Compensation Strategies that Successfully Align Employee and Shareholder Objectives
Employee compensation covers qualified plans and deferred compensation by covering all types of compensation including salary, bonuses, fringe benefits, qualified deferred compensation and unqualified deferred compensation (Landskroner, 2001). A solid compensation plan creates a beneficial relationship for both the employee and the employer, can expand and contract depending on economic solutions and should focus on increasing profit. The right employee compensation plan keeps your employees to do their best for the company; thus, firms should realize the role of the pay check in attracting employee motivation.
The publicly listed companies from the USA that will be used for this case are The Coca-Cola Company (the “Company”) and Citigroup Inc. Both companies have employee compensation plans that will help to illustrate how employee compensation plans are created to ensure employee and share holder objectives are well aligned. The Coca-Cola Company (the “Company”) is the world’s largest beverage company. Citigroup Inc is a global financial services holding company whose businesses provide financial services. It operates in two segments Citicorp and Citi Holdings.
The Coca-Cola Company’s compensation program is designed to reward employees for attaining good results that are consistent with the company’s 2020 vision to attract and retain excellent talent and to align compensation with the long-term interests of our shareowners. The company believes that as an employee’s level of responsibility increases so does the productivity of the employee and thus their compensation scheme ties pay to performance. The objectives of Citigroup Inc employee compensation program is to attract and retain good executives, motivate and reward executives by linking compensation to performance, align interests of management with those of stake holders and deliver compensation with values competitive to financial services market. The Coca-Cola Company (the “Company”) pays the base pay to attract talented executives and provide a fixed base of cash compensation. The compensation committee based on the role of the executive, ensuring fairness, current compensation and an individual’s performance, individually determines the base salaries for these company executive. Citigroup Inc has a range of base salaries with a company policy limiting the amount of annual salary for members of the management executive committee.
The benefits that a company offers its employees are another important element of a good employee compensation plan. The Coca-Cola Company (the “Company”) awards benefits equally to all employees. The benefits are meant to shield employees against financial setbacks that may be experienced due to illness, disability or death, and providing a retirement package based on the years of service to the company. Other than these benefits, the company provides the following rewards to its employees to enable them to work efficiently and concentrate on their jobs; air craft usage, car and driver, security, financial and tax planning and international service program. Citigroup Inc offers benefits like health and insurance plans and a basic broad based tax qualified benefits plan to help employees save for retirement (Citigroup DEF 14A 2009, 2009).
The Coca-Cola Company (the “Company”) pays incentives to motivate better performance to achieve good company results and honor individuals for their role in the success. The incentives are determined by the company’s Performance Incentive Plan. Citigroup Inc offers incentives in terms of cash rewards, deferred cash retention awards, and performance vesting equity awards to motivate employees to achieve certain set goals.
We now consider how these companies make their employee compensation decisions and who makes these decisions. The Coca-Cola Company (the “Company”) makes decisions based on risk assessment. The decision making process involves the compensation committee making proposals on the base salary and long term equity compensation for the employees, then discussing these proposal with the company’s board of directors, and then the compensation committee approves what was discussed. Citigroup Inc compensation decisions are made by the compensation committee through evaluating performance to determine compensation. The compensation committee also reviews the design and structure of the company’s compensation program to ensure that employees’ interests are aligned with those of the stakeholders and with the company’s strategic priorities (Madura, 2006).
The companies also offer reimbursements in terms of stocks to their employees. The Coca-Cola Company (the “Company”) offers stock options and performance share units. These two offers are meant to motivate employees to work harder in order to increase the stock price. Citigroup Inc offers stock ownership but employees will receive their income based on the price of the company’s stock. If it is low indicating a reduction of dividends for shareholders, then they receive a lower salary and if it’s high indicating an increase in dividends, they get a higher salary. This is a perfect example illustrating how a company should align employee and shareholder objectives since a reduction in dividends also signifies a reduction in employee’s wages. Such a move is aimed at making employees motivated to improve their performance to avoid losing out on the benefits.
Based on the above explanations we can come now come up with strategies that are necessary to develop an employee compensation plan that will successfully align employee and shareholder objectives. To come up with a solid employee compensation plan that ensures that the company gets the best out of its employees to improve its stock prices due to motivating their performance a company has to consider the following factors.
The purpose of the organization’s employee compensation plan as illustrated above is to motivate employees to achieve better results for the company and to attract and retain highly qualified staff. Most employees will consider the benefits a job offer before taking up employment and it is thus important to consider the intentions of the compensation plan. Factors to consider are whether the employee compensation plan is intended to reward employees for better performance, motivate them for their good performance or to reinforce certain company objectives (Notice of 2012 annual meeting of shareowners and proxy statement, 2012).
How decisions regarding pay or compensation will be made. This involves the process to be used to arrive at decisions that will determine the amount of compensation an employee will receive and who will be involved in making these decisions. As illustrated above, the compensation committee should be charged with the mandate to evaluate and recommend the amount of compensation an employee should be entitled to through analyzing their individual performance. The committee should also consult with the company’s board to receive recommendations according to an employee’s performance to ensure equity is observed while awarding compensation. Through this system of making decisions based on merit of an employee, performance of the employees as a collective unit will be realized since no one would want to receive a compensation package different from the rest.
What does the company pay for? A company will pay employees to ensure it retains the best of its staff and to motivate employees to boost their performance. Through achieving these goals, the overall achievement of the company will be evident through posting better results that will also translate to an increase in the company’s stock prices, meaning that stake holders will enjoy better dividends. A company may also pay according to seniority, since executives and junior employees should not receive equal amounts of compensation based on their roles in the company. Thus, a good employee compensation plan will emphasize on paying for delivery of quality performance.
In addition to the aforementioned strategies, there are basic elements of employee compensation that have been addressed when coming up with the employee compensation plans for the above companies. They include base pay, financial incentives, use of perks, benefits, and ensuring the system is fair to both the management and the employee. We are now going to look at why each of these elements has been applied in these companies’ compensation schemes.
Base pay represents what the organization pays its employees to perform above average. The base pay allows a company to pay for good performance oriented results, which is the major factor for creating the employees compensation scheme. Financial incentives seek to honor an employee’s contribution towards achieving certain company results. Perks are intended to satisfy employees so that they cannot be distracted from the main goal of making the company achieve better results. Benefits that employees will receive from a company will help them lead better lives; thus, providing these attractive benefits in your employee compensation plan will ensure that you attract the best staff and retain your current qualified employees. To ensure there is equality, certain decisions involving compensation packages should be made based on merit of performance rather than according to the different roles employees play in a company. This equity will ensure that everyone recognizes the part they have to play to prove their contribution to the company’s success.
Companies need to be competitive in salary and wage levels to ensure that they get the best employees. Having many qualified employees in a company reflects a good working environment that is conducive for employees to perform their best for the company. This will thus improve a company’s stock prices indicating good dividends for the shareholders of the company. It is thus clear that a good employee compensation plan will ultimately align employee and shareholder objectives through motivating for performance.