2. UNIT-5 Compensation for Special Groups and
International Compensation
Salesforce Compensation- Six Areas of Sales Compensation Plan, Eligibility for Sales Compensation,
Guiding Principles
Executive Compensation- Owner-Manager Conflict- Agency Theory, Other Theories that Explain and
Influence Executive Compensation
Components of Executive Compensation, Executive Benefits and Perquisites, Steps in Designing an
Effective Executive Compensation Plan
International Compensation- Introduction, Objectives, Components, Approaches for International
Compensation, Merits and Demerits
3. Salesforce Compensation-Six Areas of Sales Compensation Plan,
Eligibility for Sales Compensation, Guiding Principles
A company’s sales compensation plan is designed to attract, retain, and reward talented salespeople
who can win and keep customers.
A. Sales leaders, i.e., top sales executive and regional sales executives.
Regular conversations (monthly, quarterly) about effectiveness of current plans—what’s working,
what’s not; early ideas for change in the future
Participation in sales leadership meetings related to future business planning; implications for sales
compensation
Review/discuss with sales leadership teams: quarterly sales results and impact on sales incentive
compensation payments, e.g., percent of sales team earning under the plan, percent of sales team
achieving target incentive earnings; overachievement earnings; individual sales performance and
general staffing concerns
4. B. Field sales managers, e.g., first-level sales managers
Occasional “work withs” to understand challenges faced by field sales managers in
their jobs; role sales compensation plays in motivating and managing their sales team
Regular calls to selected field sales managers to gain feedback on current plans—
what’s working; what’s not
Issues/challenges with current plans—what are the most common questions or
problems members of the sales force are experiencing under the plan
Needs relative to managing with the plan, e.g., reports, response to special requests
C. Sales staff, e.g., sales operations or administrative executives
Regular conversations with sales staff supporting the plans to understand their
perspectives on what’s working, what’s not and why; early thoughts about
opportunities for plan improvement in subsequent year
Periodic meetings to confirm system capabilities, abilities to meet management
information needs
5. D. “Sellers,” e.g., sales representatives, account managers, sales specialists
Occasional “ride withs” to understand sales roles and jobs, i.e., how members of the sales
force go about their work, influence they have on customer buying decisions, service work
they perform; how sales compensation plan in- fluences their behaviour and performance
Periodic sales force surveys to understand what members of the sales force like best/least
about current plans
6. SIX AREAS OF SALES COMPENSATION PLAN INVOLVEMENT
HR professionals should be proactive in seeking opportunities to become involved
with the sales compensation plan. A solid understanding of how the sales organization
operates and the respect of sales leadership are important prerequisites for gaining
involvement with the sales compensation plan. HR involvement is most often desired
and/or needed in the following six areas:
1. Problem Resolution
HR professional must have the knowledge, skills, and experience to make a meaningful
contribution to a solution. HR professionals perceived as not possessing a sufficiently
intimate knowledge of the business to be of help to the sales organization. The old adage
of “be prepared” is quite relevant here. An HR professional must possess applicable
knowledge, skill, and experience in order to make a value-added contribution.
7. Common examples of plan problems that HR professionals are frequently asked to investigate include:
(1) sales employee dissatisfaction with the plan, (2) exceptions to either pay-out calculations or plan
rules, (3) overpayments or underpayments, and (4) turnover either higher or lower than internally
expected, industry benchmarks, or both. Seasoned HR professionals should be equipped to help the
sales organization address problems such as these.
2. Design and Implementation Process
Companies are increasingly following a documented process for the design and implementation of
their sales compensation plans. Most processes include the following four major activities:
a. Assessment: How effective is the current sales compensation plan; what evidence is there to
suggest that the plan may require modification or may need to be replaced by a completely new
plan, for example, change in business strategy; implementation of new or restructured sales
channels; jobs; or both; new product launch?
b. Design and testing: What changes could be made to incentive pay mechanics— that is, linking
performance to pay; will such change redirect sales behaviour in the areas management requires
for achievement of the coming year’s business results; can such changes be supported with sales
financial data (i.e., costing and individual performance modelling) that show a proposed change
will result in a material improvement in business results?
8. c. Implementation: How will plan changes or a completely new plan be
introduced to the sales force so that it will produce maximum motivational
mileage and thus contribute to achievement of desired business results?
d. Monitoring: What actions are taken to confirm that the sales force has received
its plans, that it understands the plans, and that field sales managers are managing
effectively with the new plans?
3. Sales Compensation Guiding Principles
Guiding principles are the main values that best-practice companies follow in
order to design effective and successful sales compensation plans. Guiding
principles are based on and support the company’s philosophy of pay. However,
these guiding principles are rarely documented and assembled in one place for
ready reference and use. There are two disadvantages to not using a set of
documented guiding principles during a plan design process:
9. 1. The absence of guiding principles is analogous to trying to shoot at a target in
the dark. How do you know when you have hit the bull’s-eye? The answer, of
course, is that you don’t know. Thus, guiding principles set forth the standards
against which a plan or plans are designed. The principles provide each of the
participants in the plan design process with the same understanding of what the
design team is shooting for at a conceptual level and in terms of the design results
2. The second disadvantage of not having and using guiding principles is that it is
virtually impossible to know the extent to which a new plan has contributed to
business success. For example, the statement of guiding principles typically
defines the expected performance distribution under the sales compensation plan.
Without the benefit of a specific expectation in this area, it is difficult to determine
if the plan paid more or fewer salespeople than expected.
10. 4. Competitive Pay Assessments
In most companies, sales executives look to the compensation plan to help attract and retain the calibre
of people they need to successfully sell to and interact with customers. Because attracting and retaining
top-notch talent is one of the most persistent challenges faced by sales organizations, HR has an
opportunity to make a major contribution to the sales compensation plan through competitive pay
assessment. HR’s role is to assure sales executives that pay levels are externally competitive and
internally equitable (or otherwise consistent with the organization’s compensation objectives based on
the roles and responsibilities of the jobs)
5. Industry Trends and Practices
Sales executives are vitally interested in how various practices affecting the sales compensation plan
compare to others in their industry. The HR professional, through participation in industry networking
groups and compensation survey job-matching sessions, can be in an excellent position to gain an
understanding of trends and practices that may affect the sales compensation plan. Thus, the HR
professional should be a member and active participant in industry and survey groups.
11. 6. Plan Effectiveness Assessment
At most companies, sales compensation return on investment (ROI) is an
important topic. 1 The reason for this interest is that companies have begun to
think of sales compensation as an investment in improving overall sales
effectiveness instead of thinking about it as an expense to be minimized. Thus,
they have shifted their outlook and view sales compensation as a means of
achieving increased volume and quality of sales. This shift in thinking provides
an opportunity for the HR professional to help sales leaders also rethink their
approach to plan assessment.
One of the reasons for the difficulty of assessing plan effectiveness is the
existence of unclear expectations for sales compensation.
12. ELIGIBILITY FOR SALES COMPENSATION
When your company is going through a change initiative, and the result is new jobs, new products, or new
processes, it is critical to validate the eligibility of relevant jobs for participation in the sales compensation
plan. Whether the job is direct-to-consumer (like a retail clerk), or business-to-business, the key criterion is the
role each job plays in the sales process, particularly the degree to which the job is involved in persuading a
customer to buy the company’s products or services. To validate the eligibility of relevant jobs for participation
in the sales compensation plan, the team must understand the sales process. In recent years, there has been an
increasing tendency to make more service- and fulfilment related jobs eligible for sales incentive pay.
However, one key differential between sales incentive pay and other variable pay is the degree to which target
incentive pay is included in the calculation for market-rate. Three primary criteria for eligibility to be on either
individual or team sales plans are:
The primary responsibility of employees in designated sales jobs is customer contact and persuading the
customer to do business with the company.
Employees can affect sales results and may have assigned sales goals.
Sales results can be tracked and accurately measured at the employee level.
13. GUIDING PRINCIPLES
Plans are aligned with the company’s business strategy and primary goals— sales growth, profitability, new product
sales, and other strategic initiatives (as highlighted in the business plan).
Plans are designed to the specific accountabilities of each job.
Plans differentiate various levels of performance.
The absolute number of performance measures is limited (i.e., up to 3)
within a specific plan, and the capability to track and report results is con-
firmed prior to plan finalization.
The goals of the sales force are based on optimal performance distribution.
This means that threshold and excellence performance levels are realistically achievable; that is, they will be set so that
at least 90 percent of the sales force achieves threshold, 60–70 percent achieves/exceeds quota, and 10–15 percent
achieves/exceeds excellence.
The company is committed to using plans that are simple, flexible, and self- calculating by plan participants. Approved
plans are ones that can be administered in a timely and cost-efficient manner with minimal requirements for manual
intervention.
Management at all levels of the organization is committed to clearly communicating the plans and to providing the
support required to enable the sales force to succeed under the compensation plan.
14. Executive Compensation- Owner-Manager Conflict- Agency Theory, Other Theories
that Explain and Influence Executive Compensation
A well-designed executive compensation plan is important because it rewards both
executives and shareholders, whereas a poorly designed one wastes corporate resources
without motivating the executive. At the extreme, a poorly designed incentive system can
cause the executive to take actions that reduce shareholder value—for example, cutting
back on long-term profitable investments (a.k.a. positive net present value projects) to
increase current compensation
Executive compensation is also important because it affects compensation levels and
composition throughout the organization. It affects the level of compensation because
lower-management compensation is often a function of upper-management compensation,
and it affects the composition of their compensation package because the same goals may
be applied as well.
15. OWNER-MANAGER CONFLICT: AGENCY THEORY
In the modern, and sometimes not-so-modern, corporation, the ownership and management
functions are separated. This separation can arise from two situations. In the first situation,
there are individuals with pre-existing businesses who either do not have the desire and/or
skills required to manage the business. In the second, there are individuals with good
ideas/products that may not have the funds necessary to bring those products to market
and/or sustain themselves through the start-up period and thus must seek outside investors.
This separation of the ownership and management functions can lead to conflicts. For
example, while the owner(s) are concerned with the maximization of the value of their
stake in the corporation, the executive(s) are concerned with the maximization of their
well-being, which involves a trade-off between maximizing their wealth and minimizing
their effort.
16. The mechanisms for controlling the incentive conflicts arising from the separation
of the ownership and control of the corporation include, but are not limited to:
a. Monitoring by large shareholders and the board of directors.
b. Equity ownership by executives.
c. The market for corporate control.
d. The managerial labour market.
e. Compensation contracts that provide incentives to increase shareholder value.
The compensation package can also be used to align the interests of owners and
executives. Properly designed, the compensation package can be a tool for mitigating
the conflict between owners and executives. It does so by rewarding executives for
taking actions that increase shareholder value. Unfortunately, owners (and directors)
have incomplete information about the actions of executives. Further, they may not
have the expertise to evaluate those actions, even if the actions are observable. Thus,
it is difficult to base compensation on actions alone. Rather, compensation is often
tied to measures that are positively correlated with managerial effort, for example,
accounting income, share price, or market share.
17. OTHER THEORIES THAT EXPLAIN AND INFLUENCE EXECUTIVE
COMPENSATION
Class hegemony theory argues that executives share a common bond, and that through
boards composed primarily of CEOs, executives are able to pursue their own goals and
interests (and not those of shareholders). In particular, Gomez-Mejia (1994) notes “board
input is primarily used to legitimize high executive pay, reflecting a shared commitment to
protect the privileges and wealth of the managerial class.”
Efficiency wage theory suggests that executives are paid a premium to provide them with
the incentive to exert effort to avoid being fired. This premium leads them to put forth effort,
because of the consequences of being fired (i.e., having to accept another position at a lower
wage). In theory, this effort increases executive productivity and reduces turnover.
Unlike an operational manager, should not be paid based upon operating results, but rather
for his or her role as leader or political figurehead (figurehead theory). As such the CEO is
both a symbol and representative of the corporation, representing the corporation at
ceremonial events and political functions, and managing interactions with owners,
employees, government, and the general public.
18. Other Theories
Under human capital theory, the value of the executive, and hence, his or her
compensation, is based upon his or her accumulated knowledge and skills. Agarwal
(1981, p. 39) explains the logic behind human capital theory:
The amount of human capital a worker possesses influences his productivity, which in turn
influences his earnings. The same general reason should hold for executives as well. Other
things being equal, an executive with a greater amount of human capital would be better
able to perform his job and thus be paid more.
Managerialism theory argues “that the separation of ownership and control in modern
corporations gives top managers almost absolute power to use the firm to pursue their
personal objectives” (Gomez-Mejia 1994). They could then use this power to increase
the level, and reduce the risk, of their compensation.
19. Other Theories
Prospect theory focuses on the executive’s loss aversion. That is, in certain circumstances,
for example, to avoid losses or missing goals and/or targets, the executive is actually
willing to take risks. In contrast, the executive is unwilling to take risk once he or she has
achieved his or her performance goals, as the benefit (to the executive) of increasing
performance is more than offset by the possibility of falling below target.
Under social comparison theory, board members use their own pay as a reference point
when setting pay of executives (O’Reilly, Main, and Crystal 1988). Under tournament
theory (Lazear and Rosen 1981; Rosen 1986), executive compensation is set to provide
incentives, not to the executives themselves, but rather to their subordinates
20. Components of Executive Compensation, Executive Benefits and Perquisites, Steps in
Designing an Effective Executive Compensation Plan
COMPONENTS OF EXECUTIVE COMPENSATION
The executive compensation package can, and most often does, contain many components. These components have differing
effects on employee motivation and risk, as well as different costs for the corporation. A well-constructed compensation
package must make trade-offs between these components to maximize the net benefit6 to both the corporation and the executive
The major and most common components of executive compensation are:
a. Salary.
b. Bonus.
c. Stock options.
d. Stock grants.
e. Other stock-based forms of compensation.
f. Pensions.
g. Benefits and perquisites.
h. Severance payments.
i.Change-in-control clauses.
21. Salary
Salary is the fixed contractual amount of compensation that does not explicitly vary with performance.
However, it can be affected by performance, as good performance can lead to higher salary in future periods.
Bonus
Bonus is a form of compensation that may be conditioned upon individual, group, or corporate performance.
For most executives, bonus is both based upon group performance and determined as part of a plan covering
a larger group of employees. Thus, their individual employment contract may only specify their participation
in the plan or a minimum bonus they are guaranteed.
Stock Options
Stock options allow their holder to purchase one or more shares of stock at a fixed “exercise” price over a
fixed period of time. They have value if the corporation’s share price is greater than the exercise price.
Stock Grants
Stock grants occur when corporations give shares to their employees. They differ from stock options in that
they have no exercise price. Whereas a stock option only has value if the corporation’s share price is above
the exercise price, a stock grant has value as long as the share price is above zero. Consequently, a stock
grant is al- ways worth more than an option grant for the same number of shares.
22. Other Stock-Based Forms of Compensation
While not as popular as stock options and grants, some companies grant stock
appreciation rights, phantom stock, and/or equity units.
Stock appreciation rights, sometimes called SARs, are the right to receive the in-
crease in the value of a specified number of shares of common stock over a defined
period of time. Economically, they are equivalent to stock options, with one
exception. With a stock option, the executive has to purchase and then sell the
shares to receive his or her profit.
Pensions
Pensions are a form of deferred compensation, whereby after retirement from the
corporation, the employee receives a payment or series of payments. These
payments may be defined by the pension plan,14 or based upon the amounts
accumulated in the employee’s personal retirement account.15 If the payments are
defined by the plan, they can be based upon a number of factors including, but not
limited to, number of years with the corporation, earnings while working, and level
within the corporation.
23. Executive Benefits and Perquisites
In addition to receiving salary, bonuses, stock-based compensation, and pensions, executives
receive a variety of benefits and perquisites, whose value must be reported in the proxy
statement.17 These items include corporate cars; the use of corporate air- planes and
apartments; special dining facilities; country club memberships; health, dental, medical, life,
and disability insurance; and the ability to defer compensation at above market rates of
interest.
Severance Payments
Severance payments are fairly common and have become very controversial. Severance
payments occur when an executive leaves the company under pressure or is fired without
cause; consequently while they are sometimes included in the executive’s employment
contract, severance payments, at most, happen once at the end of the executive’s tenure with
the company
Change-in-Control Clauses
Change-in-control clauses are also standard in the executive compensation contract. A
change-in-control payment occurs when the company is acquired by another company and is
a way to provide the executive with some insurance should he or she lose his or her job as a
result of the merger, which often happens.
24. Steps in Designing an Effective Executive Compensation Plan
An executive compensation plan is a crucial element in recruiting and maintaining a happy,
productive workforce.
1) Decide who is covered by the plan: Will it be only senior management or will it also include
department or functional managers?
2) Align your compensation strategy with company goals: This key step should build rewards into
the plan that march in accord with both your short-term and long-term objectives.
3) Benchmark against comp plans of similar companies: Today’s reality is that you’re in a race to
acquire and keep the best talent, so your packages must be competitive. You also need this information
to avoid overpaying.
4) Set a base pay, usually through industry surveys or by adding a significant percentage jump from
the individual’s previous salary.
5) Use cash incentives to meet short-term goals: Cash is usually used to reward an executive for
completion of a specific project or for hitting a specified financial goal within a given time frame of up
to a year. Some experts suggest that such short-term incentives make up 15 percent to 40 percent of
total pay.
25. Steps……….
6) Use long-term incentives to meet larger goals: When the goal is more than a year out,
many companies reward top performers with either stock options or other long-term pay-outs
that encourage staying with the organization well into the future.
7) Add supplemental benefits, including health, life, and disability insurance: “These add
extra value to the package,” the authors write, “and they’re not usually costly to the company.”
8) Provide deferred compensation options: These usually pay out at retirement. They
increase in value over time, due to compounding interest, without you having to add more
cash.
9) Pack in the perks: A company car, upgraded air travel, and health or golf club
memberships tell executives they’re special, without greatly increasing the size of the package.
They’re also attractive in recruiting efforts.
10) Evaluate the program: Once a program rolls out, evaluate it yearly. Make sure the
executives remain onboard with it, but most important, make sure that it’s achieving the
primary goal … building success for the company, not just the participants.
26. International Compensation- Introduction, Objectives, Components, Approaches
for International Compensation, Merits and Demerits
International compensation refers to all forms of financial returns and tangible
benefits that employees of an international organization receive from their
employer in exchange for providing their labour and commitment.
Almost all the employees accept jobs in MNC’s take-up assignments in various
countries, & take-up the risk, bear inconveniences & discomforts in foreign
assignments mostly based on the compensation package.
27. Objectives of International Compensation
Recruit & Retain Competent Employees
Consistency & Equity in Pay
Employability in a Cost Effective
Financial Protection to Employees
Organizational Ability to Pay
Comparative & Comparable
Benefit Management
Improve Organizational Performance
28. Components of International Compensation
The major focus of most international compensation programme is to keep international
employees at a sufficient financial level during their international assignments so that they
do not lose ground economically.
1. Base salary:
For expatriates, the term base salary means the primary component of a package of
allowances which are:
(a) Foreign service premium,
(b) Cost-of-living allowance,
(c) Housing and utility allowance,
(d) Basis for in-service benefits and pension contributions.
Base salary may be paid in home or local currency or in some hard currency like pound or
dollar.
29. 2. Foreign Service inducement/hardship premium:
Parent-country nationals often receive a salary premium as an inducement to
accept a foreign assignment or as compensation for any hardship caused by the
transfer. Such payments vary depending upon the assignment, actual hardship, tax
paid to foreign governments and length of the assignment.
3. Allowances:
Various allowances are paid to expatriates depending upon the assignment. They
include:
a. The Cost of Living allowances
b. Housing Allowances
c. Home leaves and travel allowances
4. Education Allowances for Children:
Education allowances are given towards fees for the education of expatriates’
children. Education allowances include items such as tuition, language class
tuition, books, transportation and uniforms.
30. 5. Relocation Allowances and Moving:
Relocation allowances usually cover moving, shipping; temporary living
expenses, and down payments or lease-related charges.
6. Tax Equalisation Payments:
Many international compensation plans attempt to protect the expatriate from
negative tax consequences by using a tax equalisation plan. Under this plan,
the company adjusts an employee’s base income so that the expatriates will not
pay any more or less tax than if they had stayed in the home country.
7. Spouse Assistance:
To help guard against or offset income lost by an expatriate’s spouse as a result
of relocating abroad. Multinationals generally pay allowances in order to
encourage employees to take up international assignments.
31. Approaches to International Compensation
Approaches to International Compensation- There are two basic approaches to
determine the international compensation package:
1. Going Rate Approach
This is based on local market rates. It relies on comparisons of surveys of the local nationals, expatriates of same
nationality and expatriates of all nationalities’ pay packages. In this approach, the compensation is based on the
selected survey comparison. The base pay and benefits may be supplemented by additional payments for low pay
countries.
The advantages of the Going Rate Approach are,
Equality with local nationals
Simplicity
Identification with the host country
Equity amongst different nationalities
32. The disadvantages of Going Rate Approach are,
Variation between assignments for the same employees
The rivalry between expatriates of the same nationality in getting assignments to some
countries
Potential re-entry problems in the home country
2. Balance Sheet Approach:
The Balance Sheet Approach to international compensation is a system designed to equalize
the purchasing power of employees at comparable position levels living abroad and in the
home country and to provide incentives to offset qualitative differences between assignment
locations. The balance sheet approach is widely used by international organizations to
determine the compensation package of the expatriates. The basic objective is the
maintenance of living standards of the home country plus financial inducement.
33. A. Goods and Services: Outlays incurred in the home country for food, personal care,
clothing, household furnishing, recreation, transportation, and medical care.
B. Housing: All major costs associated with housing in the host country.
C. Income Taxes: Parent country and host country income tax expenditures.
D. Reserve: Contribution to savings, payments for benefits, pension contributions,
investments, education expenses, social security taxes, etc.
The advantages of the Balance Sheet Approach are:
Equality between assignments and between expatriates of the same nationality.
Facilitates expatriate re-entry
Easy to communicate to the employees
The disadvantages of the Balance Sheet Approach are:
It can result in considerable disparities between the expatriates of different
nationalities and between expatriates and local nationals.
It can be quite complex to administer due to changing economic conditions, taxation
etc.
