MilkovichNewman:

Compensation, Eighth
Edition

V. Extending the System

The McGrawHill
Companies, 2004

14. Compensation of
Special Groups

Chapter Fourteen
Compensation
of Special Groups
Chapter Outline
Who Are Special Groups?
Compensation Strategy for Special
Groups
Supervisors
Corporate Directors
Executives

Scientists and Engineers in HighTechnology Industries

Sales Forces
Contingent Workers
Your Turn: Compensation of Special
Groups

The countrys in a bind, but Im cheerful and Im chipper,

As I slash employee wages like a fiscal Jack the Ripper.
And I take away their health care and never mind their hollers.
And pay myself a bonus of a couple of million dollars.
Mark Russell
Comedian

Mark Russells satirical song is a reflection of our worst fears about pay: Injustice hits the
common worker first. This chapter takes a look at groups that, for reasons we will discuss, receive compensation that is anything but common. Our goal is to show the logic of
compensation practices for these special groups.
So far we have described compensation programs as if they were fairly uniform across all
jobs in an organization: Jobs are analyzed; then job evaluation determines a jobs internal
worth; salary surveys give an indication of what other competitors pay for the job; discrepancies are reconciled; and provisions are made to recognize that variation in performance
across individuals in the same job should be recognized with compensation differences. Not
all jobs follow all these stages, though. Indeed, all we have to do is open a newspaper to see
that some jobs and some people are singled out for special compensation treatment in an organization. Why will Bobby Holik, a fast-skating forward for the New York Rangers, make
$45 million over the next five years? Why has Michael Eisner (chief executive officer, Walt
Disney Company) received more than $700 million in compensation since 1996, during a

459

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period when Disney stock fell 22.6 percent?1 Is the value of these jobs determined in the
same way that compensation is determined for other jobs in a company? The answer is probably no. But why? To answer this question, it is useful to work backward. What jobs get special compensation treatment in a company? Are they basically the same kinds of jobs across
companies? If they are the same kinds of jobs, are there any common characteristics the jobs
share that would cause companies to devise special compensation packages?

WHO ARE SPECIAL GROUPS?

When we look at company practices with these questions in mind, a pattern begins to
emerge. Special treatment, either in the form of add-on packages not received by other
employees or in the form of compensation components entirely unique in the organization, tends to focus on a few specific groups. This chapter argues that special groups
share two characteristics. First, special groups tend to be strategically important to the
company. If they dont succeed at their jobs, success for the whole organization is in
jeopardy. Second, their positions tend to have built-in conflict, conflict that arises because different factions place incompatible demands on members of the group.
As the first characteristic explains, the work these employees perform is central to the
strategic success of the company. As an example, consider the contrast in compensation
treatment for engineers in two different organizations. One is a high-technology firm with
a strong research and development component. The other organization employs a few engineers, but their role is not central to the mission of the organization. A survey of this
type of difference in employee composition and organizational strategy found that research and development organizations with heavy concentrations of engineers had
evolved unique compensation systems that were responsive to the special needs of the engineering contingent. Organizations with a different focus and with fewer engineers
merged this groups compensation with the standard package offered to other employees.
Exhibit 14.1 describes the nature of the conflicts faced by such special groups as supervisors, top management, boards of directors, scientists and engineers, sales personnel,
and contingent workers. When both of these characteristics are present, we tend to find
distinctive compensation practices adopted to meet the needs of these special groups.

COMPENSATION STRATEGY FOR SPECIAL GROUPS

Supervisors
Remember, supervisors are caught between the demands of upper management in terms
of production and the needs of employees in terms of rewards, reinforcements and general counseling.2 The major challenge in compensating supervisors centers on equity.
Some incentive must be provided to entice nonexempt employees to accept the challenges of being a supervisor. For many years, the strategy was to treat supervisors like
1R.
2P.

Blumenthal, Disney Shareholders Reject Pay Review for Top Brass, Barrons, March 24, 2003, p. 10.

Frost, Handling the Pain of Others: The Hidden Role of Supervisors, Canadian HR Reporter, April 7,
2003, pp. 78.

MilkovichNewman:
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Chapter 14 Compensation of Special Groups 461

EXHIBIT 14.1 Conflicts Faced by Special Groups

Special Group

Type of Conflict Faced

Supervisors

Caught between upper management and employees. Must balance need to achieve
organizations objectives with importance of helping employees satisfy personal
needs. If unsuccessful, either corporate profit or employee morale suffers.
Stockholders want healthy return on investment. Government wants compliance
with laws. Executives must decide between strategies that maximize short-run gains
at expense of long run versus directions that focus on long run.
Face possibility that disgruntled stockholders may sue over corporate strategies that
dont pan out.
May be torn between goals, objectives, and ethical standards of their profession
(e.g., should an engineer leak information about a product flaw, even though that
information may hurt corporate profits) and demands of an employer concerned
more with the profit motive.
Often go for extended periods in the field with little supervision. Challenge is to stay
motivated and continue making sales calls even in the face of limited contact or
scrutiny from manager.
Play an important safety valve role for companies. When demand is high, more are
hired; when demand drops, they are the first workers downsized. Employment status
is highly insecure and challenge is to find low-cost ways to motivate.

Top management

Boards of directors
Professional
employees

Sales staff

Contingent workers

lower-level managers. But in doing so, the existing job evaluation system sometimes left
these supervisors making less money than the top-paid employees they supervised. As
you might imagine, this created little incentive to take on the extra work involved. More
recently organizations have devised several strategies to attract workers into supervisory
jobs. The most popular method is to key the base salary of supervisors to some amount
exceeding the top-paid subordinate in the unit (5 to 30 percent represents the typical size
of the differential).
Another method for maintaining equitable differentials is simply to pay supervisors for
scheduled overtime. Companies that do pay overtime are about evenly split between paying straight time and paying time and one half for overtime hours.
The biggest trend in supervisory compensation centers on increased use of variable
pay. Slightly more than half of all companies now have a variable pay component for supervisors, up from 16 percent in prior years.3

Corporate Directors
A typical board of directors comprises 10 outside (the company) and 3 inside directors,
each having a term averaging three years. Historically, directors frequently were given
the role of rubber stamping decisions made by top management. Such boards were
stacked with people affiliated in some way with the organization (e.g., retired corporate
officers, suppliers, attorneys). Modern corporate boards have changed considerably. Approximately two-thirds of boards now include more outside directors than inside directors
3IOMA,

Pay for Performance Report, May 2000, p. 6.

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(e.g., CEO, corporate officers), and this move to more outside directors comes with a
pricehigher compensation. Almost 75 percent of the companies planning on increasing
board pay this year will do so because of competition for talented outside directors.4 Outside members now include unaffiliated business executives, representatives from important segments of society, and major shareholders. For example, Walter Mondale, vice
president under Jimmy Carter, served on six boards of directors and was compensated
$523,000 for his efforts.5 The 200 largest industrial and service companies, plus the top
100 dot-coms, averaged $138,747 in total compensation of board members. Despite the
intention to increase pay, total compensation still declined somewhat in year-to-year
comparisons. The uncertainty in the stock market has led to increased base pay, less
stock-based compensation, and an overall decline (exercised options in wildly increasing
stock markets led to nice incentive-based packagesthat has declined recently). Depending on the industry, recent figures suggest that total director compensation ranges from
$40,000 to the low $50,000s.6
In addition to cash compensation, there is an increasing emphasis on director rewards
that attempt to link to corporate performance. Shareholders are holding directors accountable for firm performance. Reflecting this trend of linking pay to performance, 61 percent
of the compensation for directors in large companies is some form of stock.7 This trend is
increasing despite the lack of evidence that giving board members more shares of stock
results in better firm performance.8 The rest of the compensation is divided among annual
retainers, committee chair fees, and board meeting fees. For example, each director receives almost $1,500 for each board meeting attended.9

Executives
How would you like to make $15.7 million per year? That is the average for chief executive officers (CEOs) in the 100 largest U.S. companies.10 How does someone earn a compensation package like that? Well, consider Dennis Kozlowski. He made $82 million last
year, enough to be near the top of the list of highly paid executives. At the same time,
stock in his company slid 71 percent. And, oh, by the way, he has been accused of wholesale looting of his company.11 If you and I had wages that rose as fast as those of CEOs,
earnings of $25,000 in 1994 would be $138,000 today.12 Is it any wonder that lofty executive pay packages are now the subject of public outrage. Exhibit 14.2 gives a brief history of how executive compensation climbed to such heights. Pay attention to the way the
granting of stock options has gradually played a bigger role in executive compensation.

4was.hewitt.com/hewitt/resource/newsroom/pressrel/2003/02-12-03.htm,

visited June 19, 2003.

Strauss, From Public Servant to Private Payday, USA Today, April 17, 2000, p. B1.
6IOMA, Conference Board Reports Outside Director Pay Drops, Report on Salary Surveys, February
2002, p. 3.
72000 Director Compensation, Pension Benefits, November 2001, p. 12.
8C. Daily, The Problem with Equity Compensation, Journal of Business Strategy 23(4) (2002), p. 28.
92000 Director Compensation, Pension Benefits, November 2001, p. 12.
10J. Useem, Have They No Shame? Fortune, April 28, 2003, pp. 5664.
11Ibid.
12Executive Pay, Business Week, April 19, 1999, p. 78.
5G.

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Chapter 14 Compensation of Special Groups 463

EXHIBIT 14.2 Brief History of Executive Compensation

The Year

The Key Event

1974
1979
1983

Michael Bergerac cracks the $1 million mark when recruited to Revlon.

Chryslers Lee Iacocca takes $1 million plus 400,000 option shares.
William Bendix of Bendix becomes the first executive to collect a huge golden parachute
(contract clause for payment in a takeover leading to termination) of $3.9 million over five
years.
Congress tries to limit excessive golden parachutes but gives rise to unintended
consequencesthe rules actually lead to larger amounts.
New law gives favorable tax treatment to stock option awards. Sizes increase.
Lee Iacocca receives first megagrant of stock options: 820,000 option shares worth
15.3 times his salary and bonus that year.
Junk bond expert Michael Milkin explodes through the $5 million mark in salary and bonus.
Leon Hirsch of US Surgical gets even larger megastock option award, worth 126 times his
salary and bonus.
Securities and Exchange Commission rules CEO salaries must be disclosed more often in proxy
statements. Easier availability of peer compensation data serves to drive up the standard.
Michael Eisner of Walt Disney exercises low-cost stock options for pretax profit of $126 million.
New tax law sets upper limit on tax-deductible executive compensation at $1 million but has
unintended effect of raising bar to that level.
Charles Wang, Computer Associates Intl. executive, cracks two-thirds of billion-dollar mark.
Alfred Lerner, MBNA executive, is top-paid CEO, with $195 million, a drop from prior years,
leading to speculation that furor over CEO pay is finally having an impact.

1984
1986
1987
1987
1987
1992
1992
1993
2000
2003

Source: Business Week, April 17, 2000, p. 100, April 23, 2003; and Wall Street Journal, April 11, 1996, p. R4.

EXHIBIT 14.3 Top Five Executives in Total Compensation (in millions)

1. Alfred Lerner, MBNA

2. Jeffrey Barbakow, Tenet Healthcare
3. Millard Drexler, Gap
4. Dennis Kozlowski, Tyco International
5. Irwin Jacobs, Qualcomm

2002 Salary
and Bonus

Long-Term
Compensation

Total Pay

$9.0
$5.5
$2.5
$4.0
$1.8

$185.9
$111.1
$88.5
$67.0
$61.6

$194.9
$116.6
$91.0
$71.0
$63.3

Source: L. Lavelle, F. Jespersen, S. Ante and J. Kerstetter, Executive Pay, Business Week, April 21, 2003.

Exhibit 14.3 shows the total compensation for the top five executives in the United
States. Notice how most of these five, as is true for many highly paid executives, reap the
greatest rewards from long-term incentives, usually by exercising stock options. Many
critics argue that this level of compensation for executives is excessive.13 And this phenomenon exists only in the United States. Wages in the European Union, for example, are
much lower. Wages plus incentives for French CEOs, the highest-paid executives, average
13M. Langley, Big Companies Get Low Marks for Lavish Executive Pay, Wall Street Journal, June 9,
2003, p. C1; Graef S. Crystal, In Search of Excess (New York: Norton, 1991).

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about $2 million in a sample of the 300 largest European companies. U.K. salaries for
CEOs are about 16 percent behind this, and other European executives fall even further
behind.14
Cybercomp
For a union view of CEO wages, visit www.aflcio.org/paywatch/. This site is maintained by
the AFL-CIO and is designed to monitor executive compensation. The Union view is that
CEOs are overpaid and that monitoring is the first step to curbing excess.

Are the critics right? One way to answer the question is to look at the different ways
executive compensation is determined and ask, Does this seem reasonable?

Possible Explanations for CEO Compensation

One approach to explaining why executives receive such large sums of money involves
social comparisons.15 In this view, executive salaries bear a consistent relative relationship to compensation of lower-level employees. When salaries of lower-level employees
rise in response to market forces, top executive salaries also rise to maintain the same relative relationship. In general, managers who are in the second level of a company earn
about two-thirds of a CEOs salary, while the next level down earns slightly more than
half of a CEOs salary.16 Much of the criticism of this theory, and an important source of
criticism about executive compensation in general, is the gradual increase in the spread
between executives compensation and the average salaries of the people they employ. In
1980, CEOs received about 42 times the average pay of lower-level workers. Now top
executives are paid 475 times the pay of the average factory worker.17 As a point of reference, the corresponding differential in Japan is under 20.18 Both these pieces of information suggest that a social comparison explanation is not sufficient to explain why executive wages are as high as they are.
A second approach to understanding executive compensation focuses less on the difference in wages between executive and other jobs and more on explaining the level of
executive wages.19 The premise in this economic approach is that the worth of CEOs, or
their subordinates, should correspond closely to some measure of company success, such
as profitability or sales. Intuitively, this explanation makes sense. There is also empirical
support. Numerous studies over the past 30 years have demonstrated that executive pay
14P.

Betts, France Has the Fattest Cats, Financial Times, June 23, 2003.
Henderson and J. Fredrickson, Top Management Team Coordination Needs and the CEO Pay Gap:
A Competitive Test of Economic and Behavioral Views, Academy of Management Journal 44(1) (2001),
pp. 96107; A. Simon, Administrative Behavior, 2d ed. (New York: Macmillan, 1957).
16Conference Board, Top Executive Compensation: (New York: 1996).
17Executive Pay, Business Week, April 17, 2000, p. 110.
18R. Blumenthal, The Pay Gap between Workers and Chiefs Looks like a Chasm, Barrons, September 4,
2000, p. 10. This comparison needs to be interpreted with some caution. One counterargument (the Hay
Group, Compflash, April 1992, p. 3) notes that American companies are generally much larger than their
foreign counterparts. When compared to like-size companies in other countries, the U.S. multiple is
comparable to the international average.
19A. Henderson and J. Fredrickson, Top Management Team Coordination Needs and the CEO Pay Gap:
A Competitive Test of Economic and Behavioral Views, Academy of Management Journal 44(1) (2001),
pp. 96107.
15A.

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bears some relationship to company success.20 A recent article analyzing the results from
over 100 executive pay studies found empirical evidence that firm size (sales or number
of employees) is by far the best predictor of CEO compensation. Size variables are nine
times better at explaining executive compensation than are performance measures. How
big the firm is explains what the boss gets paid better than does how well he performs!21
Some evidence contradicts this, though. Two studies combined both social comparison
and economic explanations to try to better understand CEO salaries.22 Both of these explanations turned out to be significant. Size and profitability affected level of compensation, but so did social comparisons. In one study, the social comparison was between
wages of CEOs and those of the board of directors. It seems that CEO salaries rose, on
average, 51 percent for every $100,000 more that was earned by directors on the board.23
Recognizing this, CEOs sometimes lobby to get a board loaded with directors who are
highly paid in their primary jobs.
A third view of CEO salaries, called agency theory, incorporates the political motivations
that are an inevitable part of the corporate world. Sometimes, this argument runs, CEOs
make decisions that arent in the economic best interest of the firm and its shareholders. One
variant on this view suggests that the normal behavior of a CEO is self-protectiveCEOs
will make decisions to solidify their positions and to maximize the rewards they personally
receive.24 As evidence of this self-motivated behavior, consider the following description of
how executives ensure themselves high compensation.25 The description comes from the
experience of a well-known executive compensation consultant, now turned critic, who specialized for years in the design of executive compensation packages:
1. If the CEO is truly underpaid: A compensation consultant is hired to survey actual
competitors of the company. The consultant reports to the board of directors that the
CEO is truly underpaid. Salary is increased to a competitive or higher level.
2. If the CEO is not underpaid and the company is doing well: A compensation consultant is hired. Specific companies are recommended to the consultant as appropriate for
surveying. The companies tend to be selected because they are on the top end in terms
of executive compensation. The consultant reports back to the board that its CEO appears to be underpaid. Salary is increased.

20Ibid.;

Marc J. Wallace, Type of Control, Industrial Concentration, and Executive Pay, Academy of
Management Proceedings (1977), pp. 284288; W. Lewellan and B. Huntsman, Managerial Pay and
Corporate Performance, American Economic Review 60 (1977), pp. 710720.
21H. L. Tosi, S. Werner, J. Katz, and L. Gomez-Mejia, A Meta Analysis of CEO Pay Studies, Journal of
Management 26(2) (2000), pp. 301339.
22A. Henderson and J. Fredrickson, Top Management Team Coordination Needs and the CEO Pay Gap:
A Competitive Test of Economic and Behavioral Views, Academy of Management Journal 44(1) (2001),
pp. 96107; Charles OReilly, Brian Main, and Graef Crystal, CEO Compensation as Tournament and
Social Comparison: A Tale of Two Theories, Administrative Science Quarterly 33 (1988), pp. 257274.
23Charles OReilly, Brian Main, and Graef Crystal, CEO Compensation as Tournament and Social
Comparison: A Tale of Two Theories, Administrative Science Quarterly 33 (1988), pp. 257274.
24Kathryn M. Eisenhardt, Agency Theory: An Assessment and Review, Academy of Management
Review 14 (1989), pp. 5774.
25Crystal,

In Search of Excess.

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3. If the CEO is not underpaid and the company is doing poorly: A compensation consultant is hired. The CEO laments with the consultant that wages are so low for top
management that there is a fear that good people will start leaving the company and
going to competitors. Of course, no one ever asks why the company is underperforming if it has such a good management team. Anyway, the result is that the consultant
recommends a wage increase to avoid future turnover.
In each of these scenarios CEO wages rise. Is it any surprise that executive compensation
is under close scrutiny by an outraged public and, more importantly, angry stockholders.26
Agency theory argues that executive compensation should be designed to ensure that executives have the best interests of stockholders in mind when they make decisions. The outcome has been to use some form of long-term incentive plan, most commonly stock options.
A Wall Street Journal/Mercer survey of 500 firms found the use of long-term incentives rising for CEOs, from 62 percent of the package in 1998 to 68 percent in 2002.27 In the simplest form, an executive is given the option to purchase shares of the company stock at some
future date for an amount equal to the fair market price at the time the option is granted.
There is a built-in incentive for an executive to increase the value of the firm. Stock prices
rise. The executive exercises the option to buy the stock at the agreed-upon price. Because
the stock price has risen in the interim, the executive profits from the stock sale.
Although this sounds like an effective tool for motivating executives, there are still
many critics.28 The major complaint is that stock options dont have a downside risk. If
stock prices rise, the stock options are exercised. If stocks dont improve, or even decline,
as was the case for much of the past four years, the executive suffers no out-of-pocket
losses. Some argue that executive compensation should move more toward requiring that
executives own stock, rather than just have options to buy it.29 With the threat of possible
financial loss and the hope of possible substantial gains, motivation may be higher. Others advocate linking stock options to executive performance. For example, if an executive
doesnt lead his or her company to outperform other companies in the same industry, no
stock options are granted.30 Finally, there is growing recognition that the linkage between
performance and pay is much more complex for executives than was previously thought.
Current work focuses on firm risk, stock ownership versus stock options, and type of industry as possible additional factors explaining executive pay.31
26M. Langley, Big Companies Get Low Marks for Lavish Executive Pay, Wall Street Journal, June 9,
2003, p. C1.
27IOMA, A New Look at Long Term Incentive Plans for Execs, Pay for Performance Report, June 2003,
pp. 1, 11.
28Nancy C. Pratt, CEOs Reap Unprecedented Riches While Employees Pay Stagnates, Compensation
and Benefits Review, September/October 1996, p. 20.
29Ira T. Kay, Beyond Stock Options: Emerging Practices in Executive Incentive Programs, Compensation
and Benefits Review 23(6) (1991), pp. 1829.
30IOMA, Heres the Latest Thinking on How Organizations Can Solve the CEO Pay Problem, Pay for
Performance Report, April 2003, pp. 1, 13.
31J. Miller, R. Wiseman, and L. Gomez-Mejia, The Fit between CEO Compensation Design and Firm
Risk, Academy of Management Journal 45(4) (2002) pp. 745756; W. G. Sanders, Behavioral
Responses of CEOs to Stock Ownership and Stock Option Pay, Academy of Management Journal, 44(3)
(2001), pp. 477492; D. Balkin, G. Markman, and L. Gomez-Mejia, Is CEO Pay in High-Technology Firms
Related to Innovation? Academy of Management Journal 43(6) (2000), pp. 11181129.

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The second trend in response to complaints about excessive executive compensation is

increasing government regulation. In 1992 the Securities and Exchange Commission entered the controversy.32 Stockholders are now permitted to propose and vote on limits to
executive compensation. The 1993 Revenue Reconciliation Act limited employer deductions for executive compensation to $1 million and capped the amount of executive compensation used in computing contributions to and benefits from qualified retirement
plans. Ironically, this very law may be contributing to the growth of executive compensation. The $1 million mark now serves as a new standard: Many executives who had been
making less than $1 million are finding their pay quickly rising to this amount.

Components of an Executive Compensation Package

There are five basic elements of most executive compensation packages: (1) base salary,
(2) short-term (annual) incentives or bonuses, (3) long-term incentives and capital appreciation plans, (4) employee benefits, and (5) perquisites.33 Because of the changing nature
of tax legislation, each of these at one time or another has received considerable attention
in designing executive compensation packages. Exhibit 14.4 traces the trend in these
components over time.
One obvious trend is apparent from these data. Companies are placing more and more
emphasis on incentives at the expense of base salary. Such a change in emphasis signals
the growing importance attached to making decisions that ensure profitability and survival of a company.
Base Salary Although formalized job evaluation still plays an occasional role in determining executive base pay, other sources are much more important. Particularly important is the opinion of a compensation committee, composed usually of the companys
board of directors or a subset of the board.34 Frequently the compensation committee will
EXHIBIT 14.4 Breakdown of Executive Compensation Components
Compensation Component
Base salary
Benefits
Perks
Short-term incentives
Long-term incentives

1970s

1980s

60%
*
*
25
15

40%
15
5
20
20

1990s
33%
*
*
27
40

Today
16%
*
*
16
68

*Unreported.

Sources: IOMA, Pay for Performance Report, May 1998, p. 11, and June 2003, p. 12; various issues of the Wall Street
Journal; Data from Towers, Perrin, Wyatt Co.; M. Bishko, Compensating Your Overseas Executive, Part 1: Strategies for the
1990s, Compensation and Benefits Review, MayJune 1990, pp. 2230.

32Michelle

Osborn, SEC: Executive Pay Is an Issue for Shareholders, USA Today, 1994, p. B1.
Ellig, The Complete Guide to Executive Compensation (New York: McGraw-Hill, 2002).
34C. Daly, J. Johnson, A. Ellstrand, and D. Dalton, Compensation Committee Composition as a
Determinant of CEO Compensation, Academy of Management Journal 41(2) (1998), pp. 209220;
H. Barkema and L. Gomez-Mejia, Managerial Compensation and Firm Performance: A General Research
Framework, Academy of Management Journal 41(2) (1998), pp. 135148.
33B.

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take over some of the data analysis tasks previously performed by the chief personnel officer, even going so far as to analyze salary survey data and performance records for executives of comparably-sized firms.35 One empirical study suggests the most common approach (60 percent of the cases) of executive compensation committees is to identify
major competitors and set the CEOs compensation at a level between the best and worst
of these comparison groups.36
Bonuses Annual bonuses often play a major role in executive compensation and are
primarily designed to motivate better performance. Most striking is the rapid rise in popularity of this type of compensation. Only 20 years ago just 36 percent of companies gave
annual bonuses. Today bonuses are given to 90 percent of executives.
Long-term Incentive and Capital Appreciation Plans Long-term incentives now account for over one-half of total executive compensation, up from 28 percent a decade
ago.37 By far the most common long-term incentive remains the executive stock option.
A stock option is the right (not obligation) to purchase a stated quantity of stock at a stipulated price (strike price) over a given period of time (exercise period) following certain
eligibility (vesting) requirements.38 Because many of the highest-reported executive pay
packages can be traced to stock options, critics have focused on their use and abuse. One
clear complaint is that stock options dont pay for performance of the executive. In a
stock market that is rising on all fronts, executives can exercise options at much higher
prices than the initial grant priceand the payouts are more likely attributed to general
market increases than to any specific action by the executive. Efforts to counter such undeserved rewards are linked to the rise of other types of long-term incentives, some of
which require that the executive beat the market or hit certain performance targets
specifically linked to firm performance. For example, Citicorp CEO John Reed received
300,000 stock options at about $120 each. For those options to vest, Citicorp stock must
reach $200 by the end of the year, an unlikely outcome given that the stock price is currently less than half that price.39 Exhibit 14.5 identifies other types of long-term incentives and describes their main features. Clearly, in todays more turbulent stock market,
stock options are not the mother lode they were in the 1990s. Options granted at one
price quickly become poor motivational tools when the stock price drops far below that
figure. Many companies now scramble to grant new options at lower prices, reflecting
better the realities of a declining market.
Executive Benefits Since many benefits are tied to income level (e.g., life insurance, disability insurance, pension plans), executives typically receive higher benefits than most
other exempt employees. Beyond the typical benefits outlined in Chapter 13, however,
many executives also receive additional life insurance, exclusions from deductibles for
health-related costs, and supplementary pension income exceeding the maximum limits permissible under ERISA guidelines for qualified (eligible for tax deductions) pension plans.
35B.

Ellig, The Complete Guide to Executive Compensation (New York: McGraw-Hill, 2002).
J. Miller, CEO Salary Increases May Be Rational after All: Referents and Contracts in CEO Pay,
Academy of Management Journal 38(5) (1995), pp. 13611385.
37IOMA Pay for Performance Report, June 2003, p.12, and May 1998, p. 11.
38B. Ellig, The Complete Guide to Executive Compensation (New York: McGraw-Hill, 2002).
39IOMA Pay for Performance Report, January 1999, p. 2.
36Daniel

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Chapter 14 Compensation of Special Groups 469

EXHIBIT 14.5 Long-Term Incentives for Executives

Type

Description

Comments

Incentive stock options

Purchase of stock at a stipulated

price, conforming with Internal
Revenue Code (Section 422A).

No taxes at grant. Company may not

deduct as expense.

Nonqualified stock options

Purchase of stock at a stipulated

price, not conforming with Internal
Revenue Code.

Excess over fair market value taxed as

ordinary income. Company may
deduct.

Phantom stock plans

Cash or stock award determined

by increase in stock price at a fixed
future date.

Taxed as ordinary income. Does not

require executive financing.

Stock appreciation rights

Cash or stock award determined

by increase in stock price during
any time chosen (by the executive)
in the option period.

Taxed as ordinary income. Does not

require executive financing.

Restricted stock plans

Grant of stock at a reduced price

with the condition that it may not
be sold before a specified date.
Cash or stock award earned through
achieving specific goals.

Excess over fair market value taxed as

ordinary income.

Performance share/
unit plans

Taxed as ordinary income. Does not

require executive financing.

Source: B. Ellig, The Complete Guide to Executive Compensation (New York: McGraw-Hill, 2002).

Of course, various sections of ERISA and the tax code restrict employers ability to
provide benefits for executives that are too far above those of other workers. The assorted
clauses require that a particular benefit plan (1) cover a broad cross-section of employees
(generally 80 percent), (2) provide definitely determinable benefits, and (3) meet specific
vesting (see Chapter 13) and nondiscrimination requirements. The nondiscrimination requirement specifies that the average value of benefits for low-paid employees must be at
least 75 percent of the average value of those for highly paid employees.40
Executive Perquisites Perquisites, or perks, probably have the same genesis as the expression rank has its privileges. Indeed, life at the top has its rewards, designed to satisfy
several types of executive needs. One type of perk can be classified as internal, providing a
little something extra while the executive is inside the company: a luxury office, an executive dining room, special parking. A second category comprises perks that are also company-related but are designed for business conducted externally: company-paid membership in clubs/associations and payment of hotel, resort, airplane, and auto expenses.
The final category of perquisites should be totally isolated from the first two because of
its different tax status. This category, called personal perks, includes such things as lowcost loans, personal and legal counseling, free home repairs and improvements, personal

40Dennis

Blair and Mark Kimble, Walking through the Discrimination Testing Wage for Welfare Plans,
Benefits Quarterly 3(2) (1987), pp. 1826.

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use of company property, and expenses for vacation homes.41 Since 1978, various tax and
regulatory agency rulings have slowly been requiring companies to place a value on
perks.42 If this trend continues, the taxable income of executives with creative perk packages may increase considerably. Examples of interesting perks are the following:
The most famous perks profile in recent years belongs to the former CEO of GE, Jack
Welch. Papers filed in his divorce case showed GE paying for an apartment for him on
the Upper West Side of Manhattan, as well as all food, wine, laundry, and toiletry
costs. Some of his recreational perks included floor-level seats at New York Knicks
games, courtside seats at the U.S. Open, and satellite TV at his four homes. Mind you,
this is all above and beyond compensation regularly reported to exceed $100 million.43
W. J. Sanders, chairman of Advanced Micro Devices, gets a security guard who doubles as the chauffeur for his company-provided Mercedes Benz. Total cost of these
since 1998? About $534,000.
World Wrestling Federation chairman Vince McMahon gets $50,000 per year to cover
cleaning costs.44
Exhibit 14.6 illustrates different types of perks and the percentage of companies that
offer them.

Scientists and Engineers in High-Technology Industries

Scientists and engineers are classified as professionals. According to the Fair Labor Standards Act, this category includes any person who has received special training of a scientific or intellectual nature and whose job does not entail more than a 20 percent time allocation for lower-level duties.
The compensation of scientists and engineers focuses on rewarding them for their special scientific or intellectual training. Here lies one of the special compensation problems
that scientists and engineers face. Consider the freshly minted electrical engineer who
graduates with all the latest knowledge in the field. For the first few years after graduation this knowledge is a valuable resource on engineering projects where new applications of the latest theories are a primary objective. Gradually, though, this engineers
knowledge starts to become obsolete, and team leaders begin to look to newer graduates
for fresh ideas. If you track the salaries of engineers and scientists, you will see a close
resemblance between pay increases and knowledge obsolescence. Early years bring
larger-than-average increases (relative to employees in other occupations). After 10 years
increases drop below average, and they become downright puny in 15 to 20 years.
Partly because salary plateaus arise, many scientists and engineers make career
changes such as moving into management or temporarily leaving business to update their
technical knowledge. In recent years some firms have tried to deal with the plateau effect
and also accommodate the different career motivations of mature scientists and engineers.
41Michael

F. Klein, Executive Perquisites, Compensation Review 12 (Fourth Quarter 1979), pp. 4650.
L. VanKirk and L. S. Schenger, Executive Compensation: The Trend Is Back to Cash, Financial
Executive, May 1978, pp. 8391.
43M. Burger, Executive Perks: How Much Is Enough? Potentials, October 2002, p. 25.
44G. Strauss, CEOs Rake in Big Perks on Top of Big Bucks, USA Today, May 1, 2001, pp. 12B.
42R.

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Chapter 14 Compensation of Special Groups 471

EXHIBIT 14.6
Popular
Perks
Offered to
Executives
Source: Hewitt
Associates, 1990.

Perk
Physical exam
Company car
Financial counseling
Company plane
Income tax preparation
First-class air travel
Country club membership
Luncheon club membership
Estate planning
Personal liability insurance
Spouse travel
Chauffeur service
Reserved parking
Executive dining room
Home security system
Car phone
Financial seminars
Loans at low or no interest
Legal counseling

Companies Offering Perk

91%
68%
64%
63%
63%
62%
55%
55%
52%
50%
47%
40%
32%
30%
25%
22%
11%
9%
6%

The result has been the creation of dual-career tracks. Exhibit 14.7 shows a typical dualcareer ladder.
Notice that dual ladders provide exactly that: two different ways of progressing in an
organization, each reflecting different types of contributions to the organizations mission. The managerial ladder ascends through increasing responsibility for supervision or
direction of people. The professional track ascends through increasing contributions of a
professional nature that do not mainly entail the supervision of employees. Scientists and
engineers have the opportunity at some stage in their careers to consider a management
track or continue along the scientific track. Not only do dual tracks offer greater advancement opportunities for scientists and engineers, but maximum base pay in the technical
track can approximate that of upper-management positions.
A second problem in designing the compensation package of scientists and engineers
centers on the question of equity. The very nature of technical knowledge and its dissemination requires the relatively close association of these employees across organizations.
In fact, scientists and engineers tend to compare themselves for equity purposes with
graduates who entered the labor market when they did. Partially because of this and partially because of the volatile nature of both jobs and salaries in these occupations, organizations rely very heavily on external market data in pricing scientists and engineers
base pay.45 This has resulted in the use of maturity curves.

45Jo

C. Kail, Compensating Scientists and Engineers, in New Perspectives on Compensation, ed. David B.
Balkin and Luis R. Gomez-Mejia (Englewood Cliffs, NJ: Prentice-Hall, 1987), pp. 247281.

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472 Part Five Extending the System

EXHIBIT 14.7
IBM Dual
Ladders

Executives

IBM fellow

Functional
management

Senior technical
staff member

Senior

Senior

Development

Advisory

Project

Staff

MANAGEMENT LADDER

TECHNICAL LADDER
Senior associate
Associate

Engineers, programmers,
scientists

Maturity curves reflect the relationship between scientist/engineer compensation and

years of experience in the labor market. Generally, surveying organizations ask for information about salaries as a function of years since the incumbent(s) last received a degree.
This is intended to measure the half-life of technical obsolescence. In fact, a plot of this
data, with appropriate smoothing to eliminate aberrations, typically shows curves that are
steep for the first 5 to 7 years and then rise more gradually as technical obsolescence
erodes the value of jobs. Exhibit 14.8 illustrates such a graph with somewhat greater so-

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Chapter 14 Compensation of Special Groups 473

Monthly salary

EXHIBIT 14.8
Maturity
Curve: Years
since Last
Degree
Relative to
Salary

$6,100
5,900
5,800
5,700
5,600
5,500
5,400
5,300
5,200
5,100
5,000
4,900
4,800
4,700
4,600
4,500
4,400
4,300
4,200
4,100
4,000
3,900
3,800
3,700
3,600
3,500
3,400
3,300
3,200
3,100
3,000
2,900
2,800
2,700
2,600

High performers (90th percentile)

Average performers (50th percentile)

Poor performers (bottom 10%)

0 2 4 6 8 10 12 14 16 18 20 22 24 26 28 30 32 34 36 38 40
Years since last degree

phistication built into it, in that different graphs are constructed for different levels of performance. To construct such graphs, the surveying organization must also ask for data
broken down by broad performance levels. Notice in the illustration that the high performers begin with somewhat higher salaries and the differential continues to broaden
over the first few years.

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Scientists and engineers also receive compensation beyond base pay. In general, hightechnology firms place a great emphasis on the use of performance-based incentives.46
Common forms of incentives include profit sharing and stock ownership. Other incentives
link payment of specific cash amounts to completion of specific projects on or before
agreed-upon deadlines. Posthiring bonuses are also paid for such achievements as patents,
publications, elections to professional societies, and attainment of professional licenses.
Finally, organizations have devoted considerable creative energy to development of
perks that satisfy the unique needs of scientists and engineers. These perks include flexible work schedules, large offices, campuslike environments, and lavish athletic facilities.
The strategic importance of these groups dictates that both mind and body be kept active.

Sales Forces
The sales staff spans the all-important boundary between the organization and consumers
of the organizations goods or services. Besides the sales function, or even as part of selling, the sales staff must be sensitive to changing consumer tastes and provide rapid feedback to appropriate departments. Indeed, there is a growing trend toward linking sales
compensation to customer satisfaction measures, with about one-third of all companies
reporting use of such quality-based measures.47 The role of interacting in the field with
customers requires individuals with high initiative who can work under low supervision
for extended periods of time. The standard compensation system is not designed for this
type of job. As you might expect, there is much more reliance on incentive payments tied
to individual performance. Thus, even when salespeople are in the fieldand relatively
unsupervisedthere is always a motivation to perform. Exhibit 14.9 shows that sales employees at every organization level have some component of pay (usually a large one)
that is incentive-based. For top-level sales representatives the incentive-based pay can be
over 40 percent of total compensation.

EXHIBIT 14.9 Sales Compensation Components

Average Salary for Sales Employees
Annual Revenue of Company
Executive
Top-level sales representative
Midlevel sales representative
Low-level sales representative
Average of all representatives

Base Salary
$87,178
78,483
49,144
37,698
54,452

Bonus plus Commision

$35,721
60,976
28,035
14,294
25,571

Total Compensation
$122,899
139,459
77,179
51,992
80,023

Source: C. Galea, 2002 Salary Survey, Sales and Marketing Management, May 1, 2003.

46George

T. Milkovich, Compensation Systems in High Technology Companies, in New Perspectives on

Compensation, ed. Balkin & Gomez-Mejia, pp. 269277.
47Sales Compensation Is Increasingly Tied to Quality, Compflash, July 1995, p. 1.

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Designing a Sales Compensation Plan

Seven major factors influence the design of sales compensation packages: (1) the nature
of people who enter the sales profession, (2) organizational strategy, (3) market maturity,
(4) competitor practices, (5) size of company, (6) economic environment, and (7) product
to be sold.
People Who Enter the Sales Profession Popular stereotypes of salespeople characterize them as being heavily motivated by financial compensation. One study supports this
perception, with salespeople ranking pay significantly higher than five other forms of reward. In the study, 78 percent of the salespeople ranked money as the number-one motivator, with recognition and appreciation being ranked as the number-two motivator.48
Promotional opportunities, sense of accomplishment, personal growth, and job security
were all less highly regarded. These values almost dictate that the primary focus of sales
compensation should be on direct financial rewards (base pay plus incentives).
Organizational Strategy A sales compensation plan should link desired behaviors of
salespeople to organizational strategy.49 This is particularly true in the Internet age. As
more sales dollars are tied to computer-based transactions, the role of sales personnel will
change.50 Salespeople must know when to stress customer service and when to stress volume sales. And when volume sales are the goal, which products should be pushed hardest? Strategic plans signal which behaviors are important. For example, emphasis on customer service to build market share or movement into geographic areas with low
potential may limit sales volume. Ordinarily, sales representatives under an incentive system will view customer service as an imposition, taking away from money-making sales
opportunities. And woe be to the sales supervisor who assigns a commission-based salesperson to a market with low sales potential. Salespeople who are asked to forgo incentive
income for low-sales tasks should be covered under a compensation system with a high
base pay and small incentive component.
Alternatively, an organization may want to motivate aggressive sales behavior. A
straight commission-based incentive plan will focus sales efforts in this direction, to the
possible exclusion of supportive tasks such as processing customer returns. Such incentive plans include both a statement about the size of the incentive and a discussion of the
performance objective necessary to achieve the incentive. Typical performance measures
include overall territory volume, market share, number of product placements in retail
stores, number of new accounts, gross profit, percentage of list-price attainment (relative
to other salespeople in the organization), consistency of sales results, expense control,
productivity per square foot (especially popular in retail stores), and bad debt generated
by sales.51 Each measure, of course, corresponds to a different business goal. For exam-

48Charles

Warner, Recognition and Appreciation Is Vital for Salespeople, www.charleswarner

.us/recogsls.html, retrieved April 10, 2003.
49Bill OConnell, Dead Solid Perfect: Achieving Sales Compensation Alignment, Compensation and
Benefits Review, March/April 1996, pp. 4148.
50B. Weeks, Setting Sales Force Compensation in the Internet Age, Compensation and Benefits Review,
March/April 2000, pp. 2534.
51John K. Moynahan, The Sales Compensation Handbook (New York: AMACOM, 1991).

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ple, an organization might use a volume measure such as number of units, orders,
invoices, or cash received if the business goal is to increase sales growth. Alternatively, if
the goal is profit improvement, the appropriate measurement would be gross margin on
sales or price per unit. Percentage account erosion would be stressed if improved account
retention became a major focus of attention, while customer satisfaction indices are increasingly popular because of greater emphasis on quality.
Market Maturity As the market of a product matures, the sales pattern for that product
will change, and companies need to adapt the compensation for their sales force accordingly. A recent study showed that with maturing markets, companies move toward a
more conservative sales pattern, focusing even more on customer satisfaction and retention. This leads companies to employ more conservative, rather than aggressive, salespeople, who can comply with the companies customer retention plans. In maturing markets, companies focus both on performance-based pay tied to customer satisfaction and
on greater base salaries to retain conservative salespeople.52
Competitor Practices In selecting an appropriate pay level, organizations should recognize that external competitiveness is essential. The very nature of sales positions means
that competitors will cross paths, at least in their quest for potential customers. This provides the opportunity to chat about relative compensation packages, an opportunity which
salespeople will frequently take. To ensure that the comparison is favorable, the organization should identify a compensation strategy that explicitly indicates target salaries for
different sales groups and performance levels.
Size of Company As Exhibit 14.10 shows, the total compensation for sales personnel
varies with the size of the company. For executive sales staff the total compensation
varies by as much as 50 percent; for normal sales staff, by as much as 44 percent.
Economic Environment The economic environment also affects the way a compensation package is structured. In good economic climates with roaring sales, companies can
afford to hire mid- and low-level sales personnel to capture the extra sales. In a recession
environment, however, companies need to react to the decreasing level of sales by focusing more on the top-level performers and rewarding those that achieve high levels of
sales despite the economic downturn. In the downturn of 2001 mid- and low-level performers total compensation was down about 10 percent from the year before, while top
performers increased their total compensation by an average of 9.3 percent. The difference in compensation is even greater when looking at the incentive part of total compensation. While base salaries rose for all levels of performance, incentive-based pay was up
by 7.6 percent for top performers, but down by over 30 percent for mid- and low-level
performers. About 30 percent of all managers reported a decrease in total head count, and
only 34 percent reported an increase in head count.53 For the economic recovery of 2003,
48 percent of managers expected an increase in sales force total compensation for that
year, 2002, and less than 20 percent expected a decrease.54

52Where

Is Sales Compensation Heading in 2003? Workspan, January 1, 2003.

Galea, 2002 Salary Survey, Sales and Marketing Management, May 1, 2003.
54Sales Pay Rising, Sales and Marketing Management, February 1, 2003.
53C.

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Chapter 14 Compensation of Special Groups 477

EXHIBIT 14.10 Sales Compensation Rises with Company Revenue

Total Compensation
Annual Revenue of Company
Less than $1,000,000
$1,000,000$9,999,999
$10,000,000$49,999,999
$50,000,000$249,999,999
$250,000,000$999,999,999
$1 billion$10 billion
More than $10 billion

Sales Executives

Sales Staff

$92,053
103,759
124,611
127,597
138,903
142,839
138,490

$69,081
70,289
75,868
82,289
85,169
95,240
99,897

Source: C. Galea, 2002 Salary Survey, Sales and Marketing Management, May 1, 2003.

Product to Be Sold The nature of the product or service to be sold may influence the
design of a compensation system. For a product that, by its very technical nature, is difficult to understand, it will take time to fully develop an effective sales presentation. Such
products are said to have high barriers to entry, meaning considerable training is needed
to become effective in the field. Compensation in this situation usually includes a large
base-pay component, thus minimizing the risk a sales representative will face and encouraging entry into the necessary training program. At the opposite extreme are products
with lower barriers to entry, where the knowledge needed to make an effective sales presentation is relatively easy to acquire. These product lines are sold more often using a
higher incentive component, thus paying more for actual sales than for taking the time to
learn the necessary skills.
Products or services that sell themselves, where sales ability isnt as crucial, inspire
different compensation packages than do opportunities where the salesperson is more
prominent. Base compensation tends to be more important with easily sold products. Not
surprisingly, incentives become more important when willingness to work hard may
make the difference between success and failure. One recent study argues convincingly
that setting sales targets or quotas is the most important, and most difficult, part of sales
compensation. Several factors can help you determine whether your quotas are reasonable: (1) Can the sales force tell you explicitly how the quotas are set? (2) In periods
when the company hits its performance target does 60 to 70 percent of the sales force hit
quota? (3) Do high performers hit their target consistently? (4) Do low performers show
improvement over time?55
Most jobs do not fit the ideal specifications for either of the two extremes represented
by straight salary or straight commission plans. A combination plan is intended to capture
the best of both these plans. A guaranteed straight salary can be linked to performance of
nonsales functions such as customer service, while a commission for sales volume yields
the incentive to sell. A plan combining these two features signals the intent of the organization to ensure that both types of activities occur in the organization.
55S.

Sands, Ineffective Quotas: The Hidden Threat to Sales Compensation Plans, Compensation and
Benefits Review, March/April 2000, pp. 3542.

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Contingent Workers
Ninety percent of all U.S. employers hire contingent workers.56 Lets define a contingent
worker as anyone hired through a temporary-help agency, on an on-call basis, or as an independent contractor. Workers in the first two of these categories typically earn less than
workers in traditional arrangements; those in the latter category earn more. For example,
working through a temporary-help agency usually means low pay in administrative or
day labor positions. In contrast, the wages for an independent contractor might be higher
than those for a more permanently employed counterpart. Indeed, independent contractors often are people who have been downsized and then reemployed by the company.
DuPont cut its work force by 47,000 during the 1990s. About 14,000 of these workers
were subsequently hired as vendors or contractors.57 Because the employment status of
contingent workers is temporary and employee benefits are less or nonexistent, wages at
times tend to compensate by being somewhat higher.
Why the move to contingent workers? Part of the answer may be cost savings. Employee benefit costs are about 50 percent less for contingent workers.58 But sometimes
wages are higher. The main reason for contingent workers may be the added flexibility
such employment offers the employer. In todays fast-paced marketplace, lean and flexible are desirable characteristics, and contingent workers offer these options.
A major compensation challenge for contingent workers, as with all our special-group
employees, is identifying ways to deal with equity problems. Contingent workers may
work alongside permanent workers yet often receive lower wages and benefits for the
same work. Employers deal with this potential source of inequity on two fronts, one traditional and one that challenges the very way we think about employment and careers. One
company response is to view contingent workers as a pool of candidates for more permanent hiring status. High performers may be moved off contingent status and afforded
more employment stability. Cummins Engine, for example, is famous for its hiring of
top-performing contingent workers. The traditional reward of a possible promotion,
then, becomes a motivation to perform.
A second way to look at contingent workers is to champion the idea of boundaryless
careers.59 At least for high-skilled contingent workers, it is increasingly popular to view
careers as a series of opportunities to acquire valuable increments in knowledge and
skills. In this framework, contingent status isnt a penalty or cause of dissatisfaction.
Rather, employees who accept the idea of boundaryless careers may view contingent status as part of a fast-track developmental sequence. Lower wages are offset by opportunities for rapid development of skillsopportunities that might not be so readily available
in more traditional employment arrangements. Companies like General Electric that promote this rewardenhanced employability status through acquisition of highly demanded skillsmay actually have tapped an underutilized reward dimension.
56P.

Allan, The Contingent Workforce: Challenges and New Directions, American Business Review,
20(2) (2002), pp. 103110.
57Kim Clark, Manufacturings Hidden Asset: Temp Workers, Fortune, November 10, 1997, pp. 2829.
58Ibid.
59Janet H. Marler, George T. Milkovich, and Melissa Barringer, Boundaryless Organizations and
Boundaryless Careers: A New Market for High Skilled Temporary Work, unpublished paper submitted to
1998 Academy of Management annual conference, Human Resource Division.

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14. Compensation of
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Chapter 14 Compensation of Special Groups 479

Your Turn

Compensation of Special Groups

You are the CEO of a 110-person consulting firm, Sierra Avo, that does high-level aeronautical
engineering work for Boeing. You have 15 aeronautical engineers hired from the very best
schools throughout the country. The problem is, six months ago you had 19 such engineers. Four
have left recently, and rumors have it that some of the others are disgruntled. Exhibit 1 lists
characteristics of the four engineers who left. The salaries of the remaining 15, and some other
data you might find useful, are shown in Exhibit 2.
1. Do you see anything in the data that might explain why workers are leaving. Justify your arguments based on the reasoning given in the chapter for changes in scientist/engineer
salaries. Do your arguments fit for Lance Welch also? If not, is there anything about current
economic conditions that might explain his salary? Would you be surprised to hear he left for
another job offer? Why?
2. Now that youve explained why people are leaving, should you change salaries to reduce the
turnover? What are the economic arguments for not increasing wages?
3. Assume your company has created a two-track career path for engineers. On one path, senior
engineers serve as managers who also specialize in client relations. How might this change the
nature of your argument about wages?

EXHIBIT 1
Workers
Who Left

Name
Sam Lansing
Naresh Rao
Lance Welch
Kim Lee

Degree
B.S.
M.S.
B.S.
Ph.D

Years since
Degree Received

Annual
Salary

Performance
Rating

11
10
1
10

$61,000
$69,300
$37,000
$87,238

Good
Excellent
New (no rating)
Good

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480 Part Five Extending the System

EXHIBIT 2
Workers
Who Remain

Summary

Employee

Highest Relevant
Degree Received

Years since
Degree Received

B.S.
M.S.
M.S.
Ph.D.
B.S.
Ph.D.
M.S.
Ph.D.
B.S.
Ph.D.
M.S.
M.S.
Ph.D.
B.S.
B.S.

3
6
3
7
6
9
4
3
7
6
9
7
4
9
4

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15

Annual Salary
$ 39,000
$ 58,800
$ 50,400
$ 95,900
$ 48,000
$ 105,300
$ 53,200
$ 77,100
$ 51,000
$ 91,200
$ 67,200
$ 61,600
$ 81,800
$ 57,000
$ 42,000

Special groups are portrayed here as sharing two common characteristics: They all have
jobs with high potential for conflict, and resolution of this conflict is central to the goals
of the organization. Probably because of these characteristics, special groups receive
compensation treatment that differs from the approach for other employees. Unfortunately, most of this compensation differentiation is prescriptive in nature, and little is
known about the specific roles assumed by special groups and the functions compensation should assume in motivating appropriate performance. Future practice and research
should focus on answering these questions.

Review Questions
1. What are the sources of monetary savings from hiring contingent workers? What equity problems can arise from hiring contingent workers, especially when they work
alongside regular employees.
2. In recent years the newspapers have been full of stories about the excessive pay to
CEOs. Assume you are a CEO trained in economics (you went to a good school, like
SUNY Buffalo or Cornell). What arguments might you give in support of your compensation? Would LeBron James (number-one draft pick in the NBA for 2003) agree
with these arguments?
3. From question 2, what might be the counterarguments from a critic of CEO compensation? (Be sure to include performance arguments and both internal and external equity
arguments.)
4. Would you expect computer programmers to be treated as special groups (in the way
defined in this chapter) in a company like Microsoft? If so, what special compensation
practices might you expect for these programmers? Why?
5. A board of directors meets perhaps 12 times a year for a day (usually). How can we
possibly justify to stockholders paying this group tens of thousands of dollars for this
brief time period?