, it is of little

competitive advantage in most customer-service businesses, such as restaurants

and retail outlets.

The strategic initiatives that show the highest correlations with organizational

performance are all ones that are likely to lead to high performance in most busi-

nesses. Sustainability shows the highest correlation supporting the finding that

sustainable management is the most frequently adopted management approach.

Also, highly correlated with organizational effectiveness are innovation, talent

management and customer focus. Again, these, like the other highly correlated

strategic initiatives, are applicable to the competitive situation of most organiza-

tions. Thus, it is not surprising that those organizations that adopt them tend to

have the best performance.

TABLE 2 Initiatives and Performance

Strategic Initiatives Performance Relative to Competitors

Building a global presence 0.03

Acquisitions 0.18*

Customer focus 0.28**

Technology leadership 0.14

Talent management 0.26**

Knowledge/intellectual capital management 0.15

Sustainability 0.31***

Innovation 0.28**

Significance Level: t p ≤ 0.10 *p ≤ 0.05 **p ≤ 0.01 ***p ≤ 0.001


Table 3 shows the correlations between the management approaches and organi-

zational performance. The correlations are not high, but they are in the expected

direction. The fact that the correlations are not high reflects the reality that how

organizations are managed is only one of many determinants of how well they

perform. For example, to be effective, they have to execute their management

approach, and, of course, the effect of any management approach depends on

how well it fits into the organization’s business environment.

Negatively correlated to organizational performance are the bureaucratic and

the low-cost operator management approaches. This result further reinforces the

point that these approaches to reward systems, leadership and talent management

simply do not fit the environment in which most U.S. corporations operate. On

the other hand, the high-involvement and sustainable management approaches

are significantly correlated with organizational performance. The correlations

are not high, but they are statistically significant. This finding is consistent with

the fact that these are the most-frequently adopted approaches to management

and tend to fit together well. In addition, they fit well with most organizations’

strategic initiatives.

CONCLUSION

Overall, the results provide positive data about the effectiveness of the high-involve-

ment and sustainable management approaches. They are most frequently used

by the companies in the sample and show the strongest links to organizational

performance. In addition, they tend to be associated with those strategic initiatives

that produce high organizational performance. They are most strongly associated

with organizations that have major talent-management and sustainability initiatives.

A word of caution is appropriate here. The data are correlational and cannot prove

causality. It may be that in some cases performance effectiveness leads to the way

organizations are managed. For example, an organization that is performing poorly

may adopt the low-cost operator approach to reduce its cost. However, in most cases,

the past research on organizational performance suggests that the most likely causal

direction is from management’s approach to performance.

The implications of the study’s results for how companies should be managed

are clear and important. They strongly suggest that the majority of organiza-

tions should use some combination of the high-involvement and sustainability

TABLE 3 Management Approach and Performance

Management Approach Performance relative to competitors

Bureaucratic -.19*

Low-Cost Operator -.17 t

High Involvement .21*

Global Competitor .07

Sustainable .28**

Significance Level: t p ≤ .10 *p ≤ .05 **p ≤ .01 ***p ≤ .001


management approaches. Yes, there are exceptions in the case of organizations

that look for competitive advantage in performance areas that are not supported by

these two approaches. However, given that these two approaches are significantly

related to organizational performance and key strategic initiatives, the case is

strong that they should be the dominant management approaches in the majority

of U.S. organizations.

Even though sustainable and high-involvement management are the most

frequently used management approaches in the United States, there is still consid-

erable opportunity for additional adoption. Only about 10% of the organizations

responding to the survey report that they are managed in these ways to a great

extent. Furthermore, the majority of the organizations report that they adopt these

approaches to only a moderate or lesser extent. Thus, there is an opportunity for

much greater adoption of these approaches and increased performance in those

organizations that adopt them. This is an area where HR leaders can play a major

role. The effectiveness of these approaches requires HR policies and practices that

support talent-management practices that attract, retain and develop individuals

who can, and will, execute them. Unlike the bureaucratic and low-cost operator

approaches, having the right talent-management practices is key to successful

organization performance.

Finally, it is important to note that the high-involvement and sustainable manage-

ment approaches are generally compatible. In most cases, it is not a matter of

choosing sustainability or high involvement as the management approach of an

organization. Both focus on human capital and the importance of some nonfi-

nancial outcomes, particularly those associated with shared decision making and

employee well-being. Both also often argue for using the same reward system

practices, such as performance-based pay, employee ownership and non-hierar-

chical pay systems. Thus, they can be used together by adopting management and

HR practices that fit them and an organization’s strategic initiatives. z

AUTHORS

Edward E. Lawler, Ph.D., ([email protected]) is a distinguished professor of business and director of the Center for Effective Organizations in the Marshall School of Business at the University of Southern California. He has been honored as a top contributor to the fields of organizational development, HR manage-ment, organizational behavior and compensation. He is the author of more than 350 articles and 45 books. Lawler’s most recent books include “Useful Research: Advancing Theory and Practice” (2011), “Management Reset: Organizing the Sustainable Effectiveness” (2011), and “Effective Human Resource Management: A Global Analysis” (2012). For more information, visit http://edwardlawler.com and http://ceo.usc.edu.

John W. Boudreau, Ph.D., is professor and research director, University of Southern California’s Marshall School of Business and Center for Effective Organizations. He is recognized worldwide for breakthrough research on human-capital strategies. His research has earned the Academy of Management’s Organizational Behavior New Concept and Human Resource Scholarly Contribution awards. Boudreau is a fellow of the National Academy of Human Resources. He has published more than 50 articles, books and chapters, including a leading textbook in human resources. His most recent works include “Beyond HR,” co-authored with Peter M. Ramstad, and “Investing in People,” co-authored with Wayne F. Casio. He has held leadership positions at WorldatWork, the Academy of Management, the Human Resource Planning Society, the Society for Industrial and Organizational Psychology, and the California Strategic HR Partnership. For more information, visit http://www.marshall.usc.edu/faculty/directory/johnboudreau.


REFERENCES

Beer, M. 2009. High Commitment High Performance: How to Build a Resilient Organization for Sustained Advantage. San Francisco, CA: Jossey-Bass.

Birkinshaw, J. 2010. Reinventing Management. San Francisco, CA: Jossey-Bass.

Lawler, E. E., and Boudreau, J.W. 2012. Effective Human Resource Management: A Global Analysis. Palo Alto, CA: Stanford University Press.

Lawler, E. E., and Worley, C.G. 2006. Built to Change: How to Achieve Sustained Organizational Effectiveness. San Francisco, CA: Jossey-Bass.

Lawler, E. E., and Worley C.G. 2011. Management Reset: Organizing for Sustainable Effectiveness. San Francisco, CA: Jossey-Bass.

Andy RestainoTechnical Compensation Advisors Inc.

Risks and Returns of Relative Total Shareholder Return Plans

When determining or evaluating the efficacy

of a company’s executive compensation

programs, it is essential to consider whether

they meet certain pay-for-performance criteria. While

there continues be some debate over how to best

measure a company’s performance, the dominant

approach is comparing its total shareholder return (TSR)

relative to an index or a group of peer companies. This

has become the default performance measure for proxy

advisory firms that provide say-on-pay voting recom-

mendations, large institutional shareholders, the media

and regulators. Companies, compensation committees

and their advisers should not ignore relative TSR, even

if they believe there are other, perhaps more relevant,

ways to measure performance.

To demonstrate a strong pay-for-performance relation-

ship, a number of board compensation committees have

embraced relative TSR by adopting performance share

plans that pay out based on the company’s TSR rank

against other companies. Relative TSR plans typically

pay a target amount (often expressed as a number of

shares) if the company’s TSR ranks at a certain percentile


Third Quarter 2013


compared with the TSR of peer companies (e.g., the median); pay fewer shares for

attaining a lower threshold percentile rank (e.g., pay 50% of the target shares if

TSR is at the 25th percentile); and pay more shares for attaining a higher maximum

percentile rank (e.g., pay 200% of the target shares if TSR is at or above the 75th

percentile). Usually, there is some linear interpolation to determine payouts for

performance that falls between threshold and maximum.

These performance share plans are often intended to address one of the common

criticisms of stock options — that stock option gains might merely be the result of

broad-market gains providing unearned pay to executives (i.e., a rising tide lifts all

boats). Relative TSR plans, on the other hand, are commonly viewed as providing a

stronger pay-for-performance link than stock options because the rising-tide effect

is believed to be eliminated because payout is based on a requirement to beat the

stock returns of peer companies. Stock returns that exceed peers are presumed

to be due to management’s ability to make superior decisions that are within its

control. These plans could be effective at isolating management’s contribution to

value if the company and each of its peers have similar exposure to broad market

returns. However, if the company’s exposure to market returns differs significantly

from its peers’ exposure, a relative TSR plan can still reward — or penalize —

executives for market or industry gains.

The remainder of this article demonstrates how some concepts from Modern

Portfolio Theory can be applied to analyze two examples of relative TSR plans

currently implemented, one of which uses a small group of industry peers, while

the other uses companies that comprise a broad market index. The findings from

this analysis provide strong evidence that relative TSR plans can be an effective

way to isolate management’s contribution to value if industry peers are used or

returns are adjusted to remove the impact of market returns.

DECONSTRUCTING RISK AND RETURN

Modern Portfolio Theory (MPT) is an investment approach that seeks to maximize

the expected return for a portfolio given an amount of risk or to minimize risk

for a given level of expected return. This is accomplished through diversification

by selecting a portfolio of assets that collectively has lower risk than any of the

individual assets in the portfolio. Diversification is accomplished by investing in

a number of different assets that change value in opposite ways.

For any particular stock, the total risk that shareholders bear is typically measured

with the volatility of the stock’s returns (i.e., the amount of fluctuation in an asset’s

value). This is often calculated as the standard deviation of the total returns to

shareholders over some time period. Higher fluctuations in prices mean an asset

is more volatile or more risky. This total risk can be deconstructed into systematic

risk, the risk related to broad market returns (i.e., the amount of the fluctuation

that is correlated with broad market returns), and unsystematic risk, the risk

that is unrelated to broad market returns (i.e., the amount of fluctuation that is


uncorrelated with broad market returns, (which includes industry-specific and

company-specific risks) by using the following formula: σs2 = βs

2σm2 + σε

2s. The

left side of this equation is the total risk of a company’s stock (i.e., volatility

squared), the first term on the right side of the equation is the company’s expo-

sure to systematic risk and the second term on the right side of the equation

is the company’s unsystematic risk. Beta is calculated as the covariance of the

stock and market returns divided by the total variance (i.e., volatility squared)

of the market returns.

Similarly, total return for an individual asset can be separated into systematic

returns — the return that is correlated with, and assumed to be caused by, the

return of the overall market, as well as unsystematic returns — the returns that

are presumed to be unrelated to market returns. The unsystematic return for a

given time period is the difference from the realized return for the stock and

the theoretical expected return for the stock. This value is commonly referred to

as Jensen’s alpha, which can be calculated as the difference between the stock’s

actual return over a given time period and its predicted return. If Jensen’s alpha

is positive for a given time period, then the stock “beat the market” for that

period (and the converse is true if Jensen’s alpha is negative). The following

formula is used to solve for Jensen’s alpha: Rs = Rf + βs (Rm - Rf) + as. The left

side of the equation is the total realized return for a stock over a given time

period, the first term on the right side of the equation is the risk-free return over

the same time period, the second term on the right side is the risk premium

that depends only on the systematic risk of the stock during the same time

period. The third term on the right side of the equation is the stock’s return

that is unsystematic ( Jensen’s alpha). This formula essentially calculates the

predicted return of the stock using the Capital Asset Pricing Model (CAPM) with

realized market returns as an input instead of expected market returns. Jensen’s

alpha is the stock’s residual return that is presumed to be independent from the

market’s return.

According to MPT, the unsystematic risk from an individual asset can be

reduced or eliminated with diversification, while systematic risk cannot.

Accordingly, MPT asserts that the expected return of an asset depends only on

its exposure to systematic risk. This exposure to market returns is measured

with the beta of a company’s stock. Beta measures a stock’s correlation to

market movements and is used to deconstruct a company’s risk and return into

systematic and unsystematic components. To consider the impact of industry

movements in a peer group, an industry beta can be calculated by assuming

the companies that comprise the peer group represent the market. While this

is a departure from MPT because the industry component of the returns would

ordinarily be considered part of the unsystematic return, this approach allows

control for industry impacts so that participants in a plan would not benefit or

be penalized for this component.


CHOOSING COMPARATORS FOR RELATIVE TSR PLANS

When designing a relative TSR plan, there are two basic approaches to defining

the group of peer companies: (1) select peers that have similar characteristics (e.g.,

industry peers or companies that comprise an industry subset of a broad index)

or (2) use the companies that comprise a broad market index (e.g., the constituent

companies of the S&P 500). The emphasis on systematic and unsystematic risk

and returns can be dramatically different between these two approaches.

Use of Industry Peers

When comparator companies are also industry peers, a relative TSR plan places

emphasis on the company’s specific risk and mitigates its exposure to systematic

and industry risk. Unless the company can significantly change its exposure to

systematic or industry-specific risk, executives who participate in such a plan

have an incentive to increase the company’s exposure to company-specific risks

by seeking to invest in core business projects rather than diversifying operations.

For example, a company that focuses on oil refining could invest in additional

refineries rather than investing in exploration.

Chevron provides an example of a relative TSR plan that uses industry peers to

test the hypothesis that a relative TSR plan that uses close industry competitors

for its peer group rewards executives for company-specific returns that exceed

the company-specific returns of peers. The plan provides little, if any, reward or

penalty for systematic or industry returns.

According to Chevron’s 2012 proxy disclosure, there are only four peer compa-

nies to which the company compares itself: ExxonMobil, BP, Royal Dutch Shell

and ConocoPhillips. The performance period for Chevron’s plan is three years

(currently calendar years). Table 1 shows

the payout schedule.

While having a small peer group

can create issues if one or more of the

peers drop out (e.g., because of merger

and acquistion activity), the companies

that comprise Chevron’s peer group

have been stable over the past decade.

Another issue that might arise from using

a small peer group is that there can be

large incremental payouts for small incremental performance. In other words, a very

small improvement in TSR can result in a jump in ranking and a corresponding

jump in payout. To Chevron’s credit, this issue is mitigated somewhat by considering

Chevron’s TSR rank a tie if the measured TSR is within 1% of the nearest peer(s), in

which case, the payout is the average payout of the tied ranks. This can result in

either a decrease or increase in payout depending on which side of the tie Chevron

is on, but does have the effect of smoothing the payout.

TABLE 1 Chevron TSR Plan Payout Schedule

TSR Rank Unit Value Paid

1 200%

2 150%

3 100%

4 50%

5 0%


For Chevron and three of its peers (other than BP), the unsystematic risk over the

2009–2011 performance period represented a relatively small portion of the total

volatility, and betas fell within a fairly narrow range. (See Appendix for details.)

Systematic returns over the same period also had a fairly narrow distribution

(corresponding to the distribution of beta), while the unsystematic returns varied

across all of the companies. All of this suggests that the TSR ranking among each

of these companies is highly dependent on returns generally associated with

unsystematic risk and company-specific risk, and that payouts, which could be

significant, might depend on only a small portion of each company’s return. Given

this set of circumstances, it is reasonable to expect a close race among the compa-

nies. Chevron’s disclosure of its performance ranks for the seven performance

cycles through 2011 is consistent with this premise. Four of the seven performance

ranks were considered tied, including the cycle completed in 2011.

If Chevron’s relative TSR plan is effective at isolating company-specific risks and

returns among the chosen peer set, it would be expected that the TSR ranking

of each company’s total return should be the same as the TSR ranking based

on only unsystematic returns. Looking at the 10 performance cycles through

2011, the ranks are identical for all but the 2001–2003 cycle. For purposes of this

analysis, performance cycles were assumed to be based on calendar-year periods,

providing evidence that this particular relative TSR plan is effective at isolating

company-specific returns. (See Appendix for details.) This presumably represents

management’s contribution to value and removing market and industry effects.

Unless the executives at Chevron can increase its exposure to market returns (i.e.,

increase its beta and exposure to systematic risk) relative to its peers, this plan

clearly provides rewards for accepting more company-specific risk.

Use of Broad Market Peers

Some companies use comparators that comprise a broad market index, such as the

S&P 500 for purposes of a relative TSR comparison. Clearly, betas will vary widely

when using a large peer group containing companies from many industries. If a

company with a low beta adopts such a plan, it might put itself at a disadvantage

when the market rises and an advantage when the market declines. The inverse

would be expected for a company with a high beta and a similar plan.

CenturyLink is an example of a company that has a relatively low beta (0.56

measured over 2009–2011) and uses a

relative TSR performance share plan

based on its percentile rank compared

with the companies that comprise the

S&P 500. CenturyLink adopted this

plan in 2012. Table 2 shows the payout

schedule, according to the company’s

proxy disclosure.

TABLE 2 CenturyLink TSR Payout Schedule

Percentile Rank Unit Value Paid

≥75th 200%

50th 100%

25th 50%

≤25th 0%


CenturyLink’s beta ranked below the 15th percentile over the 2009–2011 period,

which means that its systematic stock return was correspondingly lower than about

85% of the companies in the S&P 500. However, CenturyLink’s total return over

the same period ranked at the 55th percentile due to strong unsystematic returns.

(See Appendix for detail.) Had CenturyLink adopted this relative TSR plan in 2009,

the payout would have been just under 120% of target. After removing the impact

of market returns from each of the stocks (i.e., if only unsystematic returns are

evaluated), CenturyLink’s hypothetical payout would have been significantly higher,

demonstrating that CenturyLink’s low beta was a handicap during this time period.

To its credit, CenturyLink had an unsystematic return over the 2009–2011 period that

approximates the 68th percentile. Had CenturyLink adopted a relative TSR plan that

only evaluated unsystematic returns, it would have paid about 172% of target, an

increase of roughly 50% of target vs. the conventional TSR plan it recently adopted.

This phenomenon isn’t unique to CenturyLink. A change in rank was determined

for each company in the S&P 500 by taking the difference between the TSR rank

using total returns vs. the TSR rank using only unsystematic returns. As shown in

the Appendix, the correlation between this change in rank and each company’s

beta is significant.

It is interesting to note that CenturyLink’s 2012 proxy had a shareholder proposal

to require that this plan payout only if its TSR rank is at least at the 50th percentile

of the chosen peer group. The shareholder argued that providing a 50% payout

at the 25th percentile is too easy. The above analysis provides some evidence that

when the market rises, the company’s low beta may result in payouts that are lower

than this shareholder expects. Of course, payouts might be higher than expected

if the market declines, which clearly would not please most shareholders.

DESIGN CONSIDERATIONS

When designing a relative TSR plan, some questions should be considered:

❙z Should the plan provide incentive to focus on unsystematic (or company-

specific) returns?

❙z Should the plan provide incentive to increase or decrease exposure to

market returns?

Beta-Neutral Design

For most companies in mature industries, changing the exposure to market returns

is not realistic unless there is a dramatic change in strategy. It would be expected

that the beta for these companies would not drastically change compared with

other industry peers. For these companies, there would likely be a desire to

provide an incentive to seek increased returns by investing in projects that have

company-specific characteristics. These returns might come from the innovation of

new products or development of efficiencies that give the company an advantage

over its industry peers. Investment in these types of projects increases exposure


to unsystematic risks with the hope that a successful investment increases the

returns to shareholders. It might have the effect of increasing the overall volatility

of the company, but not due to an increase in the correlation with market returns

(i.e., market exposure).

For these companies, a relative TSR plan should seek to mitigate or remove

the influence of broad market returns when rewarding executives. This is most

commonly accomplished by comparing to industry peers, each of which would

have similar exposure to market returns (i.e., betas). Even among industry peers,

it is possible to have significant differences in market exposure, so it is essential

to examine the betas for each of the peers. If a compensation committee does

not believe a comparable group of industry peers exists, it can take one of three

approaches to mitigate or remove the impact of market returns:

❙z Compare with nonindustry companies with similar betas

❙z Compare with companies that comprise a broad market index, but set the target

payout to correspond to the company’s beta rank

❙z Compare with companies that comprise a broad market index, but remove the

impact of systematic returns using Jensen’s alpha.

The first approach, while relatively simple, might draw criticism from share-

holder watchdogs for cherry-picking peer companies. This might be addressed by

choosing companies that are similar in size and by providing a detailed description

in the company’s disclosure.

The second approach considers the company’s beta ranking when setting the

target performance percentile. For example, if the company’s beta ranks at the

60th percentile, the plan would consider paying the target payout if the company

meets the 60th percentile TSR. However, compensation committees should be

mindful that using beta ranking to set payout ranges around target (i.e., threshold

and maximum) could result in wider payout ranges for companies with higher

betas. This is because companies with higher betas will have a steeper expected

return as a function of the market return (i.e., the Security Characteristic Line

derived from MPT).

While the third approach might be the most complicated for participants and

shareholder watchdogs to understand, it is more effective at removing the impact

of systematic returns than the second approach. Using Jensen’s alpha for the

company and each of the peers allows the plan to payout only based on unsys-

tematic returns, which is the approach demonstrated by the CenturyLink example.

Providing Incentive to Change Market Exposure

Some companies might pursue a significant change in strategy that could essen-

tially change exposure to market returns. For example, a company might consider

making acquisitions that would effectively diversify the overall business and

provide more exposure to market returns or divest in businesses to focus on a


core strategy. With such strategies in place, the compensation committee might

want to design a plan to encourage a change in the company’s beta. This could be

accomplished by eliminating the influence of unsystematic risk from the company

and each of its peers, essentially focusing on beta ranking among companies and

not on relative TSR.

Other Considerations

While most relative TSR plans measure returns that exceed the returns of peers,

payouts are typically in full shares of stock (i.e., the payout includes more than

just the excess return). If a company wanted payouts based only on excess returns,

then a plan can be designed to pay only an incremental amount representing only

the company’s unsystematic returns. This could be accomplished by making payout

a function of Jensen’s alpha (or a variant that uses industry betas). This approach

might start to resemble an indexed option if the number of units were held constant.

CONCLUSION

One common criticism of relative TSR plans is that they fail to provide strong line-

of-sight to participants — that executives do not know what actions they should

take to increase a company’s TSR ranking, and that rankings tend to be capricious,

making the awards analogous to a lottery ticket more than an incentive program.

It’s not clear if this criticism applies to all relative TSR plans, plans that compare

to companies with similar market exposure (e.g., close industry peers) or plans

that compare to companies with varying exposure to the market (e.g., peers that

comprise the S&P 500).

A company with a relative TSR plan should consider taking the following steps:

A) Determine the beta for itself and each of its peer companies

B) Evaluate the breadth of the range of betas

1) If the betas are in a narrow range, then it is likely that the current plan

is effective at isolating company-specific risks and returns

2) If the betas are in a wide range, then:

a) Consider changes to the peer group by finding companies with betas

that are similar to the company or

b) Set targets and ranges to reflect the company’s beta rank or

c) Measure only unsystematic returns when determining payouts.

By choosing close industry peers, a relative TSR plan provides an incentive to

focus on increasing company-specific returns through innovation or efficiencies.

Alternatively, when using a broad market index, returns can be adjusted to provide

similar focus on only unsystematic returns. Even if returns are not adjusted in such

a plan, just being cognizant of the different types of risks and returns might help

compensation committees and executives understand the approaches that can be

taken to impact payouts of a well-designed plan. z


APPENDIX

Table 1 deconstructs risk into its different components for Chevron and each of

its peers measured over the 2009–2011 performance cycle.

Note that to calculate beta for each of the peers, the market has been assumed to

be an equally weighted portfolio of the five stocks representing Chevron and each of

the peers. As mentioned, using industry betas is a departure from MPT, but allows

us to consider market and industry returns. To test the validity of this approach, the

results from two regressions were compared. The first regression used the S&P 500

index returns as well as the industry portfolio returns as independent variables with

Chevron’s returns as the dependent variable. The second regression used industry

returns as the only independent variable (both regressions assume that the S&P 500

index is a fair representation of the broad market). The adjusted R-squared for each

regression differed by only 0.02 and the volatility of residual returns (which equals

the unsystematic risk) differed by less than 1%. This suggests that using industry

peers alone explains the vast majority of the variation in Chevron’s returns providing

comfort in using industry betas.

Using Jensen’s alpha, Table 2 shows how stock returns are deconstructed into

systematic and unsystematic components. For purposes of this analysis, TSR

is calculated based on beginning and ending stock prices, which differs from

Chevron’s plan, which uses 20-day average stock prices for the beginning and

ending data points.

Table 3 is a comparison of Chevron’s TSR rank over the past 10 three-year cycles

based on total returns and only unsystematic returns. Note that the ranking matches

for all but the 2001–2003 performance cycle. Similar results can be demonstrated

for each of the peer companies. For purposes of this analysis, it has been assumed

that performance cycles were measured over calendar years, which differs from

Chevron’s actual practice for grants made prior to 2006.

Table 4 shows that CenturyLink’s risk is relatively low as compared with other

S&P 500 companies (data have been arrayed independently): Similar to the approach

taken above for the Chevron analysis, the market is assumed to be an equally

weighted portfolio of the 485 stocks that comprised the S&P 500 as of Oct. 18, 2012,

and that had data for the entire 2009–2011 time period. (See Table 5.)

TABLE 1 Risk Components for Chevron and Peers

Risk Measured Over 2009 - 2011

Beta Market VolatilityVolatility

Total Systematic Unsystematic

Chevron 0.9276

25.64%

26.03% 23.78% 10.58%

ExxonMobil 0.8234 23.41% 21.11% 10.13%

BP 1.1755 36.17% 30.14% 20.00%

Royal Dutch Shell 1.0276 29.47% 26.34% 13.22%

Conoco Phillips 1.0459 29.80% 26.81% 13.00%


Table 6 shows CenturyLink’s percent rank over the past 10 hypothetical perfor-

mance cycles based on total returns and unsystematic returns. The market return

is provided for reference.

As shown in Table 7, the correlation between rank change and beta is signifi-

cant. Note that when the market premium, the difference between the market

return and an assumed

risk-free interest rate of

2.5%, is positive, so is

the correlation, and vice

versa, which shows that

when the market declines,

companies with higher

betas tend to experience

higher payouts from a

plan that evaluates only

unsystematic returns.

TABLE 4 CenturyLink’s Comparative Risk

Risk Measured Over 2009 - 2011

Beta Market VolatilityVolatility


25th Percentile 0.6985

25.64%

28.53% 18.89% 20.37%

50th Percentile 0.9472 36.86% 25.62% 25.28%

75th Percentile 1.2600 46.33% 34.08% 32.05%

CenturyLink 0.5645 24.21% 15.27% 18.79%

Percent Rank 14.8 12.3 14.8% 19.1

TABLE 2 Systematic and Unsystematic Components of Chevron and Peers’ Stock Returns

Annualized Return Over 2009 - 2011


Chevron 16.91% 11.10% 5.81%

ExxonMobil 4.53% 10.14% -5.61%

BP 1.63% 13.40% -11.77%

Royal Dutch Shell

20.53% 12.03% 8.50%

Conoco Phillips

16.55% 12.20% 4.35%

TABLE 5 Annualized Return Over 2009 - 2011


25th Percentile

7.61% 13.45% -9.61%

50th Percentile

17.33% 17.35% 0.88%

75th Percentile

29.39% 22.25% 11.44%

CenturyLink 20.16% 11.35% 8.82%

Percent Rank

54.9 14.8 67.9

TABLE 3 Chevron’s TSR Rank

Chevron’s TSR Rank

Performance Cycle

Total ReturnUnsystematic

Return

2009 - 2011 2 2

2008 - 2010 1 1

2007 - 2009 1 1

2006 - 2008 2 2

2005 - 2007 2 2

2004 - 2006 3 3

2003 - 2005 2 2

2002 - 2004 5 5

2001 - 2003 3 2

2000 - 2002 4 4


ABOUT THE AUTHOR

Andy Restaino, CFA, ([email protected]) is the founder and a managing director of Technical Compensation Advisors Inc., an independent executive compensation consulting firm, providing thoughtful advice and in-depth analyses on a range of technical issues that are crucial for incentive plan design, proxy disclosure and supporting corporate governance policies. For more than 15 years, Restaino has provided this advice to hundreds of leading public and private companies on a wide range of issues including compensation disclosure drafting and review, stock option and equity incentive valuations (e.g., Monte Carlo), accounting for stock-based compensation (i.e., ASC 718), employment agreements, golden parachutes (e.g., IRC § 280G), tax matters (e.g., IRC § 162(m)) and financial/probability analyses of incentive plan metrics. For more information, visit www.techcompadvisors.com.

TABLE 6 CenturyLink’s Rank in Total and Unsystematic Returns

CenturyLink’s TSR Percent Rank

Performance Cycle

Market Return

Total Return

Unsystematic Return

2009 - 2011 18.17% 54.9% 67.9%

2008 - 2010 0.06% 82.5% 81.0%

2007 - 2009 -3.59% 48.5% 43.8%

2006 - 2008 -9.26% 53.5% 47.3%

2005 - 2007 12.57% 37.3% 41.9%

2004 - 2006 17.31% 37.6% 53.7%

2003 - 2005 24.97% 12.0% 21.3%

2002 - 2004 13.10% 23.9% 26.6%

2001 - 2003 6.34% 27.0% 26.6%

2000 - 2002 -1.95% 21.4% 19.5%

TABLE 7 Correlation Between CenturyLink’s Rank and Beta

Performance Cycle

Market Premium

Correlation between Beta and Change

in Rank

2009 - 2011 15.67% 0.8501

2008 - 2010 -2.44% -0.7938

2007 - 2009 -6.09% -0.7090

2006 - 2008 -11.76% -0.8170

2005 - 2007 10.07% 0.7460

2004 - 2006 14.81% 0.7671

2003 - 2005 22.47% 0.8254

2002 - 2004 10.60% 0.7801

2001 - 2003 3.84% 0.7332

2000 - 2002 -4.45% -0.6546

Frank Giancola

Job Satisfaction Deserves a Fresh Look

J ob satisfaction occupies an interesting place

among the employee attitudes in the field of

organizational behavior and the practice of HR

management. To many organizational psychologists, it

is a reminder of old debates as to whether job satis-

faction drives performance or performance drives job

satisfaction. Over the years, many have moved on to

study concepts with more observable behaviors, such as

motivation and organizational commitment. At the same

time, HR practitioners realized that job satisfaction is the

wrong goal for HR policies and practices because a satis-

fied employee is not always a productive employee. Like

psychologists, they have turned their focus to concepts

with greater behavioral intensity, such as employee

engagement, which are more closely tied to employee

performance and an organization’s bottom line.

While these developments in academia and the busi-

ness world are understandable, certain aspects of job

satisfaction have been overlooked or recently uncovered

to justify a reconsideration of its importance to HR prac-

titioners. This article identifies and connects research

findings to show why job satisfaction is an important


Third Quarter 2013


concept that HR practitioners must understand and be able to apply in their work.

Compensation and benefits professionals, in particular, need to give this matter

attention since pay, benefits, work-life programs and job design are often identified

as key drivers of job satisfaction. The article summarizes the basics — definition,

theory, measurement and determinants — and then the behavioral outcomes

where most of the recent developments have occurred.

DEFINITION

There is no standard definition of the term “job satisfaction.” The following are

from five sources — three organizational behavioral textbooks and the glossaries

of two HR professional associations:

❙z A pleasurable and/or positive emotional state resulting from the appraisal of one’s

job or job experience (Luthans 2011).

❙z How people feel about their work and work setting (Robbins 2005).

❙z An employee’s overall evaluation of his/her job as favorable or unfavorable (Jex

and Britt 2008).

❙z An indication of how well a person likes his/her work, usually determined

by a number of factors, including pay, promotional opportunities, supervision,

co-workers and the work itself (WorldatWork 2012).

❙z How an employee feels regarding his/her job, work environment, pay, benefits,

etc. (Society for Human Resources Management 2012).

THEORY

A causal theory of job satisfaction could not be found in four recently published

organizational behavioral textbooks, which are referenced in this article. Researchers

appear to be concentrating on relationships or correlations between variables, not

causal theories, as Edward Lawler (1994) observed 18 years ago. According to Jex

and Britt, the common theme running through explanatory models is that job

satisfaction is based on a comparison between what an employee wants from his/

her job and what is provided.

MEASUREMENT

There are two types job satisfaction. Facet satisfaction refers to employees’ emotional

reaction to particular aspects of a job, such as pay, co-workers and supervision.

Job satisfaction refers to an employee’s reaction to the total job experience.

To determine satisfaction levels, employees can be directly asked to report

how satisfied they are with their job, or some aspect of it, by using a five-point

scale ranging from highly dissatisfied to highly satisfied. Another approach is

to infer satisfaction levels by asking employees to describe their work experi-

ence by checking off features that apply. For example, to assess satisfaction with

pay, employees could be asked to check whether their pay is “bad,” “less than I

deserve,” “highly paid” or “underpaid” (Smith et al. 1969).


One useful aspect about the concept is that an employee’s overall job satis-

faction can be determined with one global rating question just as accurately

as by summing up their responses to individual facet questions. This is one

of the few instances where simplicity works as well as complexity (Robbins).

Organizational behavioral psychologists believe that the best explanation of this

outcome is that the concept of job satisfaction is so broad that a single ques-

tion captures its meaning. This one-question capability has not been reported

for two other common employee attitudes — organizational commitment and

employee engagement.

Survey researchers routinely take advantage of its simplicity. When measuring

organizational commitment or employee engagement levels in a workforce, a

question such as, “How satisfied are you with your job?” is often included to

measure workforce job satisfaction. It may also serve as a cross check or help

in explaining findings regarding commitment and engagement. For example, the

well-known Gallup 12-question measure of employee engagement is preceded

by a question on job satisfaction (Harter et al. 2006).

Perhaps because job satisfaction is a heavily studied topic in organizational

psychology, there are several valid and reliable measures available for use ( Jex

and Britt 2008).

META-ANALYTIC STUDIES

Many of the new developments concerning job satisfaction are based on the

findings of recent meta-analytic studies. Meta-analytical studies usually offer

the most compelling research evidence, and some scholars think that they help

establish principles of organizational behavior (Luthans 2011).

Meta-analytical methods provide researchers with a systematic method to

quantitatively summarize a large number of individual research studies on

a particular concept, such as job satisfaction, or a technique, such as job

evaluation. The results of studies are weighted according to the number of

observations. In simple terms, meta-analysis is a sophisticated and controlled

method of describing the effect of one variable on another in many studies

on a weighted basis. One statistical expert gives the following guidelines for

the evaluation of the coefficient of correlations in meta-analysis in the social

sciences: small, 0.1−0.23; medium, 0.24−0.36; large, 0.37 and above (Cohen

1988). The method is not foolproof because it depends heavily on the number,

quality and comparability of the individual studies and other factors.

DETERMINANTS OF SATISFACTION

The three determinants of job satisfaction are: job characteristics (e.g., the

work itself, pay and co-worker relationships); social information processing

(e.g. interactions with dissatisfied co-workers); and personality dispositions,

the most recent approach.


Personality Dispositions

Research on dispositions indicates that people have an innate tendency to be

satisfied. One study found a correlation of .54 between the two, indicating that

29% of the variability in job satisfaction levels is due to genetic factors (Jex and

Britt). A study of identical twins reared separately from early childhood found a

significant consistency in job satisfaction levels in later life (Judge and Kammeyer-

Mueller 2012).

In 2001, the first meta-analytical study of the correlations between personality

traits and job satisfaction was performed and showed the following correlations:

.26 with self-esteem; .45 with generalized self-efficacy (how we judge our compe-

tence to complete tasks and reach goals); .32 with locus of control (the extent to

which we believe that we can control events); and .24 with emotional stability

(Judge and Bono 2001). The researchers also found these correlations between

personality traits and job performance: .26 for self-esteem; .23 for self-efficacy; .22

for locus of control; and .19 for emotional stability.

According to organizational behavioral psychologists, these substantial person-

ality trait correlations give support for proposing a higher order concept, “core

self-evaluations” (basic conclusions we hold about ourselves), which encompasses

these traits, to explain the personality source for job satisfaction and motivation,

as measured in terms of job performance. In addition, the similar correlations of

the four traits with satisfaction and job performance suggest that they are related

to the same personality characteristics, and that job satisfaction and motivation

are driven primarily by the same personality dispositions.

Scholars think that job characteristics, which are discussed in detail later, have

the greatest influence on job satisfaction (Jex and Britt).

Job Influences on Satisfaction

Some organizational behavioral psychologists are significantly behind the times

when it comes to describing job-related factors that influence job satisfaction,

which may be misleading HR practitioners. Several organizational psychology text-

books state that the main influences on job satisfaction are typically five factors:

the work itself, pay, promotion, supervision, work group and working conditions

(Luthans 2011; Robbins 2005; Schermerhorn et al. 2005). The studies that support

this statement were conducted before 1970 and do not reflect current employment

conditions (Smith et al. 1969). Several older studies have shown that the work itself

had by far the greatest impact on job satisfaction, followed in order by promo-

tions, co-workers, supervision and pay (Ironson et al. 1989). These findings have

led some experts to believe the work itself (intrinsic job characteristics) is a good

place to start to improve job satisfaction (Judge and Church 2000).

Since 2002, the Society for Human Resources Management (SHRM) has sponsored

an annual survey of a random national sample of about 600 working Americans

to determine the key factors that drive their job satisfaction. Respondents are


asked to rank the importance of about 25 factors that contribute to their overall

job satisfaction including: compensation; employee benefits; work-life programs;

job security; opportunities to use skills and abilities; the work itself; relationship

with supervisor; and an organization’s financial stability. The surveys use a five-

point rating scale ranging from “very important” to “very unimportant.” In its 2011

survey, SHRM (2012) found the very important factors and percent of employees

selecting them were:

1 | Job security — 63%

2 | Opportunities to use skills and abilities — 62%

3 | Organization’s financial stability, relationship with immediate supervisor — 55%

4 | Compensation/pay — 54%

5 | Benefits, communication between employees and senior management, commu-

nication between employees and senior management, the work itself — 53%

6 | Autonomy and independence — 52%

7 | Management’s recognition of employee performance — 49%

8 | Feeling safe at work — 48%

9 | Overall corporate culture — 46%

10 | Work-life balance — 38%.

Over the past 10 years, SHRM surveys have shown that, in most years, employees

consider company benefits programs to be among the top two aspects of work that

drive job satisfaction. The 2011 survey was an exception when benefits programs

rated fifth highest. In addition, job security, work-life benefits and feeling safe

in the workplace have frequently appeared on the list of the top five drivers of

satisfaction. All these items were not considered as influences in the 40-year-old

surveys cited in organizational behavioral textbooks, which made no reference

to the SHRM surveys.

Pay Level and Job Satisfaction

Pay satisfaction has been recognized as an important HR topic for many years.

It is generally defined as a person’s feelings about the difference between actual

pay and what the worker thinks he/she should be paid. It can be measured as

a facet of job satisfaction or separately, and has been studied based on pay in

general and its facets, such as pay level and delivery systems.

In 2011, SHRM surveyed a random sample of about 600 U.S. employees and

found that the general category of pay ranked fourth among the top five aspects

that were very important to employees in terms of job satisfaction. From 2002 to

2011, pay ranked among the top five factors for its impact on overall job satisfac-

tion (SHRM 2011).

The first meta-analytical study of the relationship between pay level and overall

job satisfaction was reported in 2010. Sixty-one individual studies examined in the

meta-analytical study showed a correlation of .15 between pay level and overall job


satisfaction and 48 showed a .23 correlation between pay level and pay satisfac-

tion alone. The researchers noted that it would be misleading to explain the low

correlation between overall job satisfaction with pay level with the other facets

of job satisfaction because pay level has only a slightly stronger relationship with

pay satisfaction alone.

The researchers also noted that other factors come into play that may influence

pay satisfaction, such as the degree to which employees value pay, individual

frames of reference for judging satisfaction and expectations about pay. They

pointed out that even though pay level has a limited effect on satisfaction, it does

not mean that other forms of pay are not motivating for many employees (Judge

et al. 2010).

OUTCOMES OF SATISFACTION

The specific behavioral outcomes of job satisfaction that will be discussed are:

employee performance; engagement; organizational commitment; and attraction.

Satisfaction-Performance Controversy

There is an ongoing debate in the field of organizational behavior regarding the

relationship between job satisfaction and employee performance that apparently

has affected the thinking of HR practitioners (Schermerhorn et al. 2005). Originally,

psychologists believed that satisfaction drove performance (“A happy employee is

a productive employee.”). If employees’ satisfaction levels are high and morale is

good, they would perform better. This position came under attack because it was

not strongly supported by research. The feeling was that job satisfaction alone

was not a consistent predictor of individual work performance (Luthans 2011).

HR practitioners began to take a negative view of granting employee rewards,

such as general pay increases, that would satisfy some employee needs, but had a

questionable payoff in terms of rewarding and driving future performance. Thus,

employee satisfaction was viewed as a less important organizational goal than

employee motivation.

The opposing position in the controversy was the reverse of the original one

and said that performance actually drove satisfaction. Proponents of this view

believed that good performance led to rewards, which in turn led to satisfaction

(Lawler 1994). This position was based on the idea that if employees perceive their

rewards as equitable for their performance level, they would be satisfied.

This theory has several weaknesses. First, it considers only satisfaction with

employees who had an opportunity to work and generate satisfying rewards. It

does not consider the satisfaction level of new employees and performance conse-

quences of hiring employees who might not be satisfied, for example, with their

hiring salary. Second, it also does not consider that in most cases, many of the

aspects of work that drive job satisfaction, such as employee benefits, job security

and work-life benefits, are not directly tied to an employee’s performance. Finally,


there are many low-level employees who do not have an opportunity to increase

their level of performance and generate rewards due to a lack of control over their

work. While there is evidence to support the idea that performance drives satisfac-

tion for higher-level employees, it is an incomplete and narrow explanation of what

drives job satisfaction and has limited practical value for practitioners.

Recently, the satisfaction-performance debate has been rekindled as new research

has shown a higher correlation between the two than in the past — from a weak

.17 in a 1985 meta-analytic study to a medium .30 in a 2001 meta-analytical study

(Luthans 2011). In 2008, meta-analytical research was done on 16 studies to learn

more about the directional relationship between satisfaction and performance.

Using longitudinal data, the researcher found evidence that the relationship was

stronger for the satisfaction-performance hypothesis than for the performance-

satisfaction one (Riketta 2008). The researcher said that, “The results provide some

support for the common assumption that job attitudes (job satisfaction and orga-

nizational commitment) influence performance. Almost no statistically significant

evidence for the reverse causal direction emerged.”

Some organizational behavioral psychologists have suggested that we are now

in quite a different place regarding the relationship of the satisfaction-performance

relationship than most psychologists might believe (Judge et al. 2001). Research on

employee engagement and organizational commitment also has provided grounds

for a second look at job satisfaction, as described later.

Satisfaction and Engagement

In 2002, Gallup researchers found a correlation of .91 between job satisfaction and

the Gallup measure of employee engagement, which means that there is roughly

an 80% overlap in what the two concepts address. Gallup defined engagement as

“an individual’s involvement and satisfaction with, as well as enthusiasm for, work”

(Harter et al. 2002). Its meta-analysis showed that there are substantial, generaliz-

able relationships between unit-level employee satisfaction and engagement with

productivity, profit, turnover and customer satisfaction.

An important aspect of the finding is that the relationships are at the unit level of

an organization, not the individual level, as in the satisfaction-performance contro-

versy. This finding and other research has led some organizational psychologists to

conclude that although job satisfaction may not drive individual employee perfor-

mance, organizations with more satisfied employees are more productive than those

with fewer. They point out that the interactions and complexities of the work process

cannot be overlooked, and unit-level productivity must be considered, as well as

individual productivity (Jex and Britt; Robbins). What they seem to be saying is that

more can be accomplished in an organization if employees have a positive attitude

and willingness to contribute, which presumably results in part from job satisfaction.

Thus, downplaying the importance of job satisfaction may not be a good idea if the

goal is to have a productive organization.


The connection between job satisfaction and employee engagement can also be

seen when the determinants of the two attitudes are compared. As noted previously,

several older job satisfaction studies have shown that the work itself (intrinsic job

characteristics) had by far the greatest impact on job satisfaction. A recent analysis

of the concept of employee engagement found that intrinsic motivators are a major

component of engagement models used by HR consultants Towers Watson and the

Corporate Leadership Council (Giancola 2011).

Satisfaction and Organizational Commitment

Researchers have found a strong relationship between satisfaction and organizational

commitment, which is defined as a strong desire to be a member of the organization,

a willingness to exert high levels of effort and an acceptance of the organization’s

goals and values. They recently found through meta-analysis a correlation of .65

between overall job satisfaction and affective commitment (an employee’s emotional

attachment to an organization). In addition, this correlation is stronger than correla-

tions between pairs of facets in the overall commitment concept, which is comprised

of affective commitment, normative commitment (feelings of obligation to work in

an organization) and continuance commitment (a personal assessment of the gains

and losses of working in an organization). They also observed that the satisfaction-

organizational commitment correlation is stronger than the correlations typically

found between indicators of a single concept (Newman and Harrison 2008; Harrison

et al. 2006). Organizational commitment is a major component of employee engage-

ment models used by Towers Watson and the Corporate Leadership Council to add

support to the link between job satisfaction and engagement.

Researchers argue for an aggregate job attitude based on employee satisfaction,

commitment and job involvement that contributes to individual employee effectiveness.

Satisfaction and Attraction

Psychologists have known for many years that there is a connection between the

importance employees assign to job factors and how much these factors influence

overall job satisfaction (Lawler). This relationship can be seen in the results of

employee surveys conducted by Towers Watson and SHRM.

Since 2001, Towers Watson has biennially surveyed a cross section of thousands of

employees in hundreds of mostly medium and large companies in the United States

to determine what attracts, retains and engages them. The elements include health

care, retirement, vacation and other benefits, work-life balance, job security, base pay,

career advancement opportunities, company reputation, and other organizational

programs and characteristics of importance to employees.

For example, in 2010, Towers Watson surveyed about 10,000 U.S. employees who

ranked job security, base pay, health-care benefits, length of commute and vacation/

paid-time-off benefits as the top five job characteristics that would attract them to an

employer (Towers Watson 2012). Over the past 10 years, these surveys have consistently


shown that when considering an employer, employees place a premium on having

competitive pay, health care, retirement, vacation plans and work-life benefits.

Over this same period, SHRM surveys have shown that employees consider pay

and employee benefits programs to be among the top two aspects of work that

drive their job satisfaction in most years. In addition, job security, work-life benefits

and feeling safe in the workplace have appeared on the list of the top five drivers

of satisfaction, as well as in lists of the top drivers of employee attraction. Thus,

there is general agreement between the factors employees identify as important

when considering an employer and for realizing job satisfaction. The factors that

drive satisfaction are similar to those that drive one of the key processes in human

resources, the ability to attract new employees.

Pay Satisfaction and Outcomes

Regarding pay outcomes, compensation scholars Timothy Judge and Herbert

Heneman (2000) said that, “Research has unequivocally shown that pay dissatisfac-

tion can have important and undesirable impacts on numerous employee outcomes.”

The first meta-analysis of pay satisfaction research (Williams et al. 2006) involved

203 studies conducted over the past 35 years and provided a different perspective

on pay satisfaction outcomes:

❙z Pay level satisfaction had a moderate -.31 correlation with all turnover intentions and

a small -.17 correlation with voluntary turnover. Absenteeism had a -.05 relationship

with general pay satisfaction.

❙z Performance had a .05 correlation with general pay satisfaction and a .06 correla-

tion with pay level satisfaction. The correlation was higher (.25) when objective

measures of performance were used than when supervisor ratings were used (.04).

So, the type of reward system in use had a bearing on pay satisfaction.

The meta-analytic researchers explained why these weak relationships between pay

satisfaction and behavioral outcomes seemed to conflict with the earlier statements.

The majority of the 11 studies used to support the earlier statements included outcomes

that were not represented in the meta-analysis because they tended to be unique —

pro-union vote and signing up for a job interview. The meta-analytical research, which

involved 203 studies, was limited to outcomes that had been examined in multiple

studies, making this a better source from which to generalize.

SUMMARY

A close reading of what is now known about the concept of job satisfaction indi-

cates that it deserves more attention and respect than it sometimes receives for the

following reasons:

❙z Because an employee’s overall job satisfaction can be accurately measured with

one global rating question, it is a cost-effective means for determining job satisfac-

tion levels for an organization’s entire workforce.


❙z Surveys of organizational commitment and engagement often contain a job satis-

faction question to better inform researchers on results regarding attitudes related

to satisfaction.

❙z Researchers have found moderate correlations between personality traits that

are related to job satisfaction and job performance, which suggests a similarity

between job satisfaction and motivation based on employee personality.

❙z In their textbooks, academic psychologists have provided out-of-date information

about the factors that drive job satisfaction and need to give greater attention to

the results of recent employee job satisfaction surveys. These surveys show that

employee satisfaction is driven more by pay and employee benefits, work-life and

other programs than they were in the 1950s and 1960s, which is the reference

point for academics.

❙z The relationship between pay level and job satisfaction is weak, while the rela-

tionship between the general category of pay and job satisfaction is strong, an

apparent conflict that needs further investigation.

❙z Job satisfaction is not always a good predictor of job performance, and there are

many factors that drive satisfaction that are not related to performance-generated

rewards for many employees.

❙z The relationship between job satisfaction and performance was thought to be

relatively weak, but recent research has shown a much stronger relationship that

supports the idea that satisfaction drives performance.

❙z Gallup researchers have found a significant correlation between job satisfaction

and employee engagement, and some psychologists believe that organizations

are more productive at the unit level when the workforce has high levels of

job satisfaction.

❙z Researchers have found a strong relationship between satisfaction and organi-

zational commitment and have argued for a broad attitude based on the two

concepts to explain employee behavior.

❙z The factors that drive job satisfaction are similar to those that attract employees

to an employer, making them key elements in the process of attracting, as well

as satisfying, employees.

❙z Weak relationships exist between pay satisfaction and several behavioral outcomes,

such as performance, absenteeism and voluntary turnover.

A complex relationship exists between the variables that have a major effect on

employee behavior. Our understanding of them has benefited from recent meta-

analytic studies that allow psychologists to draw sound conclusions from a large

number of studies and gain new insights into employee behavior. Psychologists also

have begun to see significant similarities between attitudes, especially between job

satisfaction and the newer concepts of organizational commitment and employee

engagement, and some are proposing aggregate concepts to better understand

employee behavior. These new methods for investigating and conceptualizing


employee attitudes have given new life to the concept of job satisfaction as one

of the key variables that should be considered when applying organizational

behavioral findings to the practice of HR management. z

AUTHOR

Frank Giancola ([email protected]) has more than 40 years of HR experience, 25 with Ford Motor Co., primarily in various compensation and benefits positions, and 23 years with active and reserve compo-nents of the U.S. Air Force as a personnel officer. Giancola has taught HR-related compensation courses at several colleges. He graduated from the University of Michigan with a bachelor’s degree in psychology-sociology and earned master’s degrees in business administration and industrial relations from Wayne State University in Detroit. He is a regular contributor to WorldatWork Publications and Online Community.

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James Chapados and Kerry

Desmond, Stowe Consulting Co.;

and Christiana Schlett

Creating a Suggestion Program as Part of a Continuous Improvement Initiative

T oday, it is understood that achieving greater and

more sustained levels of operational excellence is

the result of embracing core principles of a contin-

uous improvement culture. Operational excellence is

the result of successfully adapting to the changes that

continually occur in and around an organization. One

continuous improvement strategy, the worker suggestion

program, is often recommended to help companies tap

into the unrealized potential of their workforce.

SUCCESSFUL SUGGESTION SYSTEM

IMPLEMENTATION

Recent research on the effectiveness of continuous

improvement initiatives has found that most companies’

efforts have limited success (Schonberger 2011). Why?

Often it is because their leaders fail to commit to the

principles necessary to create a resilient company in

today’s volatile marketplace. These principles — focusing

on the customer by adding value to products or services,

creating a team-based culture, and using a rational,

fact-based system for making change (continuous

improvement) — provide the framework for ongoing


Third Quarter 2013


organizational success. Instead of focusing on these principles, companies often

mistakenly focus on using a toolbox of techniques that others have created as

a part of their journey. These tools, often taken from lean manufacturing or Six

Sigma toolkits, can provide powerful results when properly applied. But unless

they are part of a principles-based commitment to culture change, their impact

will be limited in scope and duration (Schonburger 2008).

As a method for productivity improvement or culture change, employee sugges-

tion program success has been less than stellar. Chart Your Course International

(2009) research of U.S. companies using suggestion systems found the following:

❙z The majority of companies have a significant disconnect between workers and

managers. Only 41% believe their senior management supports new ideas.

❙z Most employees never see their senior managers, or, if they do, they find them

inaccessible. Only 37% of employees think senior management tries to be acces-

sible to employees.

❙z 60% of employees think their organization’s employee suggestion program does

not exist or is ineffective.

Suggestion programs must be integrated into the fabric of worker development

and support. The better the fabric reflects key principles of continuous improve-

ment, the more effective the program will be. Senior managers in an organization

can and should weave this corporate fabric (Gutter 2012).

A successful suggestion system starts with a culture committed to building

collaboration, teamwork and worker empowerment by focusing people on contin-

uous improvement (Bodek 2010 and Liker and Franz 2011). A company challenged

in any of these three areas will have implementation problems.

Organizational collaboration exists when most tasks are designed to share respon-

sibility and accountability between traditional divisions of authority and traditional

levels of hierarchy. A dynamic structure is necessary for a suggestion system to

be effective. Many suggestions will be cross-functional and their implementation

will often involve people at different levels of organizational responsibility. Having

to navigate suggestions through a traditional organizational structure complicates

implementation. Traditional organizations that have been successful have had

someone at a high level with cross-functional management responsibility leading

the program (Liker and Meier 2007). Clorox Corp. has established a World Class

Operations Group responsible for continuous improvement across all product

groups. A part of its mission is worker empowerment.

Suggestions needing more than one person to implement add additional complexity.

Teamwork, including the use of a group of people who are properly trained, led and

supported, is necessary for a suggestion system to be effective. Two types of teams

usually exist in a successful organization (Pascal 2007). Semi-permanent teams are

responsible for day-to-day tasks and the improvement of methods to fulfill those

tasks. Temporary teams are created to address a particular challenge or opportunity.


Both team types are necessary for a suggestion system to be successful. For those

suggestions that do not easily fit into an existing team, a temporary cross functional/

hierarchical team can be created to study and implement the suggestion.

Worker empowerment works only in companies for which tasks and methods

have been clearly defined (Liker 2003). For empowerment to be effective, people

need to be properly trained, equipped and supported. Personal initiative must

be encouraged within clearly defined boundaries. Lack of clarity or inadequate

training, equipment or support makes personal initiative by workers too much of

a risk, overly difficult and frustrating. In organizations with effective suggestion

programs, workers know when to “just do it” and when they need to submit a

suggestion for review and approval.

For example, at one electronics firm, the informal rules for “just do it” were:

❙z If the improvement didn’t need regulatory approval

❙z If the cost was under $200

❙z If the improvement impacted others to make sure they were involved in the

improvement

❙z If the improvement didn’t mean there was an easy way to go back to the old way.

All other suggestions needed to be submitted for approval.

Almost all successful suggestion programs are really suggestion systems where

workers experiment and learn how to apply continuous “try-out” suggestions, even

though there seems little likelihood that improvement will result (Liker and Meier

2006). The effort provides experience and gives leaders an opportunity to teach addi-

tional skills in root cause analysis, solution generation, planning and implementation.

An effective suggestion system strengthens workforce commitment for contin-

uous improvement. Most suggestion systems focus on cost reduction or increased

revenue. But these outcomes should be by-products from fulfilling core values

and building people’s skills and experience using continuous improvement (Van

Dijk and Van de Ende 2002).

Along with improved performance and success, a suggestion system’s purpose

is to:

❙z Better use talent of the workers.

❙z Strengthen workforce morale and loyalty.

❙z Increase organizational resilience.

❙z Improve communication.

❙z Improve decision making.

❙z Maintain continuous improvement momentum.

❙z Increase value-added activity and decrease nonvalue-added activity.

For a suggestion system to work, the system needs to be a standard process

with little or no ambiguity. It must be clearly understood and consistently used

by everyone.


INSTITUTING A SUGGESTION SYSTEM

The recommended process for creating and implementing a suggestion system

follows these steps:

1 | Make sure that senior management is committed to creating the suggestion

system. It needs to understand that a suggestion system is not a panacea, but an

important part of other workforce continuous improvement initiatives. Manage-

ment must understand the costs associated with creating a formal suggestion

system including:

❙z Design and system-management time

❙z Training costs

❙z Material development costs

❙z The costs of tangible incentives and reinforcers (Tucker and Singer 2012).

Managers should understand that payback, in terms of cost savings or increased

revenue, initially needs to be considered a secondary outcome. Workforce buy-in

and empowerment comes first. Implementing a suggestion system usually involves

significant change in management attitudes and behavior. Creating a suggestion

system involves its designers working to get an accurate appraisal of the current

treatment of workers and the workers’ attitudes.

2 | Select a sponsor and design team and charter them to begin work. The sugges-

tion system sponsor should be a senior manager who has the trust and respect

of the rest of management. The sponsor should be someone familiar with the

company’s day-to-day operations. He/she should generally be known by the work-

force. The suggestion system design team should be cross-functional and include

people from different levels within the company. The team’s charter should state

that consensus will be the desired method of decision making. All final design

decisions should be reviewed and accepted by the sponsor who will help the

team present them to the rest of senior management for review and approval

(Giradelli 2012).

3 | Understanding how people make suggestions and how those suggestions are

received and acted upon is crucial. The effectiveness of the current sugges-

tion system should be evaluated. It is important to distinguish between what is

espoused by people working in the company and what is actually happening. For

instance, if there is a strong sense that leadership in the company is not open to

improvement ideas, while leaders feel frustrated with the lack of workforce sugges-

tions, then that disconnect and its reasons need to be understood (Womack and

Jones 2003). A review of a company’s current suggestion activity should include:

❙z The current number of suggestions generated in a week/month by work area

❙z The sources of those suggestions — floor workers, supervisors, vendors,

customers, etc.

❙z How suggestions are reviewed and how they are approved or disapproved

❙z Existing processes used for implementing suggestions


❙z Ratio between suggestions made to suggestions approved to suggestions imple-

mented

❙z Feedback mechanisms for informing people of suggestions and their status

❙z Any reward or reinforcement policy and the effectiveness of its execution

❙z An accurate appraisal of the strengths and weaknesses of current suggestion activity.

4 | Using one’s understanding of current methods, it is possible to develop a

proposed “suggestion tree” (Heathfield 2008). A suggestion tree describes poten-

tial suggestion sources and how they would be submitted. It determines the

criteria for execution. The authors strongly recommend that if a suggestion

addresses something occurring within an employees’ work area, doesn’t involve

any regulatory issues, costs a minimum amount of money and can be done

in a short amount of time, then the person and/or team may implement the

improvement without approval. However, the results of that improvement should

be reviewed.

5 | Determine review and approval authority for submitted suggestions. Determine

how improvement initiatives are to be evaluated and the results reported. This

process to identify who reviews suggestions and who approves them for imple-

mentation is based on:

❙z Cost savings

❙z Quality

❙z Income

❙z Work improvement

❙z Morale

❙z Execution

❙z Who observes/monitors the progress of implementation.

Suggestions should be approved and results evaluated as close to where they

originate as possible. Delays caused by handoffs, multiple levels of approval or the

use of committees sap energy and credibility from the whole process. Ideally, the

people who proposed the suggestion and those implementing the improvements

should report to the rest of the company what the suggestion was, what they did

and what happened (citing concrete results), and what was learned in the process

of implementing the suggestion (Liker and Franmz 2011). When possible, the

person(s) who proposed the suggestion should participate in its implementation.

6 | For a suggestion system to work, there needs to be appropriate consequences

attached to the suggestions made and initiatives taken, including incentives and

reinforcers (Schonberger 2000). These consequences should encourage addi-

tional suggestions and initiatives. Ideally, a suggestion system should support

and strengthen people’s commitments to the core values of continuous improve-

ment: 1. giving value to the customer; 2. fact-based decision making for initiating

change; and 3. creation of a team-based culture to assure agility and adaptability.


Selecting and using the right type and mix of incentives and reinforcers are

critical to a successful suggestion system.

So what is the difference between an incentive and reinforcer? An incentive is

something promised before action occurs. Incentives are the desired things the

person will receive by achieving a specified end result. Incentives motivate, but

they do not encourage repeat or increased behavior. A reinforcer is a consequence

attached to a person’s specific behavior. It is repeated each time, or at some

interval, when the behavior occurs. Successful suggestion systems use positive

reinforcers, given as soon as possible after the desired behavior.

Incentives and reinforcers are not mutually exclusive, and most effective

suggestion systems intentionally overlap incentives and reinforcers Chapados and

Perlinska 2010). Both can be tangible (something that holds physical value to a

person) or intangible (the mental pleasure or satisfaction a person experiences

from receiving an incentive or reinforcer).

Companies often use the concept of an “incentives store” where upon achieving,

a goal people are able to select from a number of tangible items.

Reinforcers should be tied to specific behavior that is desired to be repeated or

increased and given as immediately as possible to the person demonstrating the

behavior. An effective suggestion system has a matrix of incentives and reinforcers

enriched by the use of tangible and intangible rewards (Daniels and Daniels 2009).

A list of reinforcers and incentives, tangible and intangible, needs to be gener-

ated before the system is tested. How those incentives and reinforcers will be

provided and by whom needs to be clearly identified and defined. Inconsistency

or confusion in paying out incentives or giving reinforcers would be a major blow

to implementation.

7 | Determine how suggestions will be encouraged, collected and reviewed. Iden-

tify how:

❙z Suggestions will be encouraged, documented and collected

❙z The status of a suggestion will be communicated

❙z Actions and suggestions in the suggestion tree will be evaluated

❙z Suggestion action items will be assigned and monitored

❙z Action outcomes will be evaluated.

Designers need to keep in mind that no matter how detailed the planning,

mistakes will happen. Initially, confusion will occur as to when people can act on

an improvement idea and when it should be submitted for review and approval.

Learning when to do which involves training, coaching and practice. Errors in

judgment should be used as teachable moments, not criticized or punished.

At the beginning of implementation, any and all initiatives need to be reinforced.

Suggestions can be shaped over time with incentives and reinforcers. No matter

how well thought out, the incentive and reinforcement matrix will need to be

improved as the system evolves.


8 | Everyone involved should be trained on how the suggestion system works

(Heathfield 2008). People need to understand their roles in the system. Individuals

have to be trained in the tools, knowledge and skills needed to contribute to the

system. Employees also need to be taught the necessary verbal, writing, charting

and interpersonal relations skills needed to meet their assigned responsibilities.

9 | Give the suggestion system a trial run. Inform everyone that their experiences

and ideas for improving the system will be solicited during the testing period.

Usually three to four months of testing is needed to have enough experience,

data and information about the strengths and weaknesses of the system to make

needed adjustments. During that time, the people who designed the system and

are responsible for its implementation should be responsible for the system’s

performance and any improvements that need to be made. They should seek

feedback from all involved. Often a suggestion system is tested first in one area

and then expanded to others as the identified issues are resolved. As the strengths

and weaknesses of the system are identified, seek suggestions for improving the

system. Those suggested improvements that would add value to the system should

be tested and implemented (Imai 1997).

10 | Confirm the final design. Once the suggestion system is functioning, it needs

to be reviewed periodically and improvements made. Toyota Motors is an excel-

lent example of making such improvements (Liker and Franz 2011). In 2009 when

Toyota’s cars suffered perceived acceleration problems, the company had to recall

3.2 million cars (later another 2.1 million were recalled). Toyota changed its

approach to worker participation and empowerment by redesigning its continuous

improvement program to encourage worker suggestions be made and approved by

their work teams. Implementation was led by team leaders and supervisors until

teams became competent and confident to implement ideas on their own. This

approach significantly reduced involvement with the formal suggestion program.

Today, suggestions are more likely to be executed immediately by the person or

the team that had the idea. Even when an improvement idea needs resources

beyond the team, the person with the idea is most often made the leader of the

implementation effort. What is Toyota doing that is counter to the inclinations

of a traditional company. Toyota gives more authority and responsibility to the

front-line workers, while a traditional company would try to exert more control

by management and supervision.

A suggestion system only works if it is part of an integrated effort to create a

continuous improvement culture. Implementing a suggestion system will contribute

to the future health and growth of a company, but only if it is tied to a foundation

that supports the core values of continuous improvement. z


AUTHORS

James Chapados is principal of Stowe Consulting Co. and senior fellow at Leadership Performance Initiatives. His work with companies focuses on productivity improvement and organizational leadership.

Kerry Desmond, formerly a continuous improvement manager at a privately held drug and medical device manufacturer, is a project manager for a Fortune 500 company. He has led and facilitated numerous process improvement and project management teams.

Christiana Schlett, formerly a continuous improvement associate at a privately held drug and medical device manufacturer, is a production planner for a Fortune 500 company. She has a number of process improvement teams, including one that reduced a product family’s cycle time by 30%. She has also led several project teams that designed and implemented a demand-driven material requirements planning process.

REFERENCES

Bodek, Norman. 2010. How to Do Kaizen: A New Path to Innovations — Empowering Everyone to Be a Problem Solver. Vancouver, Wash: PCS Press.

Chapados, James and Agnieszka Perlinska. Team Based Manufacturing. Williston, VT. LPI Press.

Chart Your Course International. 2009. Survey of Workforce Attitudes about Suggestion Systems. Viewed: Oct. 10, 2012. www.chartcourse.com.

Girardelli, Davide, 2012. A Model of High-Performance Suggestion Systems Annual Meeting of the International Communication Association. June 25, Dresden International Congress Centre, Dresden, Germany. Viewed: October 11, 2012. www.allacademic.com/meta/p89548_index.html.

Guttry, Paul. 2012. “Employee Suggestion Programs that Work.” Harvard Business Review Working Knowledge Newsletter. Viewed: Sept. 14, 2012. www.hbswk.hbs.edu/item/7046.html

Heathfield, Susan. 2008. “Harness the Power of an Employee Suggestion Program, Beyond the Suggestion Box.” About.com Guide. Viewed: Oct. 10, 2012. http://humanresources.about.com/od/quality/a/sugges-tion_pro.htm.

Imai, Masaaki. 1997. Gemba Kaizen. New York: McGraw-Hill.

Liker, Jeffrey. 2003. The Toyota Way. New York: McGraw-Hill.

Liker, Jeffrey and David Meier. 2005. The Toyota Way Fieldbook. New York: McGraw-Hill.

Liker, Jeffrey and David Meier. 2007. Toyota Talent. New York: McGraw-Hill.

Liker, Jeffrey and James Franz. 2001. The Toyota Way to Continuous Improvement. New York: McGraw-Hill.

Pascal, Dennis. 2007. Lean Production Simplified. Boca Raton, Fla.: CRC Press.

Schonberger, Richard. 2011. “ASP, The Art and Science of Practice: Taking the Measure of Lean: Efficiency and Effectiveness.” Interfaces 41(2): 182-193. Viewed: Oct. 10, 2012. http://interfaces.journal.informs.org/content/41/2/182.abstract

Schonberger, Richard. 2008. World Class Manufacturing. New York: Free Press.

Schonberger, Richard. 2000. “The Human Side of Lean.” Target 4: 54-59. Viewed: October 10, 2011. www.ame.org/sites/default/files/documents/09-25-04Insights_HR_Lean.pdf

Schuring, Roel W. 2001. “Reinventing Suggestion Systems for Continuous Improvement.” International Journal of Technology Management 22(44): 359-372. Viewed: October 10, 2011. http://inderscience.metapress.com/content/7v2ewtnn69h2tyhc/

Tucker, L. and S. Singer. 2012. “Key Drivers of Successful Implementation of an Employee Suggestion-Driven Improvement Program.” Harvard Business Review Working Knowledge Newsletter. Viewed: Aug. 13, 2012.

Van Dijk, Christian and Jan Van de Ende. 2002. “Suggestion Systems, Transferring Employee Creativity into Practicable Ideas.” R&D Management 32(5): 387-395. Viewed: Oct. 10, 2012. http://inderscience.metapress.com/content/7v2ewtnn69h2tyhc/

Womack, James and Daniel Jones. 2003. Lean Thinking. 2nd ed. New York: Free Press.

Mark Szypko, CCP, GRPKenexa High Performance Institute

Rena Rasch, Ph.D.Kenexa High Performance Institute

Perception is Reality: The Importance of Pay Fairness to Employees and Organizations

F airness is in the eye of the beholder, and pay fair-

ness is no different. The perceived fairness of an

employee’s compensation is based on objective

components (e.g., the extent to which pay rate is logically

tied to the external market) and subjective components

(e.g., an employee’s emotional response to the implied

value statement made by compensation). Regardless of

whether an employee’s perception is rooted in objective

or subjective measures, the perception of pay fairness

is just as important as the reality of it.

Employees need to feel the hard work they put into

their job matches what they get back from it — and

pay is an important component of this evaluation. It is

known that pay is important to employees. Wiley (2011)

reported 25 percent of employees say fair compensa-

tion is the single most important thing they want from

their organization. The importance of pay fairness to

employees can also be observed by its relationship to a

number of important work and life outcomes, including

employee engagement, turnover intentions, work stress,

psychological and physical health, and life satisfaction.

But fair pay is not important to just employees; paying

employees fairly is also in a company’s best interest.


Third Quarter 2013


There is a significant body of research suggesting that organizations with a more

engaged workforce outperform their peers on a number of organizational perfor-

mance metrics (Salonova, Agut, and Piero 2005; Harter, Schmidt, and Hayes 2002).

Organizations may also save money through reduced work stress, which leads

to improved psychological and physical health, which means fewer absences and

better focus (Spector, Dwyer, and Jex 1988; Spector and Jex 1991; Wright and

Cropanzano 1998). Turnover intentions may also be reduced, and the hefty cost of

replacing an employee may be avoided by paying employees fairly (Fitz-enz 1997).

Compensation practices, among other organizational factors, have an impact

employee- and organization-level outcomes. This article will discuss why fair pay

is important. Then, it will present steps compensation specialists, HR practitioners

and managers can take to ensure they are promoting perceptions of fair pay.

THE BENEFITS OF FAIR PAY

The authors’ research indicates that employees who believe they are fairly paid

are more engaged, are less likely to quit, experience less stress at work, feel

healthier physically and psychologically, and are more satisfied with their personal

life. (See Figure 1.)

An organization’s total rewards architecture and its culture can have an impact on the

way employees perceive the fairness of their pay. Compensation programs anchored

firmly to the external market are immediately credible from a fairness perspective,

and organizational transparency can increase an employee’s faith in the fairness of all

corporate programs, including compensation. In addition, external forces, such as an

employee’s friends, family and coworkers, can influence perceptions of fair pay. The

increasing availability of salary data over the Internet provides yet another point of

triangulation as an employee considers the fairness of his/her pay.

FIGURE 1 Benefits of Fair Pay

Unreasonable Work Stress

Turnover Intentions

Personal Life Satisfaction

Mental/Physical Health

Employee Engagement

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Percent Agree Fair Pay Unfair Pay

17%

15%

85%

85%

78%

54%

49%

70%

64%

33%


Given the many forces that influence perceptions of fair pay, it is not surprising

that a gap may exist between the objective fairness (or competitiveness) of an

employee’s pay and his/her perception of whether the pay is fair. If organizational

leaders and compensation teams can help reduce the gap between employees’

perceptions of fairness and the reality that pay has been calculated using a fair,

consistent and rigorous methodology, they may have a positive impact on employees’

lives at and outside of work, as well as help the organization’s bottom line.

DRIVERS OF FAITH IN PAY FAIRNESS

Figure 2 illustrates the three key drivers of an employee’s faith in the fairness of

his/her pay:

❙z Understanding how pay is determined

❙z Knowing how to maximize pay

❙z Believing pay is related to performance.

Furthermore, employees who rate favorably on these three drivers of belief in

fair pay show significantly higher scores along every dimension of the Employee

Engagement Index (EEI). (See Figure 3 on page 68.) Employee engagement is defined

as “the extent to which employees are motivated to contribute to organizational

success, and are willing to apply discretionary effort to accomplishing tasks impor-

tant to the achievement of organizational goals.” In the EEI, employee engagement is

measured by asking employees how closely they agree with the following four items:

❙z I am proud to tell people I work for my organization (Pride).

❙z Overall, I am extremely satisfied with my organization as a place to work (Satisfaction).

FIGURE 2 Benefits of Fair Pay (R2 = .38)

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

Per

cent

age

Bel

ievi

ng P

ay is

Fai

r

Unfavorable Favorable

Understand How Pay is Determined

Know How to Maximize Pay Pay Related to Performance

15%18%

31%

62%67%

77%


❙z I would gladly refer a good friend or family member to my organization for

employment (Advocacy).

❙z I rarely think about looking for a new job with another organization (Commitment).

CURRENT PERCEPTIONS OF PAY FAIRNESS

The importance of understanding differences in engagement levels between those

who believe they are paid fairly and those who do not becomes clear when

current perceptions of pay fairness are examined.

Half of employees in the United States and 40 percent globally believe they are

paid fairly. Seven out of 10 (70 percent) employees in the United States understand

how their pay is determined; globally, three out of five employees understand how

it is determined (61 percent). Fifty-seven percent of U.S. employees know how to

maximize their compensation; globally, fewer than half of employees know what

to do (48 percent). (See Figure 4.)

Understanding pay and how to maximize it increases with an employee’s

level within the organization (see Figure 5), most likely because individuals at

higher levels in the organization receive greater exposure to the mechanics and

motivations behind compensation programs. Exposure through participation

in the development, and potentially in the approval, of base and variable pay

programs provides a level of visibility not available to rank-and-file employees.

Even managers not involved in development and approval would no doubt

be exposed to the programs via management training conducted by human

resources during program roll-out.

FIGURE 3 Kenexa’s Employee Engagement Index

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

EE

I Sco

re



Know How to Maximize Pay Pay Related to Performance

32% 33%

40%

67%

73%77%


The bottom line is that many employees, and even many front-line and mid-level

managers, do not understand how their pay is calculated or how to maximize it.

Resolving this knowledge deficit and increasing employee belief in the fairness of

pay represents a significant opportunity to increase engagement levels.

FIGURE 4 Perceptions of Pay Fairness

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Unfavorable Neutral Favorable

U.S

.


Glo

bal


U.S

.

Know How to Maximize Pay

Glo

bal

Know How to Maximize Pay

U.S

.

Fair Pay

Glo

bal

Fair Pay

16

21

21

27

31

38

14

18

22

25

19

23

70

61

57

48

50

40

FIGURE 5 Understanding Pay at Organizational Levels

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

Understand How Pay is Determined Know How to Maximize Pay

Individual Contributor Front-Line Supervisor Mid-Level Manager Executive/Senior Manager

69%72%

86%

73%

53%

60%

78%

63%

Note: WorkTrends 2012 U.S. sample


BUILDING FAITH IN PAY FAIRNESS

The data suggest an employee’s perception of pay fairness is largely a function of

transparency. Although a startling number of employees do not perceive their pay

to be fair, these perceptions are largely under compensation practitioners’ control

through involvement in, and communication about, compensation practices. If an

employee has visibility into a compensation program and understands its general

design and how it can be influenced, he/she will likely perceive that program to

be more fair. For this reason, even organizations with less lucrative pay packages

can still leverage compensation as a tool to drive retention and engagement.

Driving the right level of visibility into pay programs and philosophies, while

keeping in mind the organization’s overall culture around transparency, is no small

task. Effective communication relies not only on the mechanics of communica-

tion, but also on the message itself. Compensation practitioners play a key role in

driving this critical transparency.

Helping the Organization Understand How Pay Is Determined

Organizational leaders can take a number of steps to help their employees

understand their pay. First, understand and accept that employees will seek

out compensation data from external sources, such as the Internet, friends

and colleagues, affinity group publications and government publications.

Absent context or education, they will likely use this data to judge the fair-

ness of their own pay. Recognize that an employee who has sought this

data is making an effort to be a more informed participant in the employer-

employee dialogue. That employee represents an opportunity to close the

gap between the perception of pay fairness and the reality that there are

many valid reasons why the organization’s compensation program does not

match certain sources of external data.

Rather than taking a defensive position, try to understand the employee’s data,

and help that worker understand how it compares to the data the organization

uses in the context of setting pay. Take this opportunity to share the employer’s

stated market position, the types of organizations the employer compares itself

to in conducting the market assessment and the breadth of the labor market as

evidenced by the geographies reviewed in the assessment.

Second, build a communication program around pay transparency. Providing

managers and field HR staff with visibility into the organization’s compensa-

tion philosophy and policies will enable and empower them to have informed

conversations with employees. Visibility may cover a wide spectrum, with some

organizations revealing deep detail, such as market rates and salary ranges, while

others reveal only general policies. The right level of transparency reflects the

organization’s overall approach to information-sharing. Whether the culture is

open or conservative, the information to be shared can still be communicated

clearly, frequently and via multiple channels.


Finally, the pay discussion should not focus exclusively on base pay. Many

organizations have introduced variable pay programs into the rewards mix, and

need to ensure that employees understand not only the inherent value of variable

pay programs, but also their influence on the market position and overall pay

mix. Industry, organization size and level of maturity, organizational culture and

external economic conditions can influence the mix of fixed and variable pay,

cash and equity, benefits and work-life balance. When employees understand

the genesis of this mix, they are better able to maximize their earning potential

through these programs.

Helping the Organization Understand How to Maximize Pay

While base salary can be maximized to a modest extent via performance-

based salary increases, most opportunities to maximize pay will involve

variable compensation, including short- and long-term incentives. Ensure

that managers and employees understand all variable pay/incentive programs,

particularly the metrics that will determine the size and timing of any payout.

Share examples of performance levels and the corresponding payout. If part

of the organization’s compensation package is in the form of stock, make sure

your employees understand exactly how stock plans work. Do not assume

that your employees understand stock programs.

Helping the Organization Understand the Relationship of Pay to Performance

Even seemingly simple salary increase programs can be easily misinterpreted by

managers and employees. For example, “pay for performance” is often confused

with “increase for performance.” Pay for performance dictates that where an

employee is paid in a salary range should coincide with performance over an

extended period of time. Employees with higher levels of performance will be paid

higher in the range and lower levels of performance will be paid lower in their

range. This is in contrast to the increase for performance concept that suggests

employees of equal performance would get equal increases with no regard to their

position in range. Pay for performance is concerned with the employee’s salary

movement over time, while increase for performance is concerned only with the

size of the current year increase.

Nuances like this can be easily misinterpreted by managers and employees;

mitigate this possibility by providing adequate training, tools and guidelines for

managers. Provide managers with performance-based guidelines for merit budget

distribution and encourage managers to share that information with employees. If

a matrix is used, share it.

PAY TRANSPARENCY AND COMMUNICATION CULTURE

Pay transparency partially mediates the relationship between communicative

organizational culture and pay fairness*. In other words, people who work in


communicative organizations are more likely to understand their organization’s

pay practices, and are therefore more likely to believe they are paid fairly. (See

Figure 6.) Also, employees who understand their pay better feel more encour-

aged to participate in decision-making that involves them. (See Figure 7.) It may

be that good communication around pay practices from leaders also encourages

employees to communicate upward as well. This does not mean that compensation

FIGURE 6 Employee’s Perception of Pay-Related Communication

In my organization, there is open, honest, two-way communication.

100%

90%

80%

70%

60%

50%

40%

30%

20%

10%

0%

Per

cent

Fav

ora

ble


I have a good understanding of how my pay is determined.

I know specifically what I need to do to maximize my compensation.

56%

37%

81%

72%


FIGURE 7 Employees’ Understanding of Pay Determination

I have a good understanding of how my pay is determined.

70%

60%

50%

40%

30%

20%

10%

0%

Per

cent

Fav

ora

ble


Where I work, employees are encouraged to participate in making decisions that affect their work.

29%

61%



leaders at organizations who score high on communication can be less vigilant,

but underscores their need to maintain that high level of transparency in the

development and delivery of pay programs. Those organizations with a culture

that is less transparent should consider increasing transparency.

PERCEPTION IS REALITY

Compensation practices can be intellectually complex and emotionally charged.

Employee attitudes and feelings about their pay and its fairness are just as important

as reality. Focusing on pay transparency helps ensure that employees understand

the care and rigor deployed in the development of their compensation packages.

It should be noted that while this article is focused on pay, the term “pay”

is broadly defined to include all aspects of the total rewards architecture. The

discussions with employees should also incorporate, when appropriate, benefits

and nonfinancial aspects of the rewards architecture, with the same care taken to

ensure transparency and understanding. In today’s economy, fringe benefits are

anything but fringe from a cost perspective, representing a 30 percent – 40 percent

premium in addition to an employee’s salary. These benefits are provided to be

compliant from a regulatory perspective, but they can also be leveraged to create

more attractive rewards packages, and hence have a place in driving perceptions

of fairness.

If perception is reality, the challenge is to foster an environment in which

employees perceive that they are paid fairly. Embracing pay transparency allows

compensation practitioners to leverage the hard work done in developing competi-

tive and equitable pay programs to garner good will and trust from managers and

employees across the organization. Helping employees understand how their pay

is determined, how they can maximize their pay and how their pay is tied to their

performance are major steps forward, and can help practitioners and leaders fully

use compensation as a driver of organizational success, not just a cost. z

*To see the results of the SEM, contact author Rena Rasch.

AUTHORS

Rena Rasch, Ph.D., ([email protected]) is the manager of the Kenexa High Performance Institute’s Minneapolis team, which she joined in 2008. She also manages the Institute’s “WorkTrends” study, an annual employee opinion survey of more than 33,000 workers in 28 countries around the world.

Rasch strives to provide empirically-based solutions to HR practitioners’ biggest questions. Topics of interest include employee engagement, generational differences in the workplace, trust in leadership, work-life balance and work stress, unionization intent, why employees join and leave their organizations and compensation practices. She has a Ph.D. in industrial and organizational psychology from the University of Minnesota.

Mark Szypko, CCP, GRP ([email protected]) has more than 30 years of experience as a compensation practitioner and has held compensation, benefits and HR systems leadership roles for numerous organizations, including Honeywell, Digital Equipment Corp., Wang Laboratories, Kronos, Progress Software and Lightbridge. In his role at Kenexa, Szypko drives research on trends in compensation practice and tours globally speaking on compensation and HR-related topics.

Szypko earned a bachelor’s degree from Suffolk University and a master’s in business administration from Western New England University. He is also a WorldatWork faculty member, a reviewer for the publications and a recipient of the WorldatWork Lifetime Achievement Award.


REFERENCES

Fitz-enz, Jac. 1997. “It’s Costly to Lose Good Employees.” Workforce 76: 50-51.

Harter, James K., Frank L. Schmidt, and Theodore L. Hayes. 2002. “Business-Unit-Level Relationship Between Employee Satisfaction, Employee Engagement, and Business Outcomes: A Meta-Analysis.” Journal of Applied Psychology 87: 268-279.

Salanova, Marisa, Sonia Agut, and Jose Maria Peiró. 2005. “Linking Organizational Resources and Work Engagement to Employee Performance and Customer Loyalty: The Mediation of Service Climate.” Journal of Applied Psychology 90: 1217-1227.

Spector, Paul E., Daniel J. Dwyer, and Steve M. Jex. 1988. “Relation of Job Stressors to Affective, Health, and Performance Outcomes: A Comparison of Multiple Data Sources.” Journal of Applied Psychology 73: 11-19.

Spector, Paul E. and Steve M. Jex. 1991. “Relations of Job Characteristics From Multiple Data Sources with Employee Affect, Absence, Turnover Intentions, and Health.” Journal of Applied Psychology 76: 46-53.

Wiley, Jack. 2011. Respect: Delivering Results by Giving Employees What They Really Want. Hoboken, NJ: John Wiley & Sons Ltd.

Wright, Thomas A. and Russell Cropanzano. 1998. “Employee Exhaustion as a Predictor of Job Performance and Voluntary Turnover.” Journal of Applied Psychology 83: 486-493.

CEO Pay Levels Increased Slightly in 2012 as Companies Navigate Say on Pay

Top U.S. public companies made only slight increases to executive compensation levels in 2012,

as emphasis shifted further toward long-term performance incentives, according to the results

from the sixth “Wall Street Journal/Hay Group 2012 CEO Compensation Study.”

After a significant 11% CEO pay jump in 2010, 2012 marked the second consecutive year that

total compensation showed only modest increases. Base salaries grew 1.3% to $1.15 million

in 2012, while annual incentive payments were flat at $2.1 million. For the third year in a row,

however, long-term incentives (LTIs) increased, growing 3.8% to $7 million. In sum, total direct

compensation increased 3.6% to $10.1 million in 2012.

When it comes to company performance, the story is mixed. The median company showed a

slight 2.1% increase in net income from 2011, but had a strong 14.4% total shareholder return

(TSR). That’s a reversal from last year when the median company showed a 13% increase in net

income from 2010, but only a modest 3.1% TSR.

In fact, for just the second time in the history of the study, long-term performance plans were the

most heavily-weighted piece of the entire pay puzzle, making up 31% of the average CEO’s total

compensation, up from 26% in the prior year. When it comes to LTIs specifically, performance

awards made up more than half (51%) of the LTI value provided to CEOs in 2012, up from 44% in

2011. The prevalence of performance awards also increased in 2012, as they were awarded by

80% of the companies that grant LTI.

In the short term, it did not necessarily pay to be a top-performing CEO. The top third of net

income performers in 2012 improved their company profitability by a median 36%, and received

a 5.1% increase in cash compensation as a result. However, low performers saw profitability

decline more than 37% in 2012, but experienced only a 4.1% decline in cash compensation. All

told, top performers fared only 9 percentage points better in cash pay increases despite a more

than 70% difference in net income change when compared with low performers.

Other key findings:

z For the second year in a row, CEOs experienced significant gains in take-home equity-based

pay. In 2011, realized pay increased a marked 34% to $5.6 million. However, in 2012, the bull

market further enhanced take-home realized LTI values — in the form of stock option exercises

and the vesting of restricted stock and long-term cash plans — another 39% to $7.8 million.

z Eighty-one percent of companies that granted LTI used more than one vehicle, with the most

prevalent combination (30%) including all three long-term incentive vehicles (i.e., stock options,

restricted stock and performance awards). The next most popular combination was stock

options and performance awards (27%), followed by the combination of performance awards

and restricted stock (17%).

z After several years of very few year-over-year changes in perquisites, the pace of change increased

significantly in 2012, with nearly every perquisite declining in prevalence. For the fourth year in a

row, tax gross-ups on perquisites was the most eliminated perk, falling precipitously in prevalence

from 26 to 13%. Personal use of the corporate aircraft remained the most prevalent perquisite in the

study, with 65% of companies offering corporate aircraft use as a perk to their CEOs.

Hay Group’s 2012 study focused on the primary elements of compensation for CEOs of the

300 largest U.S. companies to file their final definitive proxy statements between May 1, 2012,

and April 30, 2013.

Published Research in Total RewardsA review of total rewards, compensation, benefits and HR-management research reports.

(Compiled by the editors from the WorldatWork Newsline column at www.worldatwork.org.)


Third Quarter 2013

http://www.haygroup.com/us/downloads/Details.aspx?ID=36975


Defined Benefit Plans Greatly Outperformed 401(k) Plans in 2011

Investment returns in defined benefit (DB) pension plans outperformed those in defined contribu-

tion (DC) plans – predominantly 401(k) plans – in 2011 by the widest margin since the mid-1990s.

The difference in 2011 investment results counters a recent narrowing of the gap between DB

and DC plan performance.

The Towers Watson analysis of more than 2,000 plan sponsors found that DB plans had median

investment returns of 2.74% in 2011, while DC plans had median returns of -0.22%. The nearly

three-percentage-point difference is the widest margin by which DB plans outperformed DC

plans since 1995 when Towers Watson first analyzed the rates of returns for both plan types.

The analysis also found that despite the large performance difference in 2011, the gap between

DB and DC plans narrowed during the previous five-year period. Since 1995, DB plans have

outperformed DC plans by 76 basis points annually, but in the past five years for which data is

available (2007 through 2011), the difference shrank by roughly half, to 39 basis points. The smaller

gap is mostly due to the strong stock market performance in 2009, when DC plans returned

20.86% while DB plans gained 15.46%. DB plans actually realized higher returns than DC plans

in all other years between 2007 and 2011.

The analysis notes that performance in some DB plans was helped by sponsors shifting assets

from equities to long-duration bonds in an effort to better match the value of plan liabilities

with respect to interest rate changes. That move proved to be successful from a total invest-

ment return perspective, as the performance of long-duration bonds far outpaced that of equity

markets during 2011.

Checking Email at Night, on Weekends Is the New Norm

The conventional, 9 a.m. to 5 p.m., five-day workweek is a thing of the past for the overwhelming

majority of workers at small to mid-sized U.S. businesses. Due to the widespread availability

and use of smartphones and tablets, email is more accessible than ever and, as a result, it has

become deeply embedded in the daily workplace and personal lives of most employees.

The independent, blind survey of 503 employees in small to mid-sized U.S. workplaces was

conducted by Opinion Matters on behalf of GFI Software. The results highlight employee habits

around email use, including response frequency during the work day, as well as after hours, as

shown below:

z Based on the reported email habits of survey respondents, more than three-quarters of respon-

dents (81%) said they check their work email on weekends, 55% check email after 11 p.m. and

59% keep on top of their work email while on vacation.

z Outside of regular work hours, more than six in 10 (64%) check email at least once a day.

z One in 10 admitted to checking work email at a child’s school event, 9% at a wedding and

6% at a funeral.

Despite the growing use of instant messaging platforms, email dwarfs other forms of office

communication: 44% of respondents use email at work more than any other communications

format; 28% rely primarily on the phone; 22% on face-to-face; and 6% on instant messaging.

More than three-quarters (76%) of respondents said they typically reply to emails within one hour

during work hours, and nearly one-third of them (32%) reply within 15 minutes.

Professionals who say they have checked email at a funeral are more likely to work in IT and

telecommunications (14%) and finance (13%). People working in sales, media and marketing,



http://www.towerswatson.com/

http://www.opinionmatters.co.uk/

http://www.gfi.com/


and health care said they have never checked email at a funeral. Legal (38%), IT and telecom-

munications (32%), and manufacturing (34%) professionals are more likely to respond to emails

within 15 minutes. Professionals who think that responding to an email within one working day

is sufficient are more apt to work in education (23%), retail, catering and leisure (20%) and arts

and culture (20%). Employees at larger companies are more likely to check email during off hours.

Two-thirds (66%) of respondents who work at companies with fewer than 10 employees check

email outside regular work hours, while 75% of those who work at large companies said the same.

During vacations, 74% of sales, media and marketing professionals said they check their email.

In contrast, fewer than half (46%) of manufacturing and utilities employees do so.

Trend Toward Part-Time Workers Continues to Affect Health-Care Coverage

Whether the federal health insurance reform law causes employers to hire part-time workers, the

trend away from full-time employment is already underway, according to new research from the

nonpartisan Employee Benefit Research Institute (EBRI).

The Patient Protection and Affordable Care Act of 2010 (PPACA) requires that employers with 50 or

more full-time workers pay a penalty if they fail to provide health coverage to full-time workers in

2014, which has raised concern that employers may respond by cutting back on health coverage

for part-time workers or by increasing the proportion of part-time workers. But as a new EBRI

report points out, the trend toward more part-time workers — and less workplace-based health

insurance coverage — was already underway well before the passage of PPACA. In the wake of

the recent economic recession, the percentage of workers employed part-time has been rising

since 2007, increasing from 16.7% to 22.2% in 2011.

Over that period, EBRI found part-time workers experienced a much larger decline in health

coverage than full-time workers. Between 2007 and 2011, full-time workers experienced a 2.8%

reduction in the likelihood of having coverage from their jobs, while part-time workers suffered

a 15.7% decline.

Global Employee Engagement Improves

A new analysis finds that overall employee engagement worldwide and employees’ perceptions

of their overall work experience continues to modestly improve.

Aon Hewitt’s annual study of more than 2,500 organizations representing 3.8 million employees

found that employee engagement levels rose to 60% in 2012, up from 58% in 2011 and 56% in 2010.

The way employees perceive their overall work experience also improved in 2012, including:

z Effective communication (+7 percentage points)

z Business unit/division leadership (+6 percentage points)

z Managing performance (+5 percentage points)

z Innovation (+5 percentage points)

z Recognition (+5 percentage points).

Engagement scores dropped in the areas of:

z Sense of accomplishment (-3 percentage points)

z Customers (-3 percentage points)

z Organization reputation (-2 percentage points).



http://www.ebri.org/

http://www.aon.com/


The analysis showed 2012 engagement scores varied by region. The largest engagement increases

were in Europe (improving 5 percentage points) and Latin America (improving 3 percentage

points). In North America, engagement dropped slightly to 63%, the lowest score since 2008.

Asia-Pacific’s engagement scores remained consistent with those from 2011.

Executive Compensation Incentives Hold Steady for Top Financial Positions

Incentives continue to play an important role in executive compensation, with nearly 70% of

financial executives reporting having an annual target bonus level, according to the findings of

an annual survey issued by Grant Thornton and the Financial Executives Research Foundation.

The seventh annual “Financial Executive Compensation Survey” reports the salaries, bonuses,

long-term incentives and retirement benefits of CFOs, corporate controllers, treasurers and other

financial executives among U.S. public and private companies.

This year’s survey also found that the majority (80%) of public-company CFOs receive a form of

stock-based long-term incentive awards. For those executives who receive this benefit, stock

options were the most popular option (44%) for public company CFOs.

Performance measures used in determining the long-term incentive compensation (cash, stock-

based, other) for public and private company respondents were most typically aligned with

company goals and objectives. Other measures cited most prevalently included discretionary,

EBITDA/EBIT, cash flow and net income.

Other highlights of the survey include:

z The estimated average salary increase for all respondents was 3%. For public companies, the

average salary increase was 3.5%, and for private companies the average salary increase was 3.1%.

z The “perks” financial executives reported receiving have remained stable during the past few

years, with 77% receiving a cell phone, 22% an airline club membership and 18% a company

car or car allowance. Only 8% reported receiving a country club membership and relocation

assistance, and just 2% receive housing and other living expenses.



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