Case Incident OB

Written by: Shahid Babar

CASE INCIDENT:

It’s Not Fair!

Few topics in the business press have grabbed more headlines recently than highly lucrative annual bonuses for top management. Critics bemoan the multimillion- dollar  compensation packages offered in the financial services industry in particular, following the dire consequences of the meltdown of this sector a few short years ago. How is executive executive compensa compensation tion determine determined d by compensa compensation tion committee committees s !ome research researchers ers suggest that principles from equity theory "making comparisons to referent others# might explain variations in executive pay. $o set set what is considered a %fair& level of pay for top executives, members of the board find out how much executives with similar levels of  expe experi rien ence ce in simi simila larr firm firmss "sim "simil ilar ar inpu inputs ts## are are bein being g paid paid and and atte attemp mptt to ad'u ad'ust st compensation "outcomes# to be equitable. (n other words, top executives in large oil firms are paid similarly to top executives in other large oil firms, top executives in small hospitals are paid similarly to top executives in other small hospitals. (n many cases, simply changing the referent others can change the salary range considered acceptable. )ccording to one view of 'ustice theory, this should be perceived as equitable, although executives may encourage boards to consider specific referent others who are especially well-paid. Critics of executive compensation change the debate by focusing on the ratio of executive compensation to that of the company*s lowest-paid employees. +esearcher Cary Cooper  notes, %(n business, it is important to reward success and not simply status.& Cooper   believes all employees should should share the company*s good fortune in profitable periods. He has recommended that C compensation be capped at / times the salary of the lowest  paid employee. (n fact, the average !01 2// C is paid 34 times what the lowest-paid laborer makes. $his is eight times more than the ratio from the 562/s, which might serve as another reference point for determining what is considered %fair.& %fair.&

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1. How does does the executive executive compensa compensation tion issue issue relate relate to equity equity theory? theory? Who do you think should be the comparative others in these equity judgments? How should we determine what is a “air! level o pay or a top executive?

"quity #heory mployees weigh what they put into a 'ob situation "input# against what they get from it "outcome#. $hey compare their input-outcome ratio with the inpu t-outcome ratio of relevant others.

$he executive compensation issue relates to the equity theory most of the times, as compensation calculation procedure in most of the organi7ations, o rgani7ations, especially 89Cs, is based on reference compensation from the market. $he compensation comparative procedure for equity 'udgement is based on the following: Company performance Company targets achievement Comparative compensation with in competitors Comparative compensation with other organi7ations of similar si7e;structure $o determine a fair level of pay for a top executive education, experience, previous organi7ational outcomes tied to the C*s performance should be considered. $. %an you think think o procedur procedural al justice implication implicationss related related to the ways ways pay policies policies or top executives have been instituted? &o these pay'making decisions ollow the procedural justice principles outlined in the chapter?

1rocedural 'ustice is defined as the perceived fairness of the process used to determine the utcome.
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(. &o you think the the government government has has a legitimate legitimate role in contro controlling lling executive executive compensation? How might we use distributive and procedural justice theories to inorm this debate?

overnment has a legitimate role in controlling executives* compensation by regulatory authorities for different organi7ation types. (t should follow the procedural 'ustice: •

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$he increment percentages sets should have minimum and maximum level as per standards. !imilarly perks and bonus slabs are well defined. 1erformance based slabs should be defined. )ll organi7ation follow same standards )ny exception should be re-visited by regulatory authority for executives

). *re there there any any positive positive motivational motivational conseque consequences nces o tying compensatio compensation n pay closely to irm perormance?


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(ndividually: yearly increment and bonus links with yearly goa l achievement of an individual. $hroughout the year individuals strive to archive self-goals and hence it leads to individual motivations  $eam:  $eam: !imilar to individual, goals of a department are linked to company goals and tied with appraisal process CF$: 9ew concept of tying multiple cross functional team with same goals and additional bonus to achieve maximum performance with motivated teams "like Collaborative for =usiness and perations 8anagement#

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