THE COMPENSATION HANDBOOK F I F T H E D I T I O N A STATE-OF-THE-ART GUIDE TO COMPENSATION STRATEGY AND DESIGN LANCE A. BERGER and DOROTHY R. BERGER New York San Francisco Washington, D.C. Auckland Bogotá Caracas Lisbon London Madrid Mexico City Milan Montreal New Delhi San Juan Singapore Sydney Tokyo Toronto Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved. Manufactured in the United States of America. Except as permitted under the United States Copyright Act of 1976, no part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written permission of the publisher. 0-07-164287-0 The material in this eBook also appears in the print version of this title: 0-07-149675-0. All trademarks are trademarks of their respective owners. Rather than put a trademark symbol after every occurrence of a trade- marked name, we use names in an editorial fashion only, and to the benefit of the trademark owner, with no intention of infringe- ment of the trademark. Where such designations appear in this book, they have been printed with initial caps. McGraw-Hill eBooks are available at special quantity discounts to use as premiums and sales promotions, or for use in corporate training programs. For more information, please contact George Hoare, Special Sales, at Professional Want to learn more? We hope you enjoy this McGraw-Hill eBook! If you’d like more information about this book, its author, or related books and websites, please click here. For more information about this title, click here Contents Preface vii About the Editors ix Contributors xi Part 1 Introduction 1 Employee Pay: A Riddle Wrapped in a Mystery Inside an Enigma 3 Lance A. Berger 2 Total Rewards and the Future Workforce 11 Steven E. Gross and Shelley Peterson 3 Total Rewards Strategy 21 Thomas B. Wilson 4 Three Trends Shaping the Future of Compensation and Human Resources 31 Allan Schweyer 5 Demographics: The Tempest Driving Compensation 49 Dorothy R. Berger Part 2 Base Salary 6 Salary Administration 63 Andrew S. Rosen 7 Merit Pay 85 Myrna Hellerman and James Kochanski 8 Job Analysis, Documentation, and Job Evaluation 95 Bernard Ingster, Ph.D. 9 Salary Surveys 111 Don York and Tim Brown iii iv CONTENTS 10 Benchmarking 125 Iain Fitzpatrick and Thomas D. McMullen 11 Skills, Knowledge, and Competency-Based Pay 143 Gerald E. Ledford, Jr, Ph.D., Robert L. Heneman, Ph.D. and Aino Salimäki 12 Broadbanding 159 Kenan S. Abosch 13 Nonmonetary Awards 167 Rodger D. Stotz and Melissa Van Dyke 14 Salary Administration at a Prestigious Cultural Institution: Pennsylvania Academy of the Fine Arts 187 Leslie Moody 15 Compensation Practices in a Middle Market Company 191 David E. Griffith 16 A Vision for Information Technology in Compensation 197 Steven T. McGuire Part 3 Variable Compensation 17 Incentive Compensation Program Design 205 Linda E. Amuso and David Knopping 18 Using Variable Pay Programs to Support Organization Goals 215 Erin C. Packwood 19 Rationalizing Variable Pay Plans 227 Kenan S. Abosch 20 Sales Compensation 239 Jerome A. Colletti and Mary S. Fiss 21 Team-Based Incentives 259 Theresa M. Welbourne, Ph.D. and Luis R. Gomez-Mejia, Ph.D. 22 Gainsharing or Profit Sharing 277 Robert L. Masternak 23 Scanlon Gainsharing 295 Paul Davis and Dow Scott, Ph.D. Part 4 Executive Compensation 24 Executive Compensation Strategy 311 Ted Buyniski and Marvin A. Mazer 25 Long-Term Incentives 323 Jeffrey S. Hyman, Esq. CONTENTS v 26 Executive Compensation: A Recruiter’s Recommendations 339 Randy Jayne 27 Executive Compensation: An Academic’s Perspective 349 Johannes M. Pennings, Ph.D. 28 Regulation of Executive Compensation 365 Frank P. VanderPloeg, Esq. 29 Executive Employment Agreements 385 Richard L. Alpern Part 5 Compensation and the Board 30 The Compensation Committee and Executive Pay 397 Seymour Burchman and Blair Jones 31 New Dynamics of CEO Pay 415 David N. Swinford 32 Board Compensation 423 Pearl Meyer and Nora McCord 33 Board Critical Issues in Executive Pay 433 Bruce R. Ellig Part 6 Performance and Compensation 34 Performance Management Best Practices 447 Thomas B. Wilson and Susan Malanowski 35 Guidelines for Effective Executive Performance Appraisals 459 James F. Reda 36 Forced Ranking 479 Dick Grote 37 The Balanced Scorecard and Compensation 493 Paul R. Niven 38 Performance Metrics and Compensation 511 Mark Graham Brown 39 Using Compensation to Drive Workforce Productivity 521 Christian M. Ellis and Summer F. Barnes 40 Return on Investment of Compensation Expenditures 531 Fred Whittlesey 41 Pay-for-Performance: New Developments and Issues 543 Mark D. Cannon, Ph.D. vi CONTENTS Part 7 Talent Management and Compensation 42 Using Compensation to Win the Talent Wars 559 Deborah Rees 43 Talent Management, Organization Transformation, and Compensation 571 Lance A. Berger 44 Work–Life Effectiveness and Total Rewards Strategy 585 Kathleen M. Lingle 45 Compensating and Motivating a Diverse Workforce 597 Martin G. Wolf, Ph.D. 46 Communicating Compensation Programs 607 John A. Rubino 47 Talent Management and Compensation in the Fast Food Industry 617 Jerry M. Newman Part 8 Global Compensation 48 Expatriate Compensation Practices 627 Geoffrey W. Latta 49 Global Local National Compensation Practices 641 Paul Coleman 50 Global Compensation Processes 653 Robert Mattson and David Turetsky Index 665 Preface HE COMPENSATION HANDBOOK HAS BEEN recognized as the most authoritative reference book in the compensation field for over 35 years. T The book’s success has resulted from: ■ Identifying the most significant issues impacting compensation and human resources practitioners ■ Providing the best straightforward, comprehensive, and understandable solutions to deal with issues ■ Presenting the thoughts and research of respected and prestigious compensa- tion leaders ■ Offering unique and innovative approaches not found elsewhere ■ Building on the strong foundation of past editions ■ Imparting the best historical and current compensation tools, methods, and diagnostics for compensation and human resources professionals to align their programs with key issues Each edition of the book has its own novel foundation. The first three editions focused on the evolution of new compensation techniques and methodologies as they applied to the business and social environment of their eras. The fourth edition is based on a framework of compensation diagnostics. It structures prior and cur- rent approaches into a cohesive set of guiding principles that helps practitioners to select the most appropriate compensation methodology. vii Copyright © 2008 by The McGraw-Hill Companies, Inc. Click here for terms of use. viii PREFACE The fifth edition’s objective is to demonstrate to human resources and com- pensation professionals how they can address a dramatically changing set of human capital issues. These include: ■ New strategies for winning the talent wars ■ Addressing the retirement of the baby boomers, the greatest talent manage- ment issue of the twenty-first century ■ Responding to a multicultural, multigenerational workforce ■ The globalization of human capital Thanks to the contributions of 64 compensation specialists, 45 of whom are new authors to The Compensation Handbook, this edition contains new, updated, or revised chapters. This “linkage” to talent management issues provides com- mon threads and a roadmap for developing a comprehensive approach to com- pensation program design and implementation. The fourth edition’s structural integrity is maintained because our readers have expressed their appreciation of consistency when seeking updated information and solutions to compensation issues. We again, as we did for the fourth edition, dedicate this book with apprecia- tion and affection to Milton L. Rock, consummate compensation and business guru, whose vision spearheaded the first through third editions of The Compensation Handbook. Dorothy R. Berger Lance A. Berger