Although Vroom's expectancy theory and its later application to the workplace by Lawler have significant implications for the development of compensation plans with incentive value, they do not consider at least two critical components of incentive plan design: individuals' initial commitment to their goals and the relative value of rewards individuals receive for accomplishing their goals. This article integrates expectancy theory, goal theory, and equity theory into a comprehensive framework for the effective design of compensation plans with incentive value.
Recently, some compensation and benefits experts have been witnessing a renewed interest in good old-fashioned base pay as an important part of a pay mix that includes base, bonus and options. The trend is clear among executives in high-tech companies in general and high-tech start-ups in particular. The change in the compensation mix in the high-tech sector is so subtle that it has gone unnoticed by many. The implications of the change, however, are not so subtle. This article addresses the implications for entrepreneurs who invested in high-tech start-ups for quick profits from IPOs, technology stock shareholders, compensation professionals charged with developing pay plans that promote technology companies’ business objectives, and employees who hold stock options.
The point factor method of job evaluation is one of the most popular and enduring approaches to linking the market and internal value of jobs. Statistically, regression analysis is used to create a market line that allows the organization to predict the market value of its jobs using point scores that define the jobs’ internal values. While attention is given to the fact that the market line represents the statistically “best” option for predicting these market rates, overlooked is the fact that these predictions almost always differ from the jobs’ actual market rates. This article explores the impact of this prediction error in compensation planning. It uses data on 41 jobs to define a market line using simple regression and identify the errors associated with the line’s predicted market values. It provides methods for precisely defining the extent of this prediction error and for minimizing it. It also discusses the impact of this error on the interpretation of salary grades, and the need for policy on key compensation planning issues to minimize the negative impact of prediction error.
or many organizations during the bull market of the 1990s, attracting, retaining and motivating highly qualified employees was a matter of offering them sufficiently large stock grants, option grants and/or bonuses. Often despite their profitability, growth in the market capitalization of these organizations ensured a growth in the market value of their stock and, at the same time, ensured employees that their options would remain "in the money." So long as profitability was not a major concern, it was also relatively easy for these organizations to generate yearover-year revenue growth. Under these conditions, it was difficult for employees not to get excited about the payout potential of their incentive compensation plans.Such is no longer the case. On December 21, 2001, the Dow Jones Industrial Average was down more than 5% for the year, the S&P 500 was down more than 12% for the year and the Nasdaq Composite was down more than 22% for the year. The economy is now officially in recession, and it is difficult to predict what economic conditions will look like in 2002. Although there is a growing consensus that 2002 will be kinder to investors than 2001, stock strategists warn that investors' growing risk aversion will limit stock gains in 2002.For both the employees participating in incentive compensation plans and the employers who are sponsoring such plans, these deteriorating economic conditions have encouraged a more sober view of incentive compensation. With yearover-year revenue and profit growth no longer a foregone conclusion, employers are increasingly concerned about encouraging their employees to accomplish goals that will not have a clear, positive impact on business. And with incentive payouts harder to come by, employees are increasingly concerned about three potential problems:• being held accountable for goals they cannot attain,• opportunities for rewards that are not commensurate with the compensation risk they are being asked to take and • managers who are not going to provide the support necessary for them to optimize the opportunities for goal attainment and rewards.As a result of such concerns, there is a renewed interest in the fundamentals of effective incentive compensation. Most notably, there is a renewed interest in the importance of both plan design and managerial support to incentive compensation. These issues are discussed below.
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