They Make How Much!? Why History Matters with CEO Pay
Topic: Leadership, Compensation
Publication: Academy of Management Journal
Article: Do CEOs Encounter Within-Tenure Settling Up? A Multiperiod Perspective on Executive Pay and Dismissal
Authors: Wowak, A.J., Hambrick, D.C., & Henderson, A.D.
Reviewer: Neil Morelli
Past studies have found a significant yet modest relationship between CEO pay and performance. In an effort to challenge this finding, Wowak, Hambrick, and Henderson tested whether a multiperiod “settling up” view should be taken when defining the pay to performance relationship, rather than the more common cross-sectional snapshot. According to the authors, settling up is when executive boards dynamically adjust current pay according to historical performance.
Wowak et al. specifically examined firm performance (based on total shareholder return and return on equity), annual pay revision, and a binary dismissal variable for 590 CEOs who had served at least four years and led companies valued at least $10 million. Their analyses showed that boards do consider past track records of performance and pay history in determining current pay, as opposed to only considering current performance. Also, the level of over(under)payment preceding a given year was negatively related to the current year’s pay revision.
In response to researchers, and occasionally the public, scratching their collective heads about the functions of CEO pay, Wowak et al. offer a new perspective. Apparently, it isn’t just the present, but also the past that helps determine the rewards and punishments of CEO performance.
Wowak, A.J., Hambrick, D.C., & Henderson, A.D. (2011). Do CEOs encounter within- tenure settling up? A multiperiod perspective on executive pay and dismissal. Academy of Management Journal, 54(4), 719-739.
When Turnover Strikes: The (Possible) Cost of Pay Dispersion
Topic: Compensation, Turnover
Publication: Journal of Applied Psychology (MAY 2011)
Article: Executive turnover: The influence of dispersion and other pay system characteristics
Authors: J. G. Messersmith, J. P. Guthrie, Y.-Y. Ji, & J.-Y. Lee
Reviewed By: Thaddeus Rada
It is probably not much of an exaggeration to say that being paid a fair wage or salary is one of the highest priorities of all employees in any organization. Therefore, it is not surprising that compensation is one of many factors in the workplace that can have an impact on employee turnover decisions. The current study, by Messersmith and colleagues, addresses how turnover at the highest level of an organization (the top management team, or TMT) might be impacted by pay dispersion (the size of the pay differences between different employees in the TMT).
Messersmith and colleagues used tournament theory as a guiding framework for their study. Tournament theory views organizations as competitive playing fields in which the goal of the “players” (the employees) is to move up in the organization in order to reap greater financial benefits. Among their hypotheses, the authors suggested that TMTs with greater pay dispersion (that is, larger pay differences between TMT members) would be more likely to experience turnover than organizations with less pay dispersion.
If You Want to Prevent Exhaustion … Don’t Worry, Be Happy!
Topic: Stress, Burnout, Performance, Fairness, Compensation
Publication: Journal of Organizational Behavior
Article: Emotional exhaustion and job performance: The moderating role of distributive justice and positive affect (AUG 2010)
Author: O. Janssen, C. K. Lam, & X. Huang
Reviewed by: Sarah Teague
Sometimes work is just exhausting; emotionally exhausting to be specific. Emotional exhaustion (EE) refers to feeling overwhelmed or drained at work. Not surprisingly, recent research has linked EE to decrements in performance through the Conservation of Resources (COR) theory. COR theory suggests that EE impairs performance because employees feel that they do not have the adequate resources to meet the current job demands, but is this always the case? When an employee begins to feel depleted, do they automatically attribute it to lack of personal resources? The authors of the current article suggest not.
The current study used COR and justice attributions (i.e. internal vs. external explanation for an event) to further explain how emotional exhaustion impacts job performance. Specifically, the authors proposed that emotional exhaustion will have a greater negative impact on performance when perceived distributive justice (DJ; adequate compensation for effort expended) is high. They reason that when DJ is high, employees attribute their depletion to personal inadequacies (internal) rather than poor compensation (external).
What do Job Ads Say About Your Organizational Culture?
Topic: Compensation, Culture, Motivation, Rewards, Organizational Reputation
Publication: The International Journal of Human Resource Management
Article: Compensation as a Signal of Organizational Culture: The Effects of Advertising Individual or Collective Incentives
Author: K. Kuhn
Reviewed By: Lit Digger
It is commonly assumed that compensation and rewards systems reflect the cultures of the organizations that implement them, but what type of message is being received by your organization’s job applicants?
Kristine Kuhn (2009) conducted an experimental study to investigate how job advertisements’ simple statements about an organization’s compensation structure would affect applicant perceptions of organizational culture. In the same article, Kuhn conducted an additional study to see how job advertisement differences in compensation structure statements would affect applicants when they were forced to choose one organization over another. (Yes, this article was two-for-one – jam-packed with researchy goodness!)
Kuhn found that applicants were more likely to perceive an organization’s culture as individualist when that organization’s compensation structure statement suggested that employees would be rewarded for individual performance or skill. In contrast, applicants were more likely to view an organization’s culture as collectivist when that organization included a compensation structure statement suggesting that employees would be rewarded with profit sharing across the company or from taking part in a high-performing team. This is a notable finding because, aside from commonly held assumptions, little empirical research exists on this topic.
Kuhn also noted that some job seekers may be more likely to be high on idiocentrism, meaning that they would view themselves as, in her words, “independent entit[ies]” such that personal achievements would naturally take precedence over group achievements. (For you curious cats, the alternative to this would be allocentrism, which involves viewing yourself in relationship to others and having a more interdependent worldview). Regarding this idea, Kuhn found that the relationship between idiocentrism and the applicant’s attraction to a company was affected by the applicant’s perceptions of the company’s culture in the following way:
· If I perceive the company’s culture to be highly individualistic, and the more idiocentric I am in my worldview, the more likely I am to be attracted to that company.
· On the other hand, if I perceive the culture as not very individualistic, and the less idiocentric I am in my worldview, the chances are greater that I will be attracted to that
So perceptions of organizational culture MATTER, especially when job applicants are forced to choose one organization over another (Sound like the real world to you? Sure does to me). And if perceptions of organizational culture are affected in part by the language used in job advertisements, editors beware! If you’re sending the wrong message to your job applicants, you’ve just missed your first (fairly inexpensive and easy) opportunity to give that potential newbie a realistic job preview, and you’re risking one more head on your end-of-the-year turnover count.
So think of this as an opportunity. Consider your organization’s compensation structure, the message it’s sending to your current employees, and the message that’s being received by your job applicants. If all of the above are in alignment with your organization’s values and intentions, proclaim away… and may the best applicant win.
Kuhn, K. (2009). Compensation as a signal of organizational culture: The effects of advertising individual or collective incentives. The International Journal of Human Resource Management, 20 (7), 1634-1648.
Quarter past nine, I’m late again!
Topic: Compensation, Motivation, Rewards, Strategic HR
Publication: Research and Practice in Human Resource Management
Article: A Mathematical Model to Monitor Late Arrivals at Work.
Author: S.A. Oke, T.M. Ezenachkwu
Featured by: Sarah Bowen
In their recent article, Oke and Ezenachukwu embark on an ambitious journey to prove that timeliness is improved through rewards and recognition in the workplace. The authors conduct their research in a beer and soft drink production company to test their model and assumptions. Educational commitments, monotony of work, and poor welfare provisions were three key reasons workers gave as reasons for their tardiness.
The researchers proposed that work tardiness issues can be resolved through the use of rewards to employees who arrive early to work. In order to alleviate lateness, the company implemented a computer system to supervise the arrival and departure times of workers and calculate the additional compensation for arriving early. Adjusting for a variety of commuting differences, the results showed that most workers will arrive early to work when additionally compensated for their timeliness.
Maintaining proper records of employees’ daily arrival and departure times, informing employees about the program’s benefits, and giving feedback to employees and managers contributed to the effectiveness of this approach.
Electronic displays installed as part of this program served as reminders to employees about their responsibilities to the company and aided in motivating workers to achieve a better work culture. In addition to directly affecting the bottom line, on-time arrival impacts the culture of the organization: when workers arrive on time, a company acquires a more positive image and employees become more confident in management.
Who is holding the glass ceiling in place?
Topic: Compensation, Organizational Justice, Motivation, Rewards
Publication: Journal of Human ResourcesArticle: Who is holding the glass
ceiling in place?
Author: N. Fortin
Featured by: Benjamin Granger
Many 21st century women still earn less than their male counterparts. However, this injustice may not be due fully to chauvinists and stereotypes. In her article, The Gender Wage Gap among Young Adults in the United States: The Importance of Money versus People , Nicole Fortin investigates influences that women themselves exhibit which may contribute to their smaller paychecks. As women more often choose to volunteer with organizations that are altruistic in nature, and tend to place more importance on workplace success rather than rolling in the dough, it is easy to follow Fortin’s argument that such noncognitive factors inevitably influence the gender wage gap.
Using data from the National Longitudinal Study of the High School Class of 1972 and the National Educational Longitudinal Study of 1988/94, Fortin explores the possible impacts on the gender pay gap by examining four noncognitive functions:
· The importance of money and work
· The importance of people and family
· Locus of control (the extent to which a person feels they- rather than their environment have control over their own success).
In addition to human capital and cognitive factors, Fortin argues that these noncognitive qualities significantly influence the discrepancy in wages among men and women.
Fortin finds that lower locus of control and higher importance of people and family tend to widen the gender wage gap, while higher self-esteem and importance of money and work tend to lead to more equitable wages for workers in their early thirties. Although the research shows that the differences due to these noncognitive factors are largely insignificant over time, the importance of work and money should not be overlooked, as it plays the largest role of the four noncognitive factors.
Fortin, N. (2008, Fall2008). The Gender Wage Gap among Young Adults in the United States. Journal of Human Resources, 43(4), 884-918. Retrieved March 14, 2009, from Advanced Placement Source database.
Who Wouldn’t Take the Money and Run?
Topic: Compensation, Culture, Organizational Commitment
Article: When do committed employees retire? The effects of organizational commitment on retirement plans under a defined benefit pension plan.
Publication: Human Resource Management
Blogger: Benjamin Granger
Organizations commonly use defined-benefit pension plans in an effort to attract and retain good
employees. After all, turnover is expensive! These plans usually allow employees to accrue retirement income security which should encourage employee retention. However, the monetary values of such plans diminish greatly once employees pass the optimal age for retirement. But do employees just care about the money? (Yes, if they live in California and drive a Hummer. Yikes!).
Although many employees plan their retirement around the optimal point to maximize their retirement
benefits, others stay with the organization and see the monetary value of their retirement benefits drop substantially. So who are these crazy people?
Luchak, Pohler, and Gellatly (2008) investigated the role that organizational commitment plays when
considering the age that employees plan to retire. By definition, employees that are highly committed to their organization are less likely to quit. But, are highly committed employees also willing to stay in the face of the depreciation of their pension plans?
The results of Luchak et al.’s study suggest that it depends on the type of commitment you consider. That is, employees can be committed to their organizations for different reasons. The authors studied two important commitment types: affective commitment and continuance commitment. Employees high in affective commitment feel emotionally connected to the organizations while those high in continuance commitment stay with the organization because they will incur unfavorable losses if they leave. Clearly, these
commitments are very different. Affectively committed employees want to stay because they connect with the organization, but employees high in continuance commitment stay because they basically have to.
Luchak and colleagues found that employees high in affective commitment do indeed plan to remain with their organizations past the optimal retirement age. Thus, it appears that to these employees, the emotional connection they have with their organization is more important than money. Interestingly though, compared to employees with very high and low levels of continuance commitment, those with moderate levels of continuance commitment were the most likely to plan their retirement at the optimal age. But what if we consider both types of commitment simultaneously? Employees who are high in affective and low in continuance commitment were the most likely to plan their retirement long after the optimal age, while those low in affective and high in continuance commitment were most likely
to plan retirement near the optimal age.
Luchak et al’s findings are interesting because they suggest that employees who are emotionally connected to their organization (i.e., high affective commitment) are likely to remain with the organization past the age that would benefit them the most by retiring. So it seems that to some employees (minus the Hummer drivers of course) it’s not just about the bucks!
Luchak, A. A., Pohler, D. M., & Gellatly, I. R. (2008). When do committed employees retire? The effects of organizational commitment on retirement plans under a defined-benefit pension plan. Human Resource Management, 47(3), 581-599.
Pay-for-performance: Helping those that help themselves?
Long gone are the days when Mom and Dad would offer a few bucks for an “A” on your report card to buy some candy from the grocery store. Now, the schools are starting to provide the incentives—and they aren’t just offering up bubble gum and lollipops.
A recent article from The Wall Street Journal (August 21, 2008) reported that a number of schools around the country are implementing new pay-for-performance (PFP) systems as means of encouraging high school students to enroll and pass Advanced Placement (AP) courses. The performance rewards (in some cases, upwards of$1000) are given to the top performing students on the various AP exams. With a great sigh of relief from its investors, longitudinal analyses of the PFP systems have shown mostly positive results—higher enrollment in AP classes, higher test scores and more graduating seniors moving on to college (whew).
But should schools (and other organizations, for that matter) be wary of the PFP reform? Research from organizational psychology, management and education indicates that although PFP is generally linked to higher overall performance and satisfaction across a variety of domains, there are a number of consequences that should be carefully considered before they are used (Rynes, Gerhart, & Parks, 2005, provide an excellent review of the issues associated with PFP systems).
For example, there is evidence to suggest that PFP is more attractive to individuals’ with greater need for achievement and self-efficacy, which are often related to characteristics such as education level and even gender or race in many work domains. Thus PFP systems have the potential to create discriminative compensation practices or entirely homogenous workforces if not carefully monitored. Furthermore, in jobs/tasks where units of performance are not clearly established (i.e., subjective supervisor ratings, etc.), the benefits of PFP are often difficult to determine and may actually be detrimental.
Time will tell if PFP catches on in our nation’s schools—in the meantime, I suppose a bag of M&M’s never hurt anybody.