Introduction

In current business scenario, organizations are using attractive compensation policies and programs in order to attract, retain and motivate employees. Companies develop compensation philosophy, in which they set some principles that further assist the management in compensation administration. Through compensation philosophy, companies define values and beliefs that they have regarding the compensation and benefits payable to employees. At &T has also a compensation philosophy, which provides a strong link between achievement of overall company’s objectives and an executive’s total earnings opportunity.

Use of competitive compensation opportunities, performance based payments and significant portion of the total compensation opportunity should be equity-based are some core principles of company’s compensation philosophy (Board Compensation Committee Report on Executive Compensation). Beside this, the company is facing some challenges with its compensation and benefit system. This paper analyzes other organizations, which had faced the same situation, but at the same time used effective strategies in order to address the issue. Moreover, it also includes theories and strategies that should be contemplated to address the situation. In addition, it also explains some recommendations to management at AT&T so that they can make effective strategies, policies and programs to resolve the compensation issue.

A Review of other Organizations

At AT&T, the executive compensation is increasing regularly as compared to compensation that is received by other employees in the organization. The company provides more benefits and incentives to its executives in comparison of other employees. According to Wilson (2004), Allied Signal, AT&T, Wells Fargo, IBM, General Electric, Sears and Corning are some companies, which was not successful with their transformation efforts without the strategic use of rewards. At the same time, there are other companies such as Starbucks, Southwest Airlines, Federal Express, Microsoft, Home Depot, Cisco Systems and Saturn, which had achieved business growth, market leadership and financial success with the creation of an effective reward system to create competitive advantages.

Some big companies such as GE and Pfizer are also faced this situation. In order to resolve this situation, these companies are following some best practices (Wilson, 2004). For example, they link executive compensation to the achievement of strategic objectives. At the same time, they also disclosed information about executive compensation. These companies disclose information above and beyond SEC requirements in regard to their compensation consultant services. They disclose information regarding this issue in their proxy statements. Such information include names of compensation consultants, what they are engaged for, other work done for the company and service fees and the responsibility of the company’s compensation committee to engage. All these help companies to resolve different compensation issues within the organization in an effective manner.

Wal-Mart has also faced several issues regarding its compensation and benefit system. It was criticized that the world’s biggest discount retail giant offers skimpy wages and benefits to employees. In the year 2007, the company disclosed for the first time its annual contributions to profit sharing program, workers’ retirement accounts, and stock purchase plan (Barbaro, 2007). This disclosure helps in identifying the compensation method used by Wal-Mart to make payment its people. Along with this, it was also beneficial for the company to resolve several compensation issues.

In addition, some organizations also faced some degree of employee anger and frustration due to issue of executive compensation. These organizations design the compensation structure in such a manner, in which compensation of executive has been increased, but at the same time benefits and compensation for employee have been decreased. It resulted in increased employee turnover rate, decreased productivity and other organizational conflicts. At the same time, most of global companies offered a large part of their stock options to CEOs, and then high-compensated executives and only a few percentages to all other employees. This policy caused to several compensation issues for these organizations.

In contrary to this, in order to avoid this issue, Whole Foods offered 85% of its stock options to non-executives (O’Toole and Lawler, 2007). The main of the company behind using this approach is to control executive pay practice. Concurrently, it also helped the company to push up the salaries of productive workers, who add value to the company. Use of this approach helped the company to address the situation that is faced by AT&T.

This same situation is also faced by Google, Procter & Gamble and Apple. In order to resolve executive compensation issue, these companies used a different approach. These companies offered stock options, bonuses, incentives and other benefits to all of its employees rather than providing these benefits to only a few executives. This approach also helped the company to reduce their tax expenses. It is because under US Tax Code, companies are allowed to deduct any amount as a cost of business, if it is paid as an incentive compensation to all of its employees (Wadhwa, 2011). Therefore, if other companies will also follow this approach, it will be helpful for them in order to make their businesses more productive while benefiting workers.

Theories and Strategies related to Compensation and Benefit System

Equity theory of compensation can be used by managers at AT&T in order to resolve the situation. This theory suggests that people in the organization wants to maintain fair relationship between their performance and reward as compared to others. There are two main assumptions of this theory, first, employee make contributions, for which they expect certain rewards like pay, promotion, reorganization and other benefits (Gerhart & Rynes, 2003). Secondly, individuals decide whether a particular exchange is satisfactory or not in comparison of others. If employees perceive inequity, they take necessary actions to restore equity that sometime not beneficial for organization’s point of view.

This theory can be used by AT&T to resolve the issue regarding executive compensation. Several board members and substantial shareholders at AT&T have expressed their concerns in relation to overwhelming benefits that are offered by the company to its executives. By implementing this theory, managers at AT&T can address the issue and can contribute to develop a better compensation and benefit system (Chingos, 2002).  Along with this theory, there are different compensation strategies that can also be used by the company in order to resolve the situation. Under this, the company can use following three compensation strategies in order to build an effective compensation and benefit system. These strategies are as follow:

Pay for Position: In this strategy, compensation is fixed and paid according to grade structure and level attached with the job. In addition, pay rates are also dependent on different factors such as on the level in the hierarchy, job nature, experience qualifications, skills and abilities. Further, employees are paid as per their placement in the relevant position (Flannery, Hofrichter & Platten, 2002). Use of this strategy will be beneficial for the company to address the compensation issue. It is because managers at AT&T can consider this strategy in the company’s compensation philosophy. Further, it will be helpful for the company to resolve compensation issue.

Pay for Person: In contrast to above pay for position strategy, in this strategy compensation is offered to an individual for his job related skills, knowledge and experience by keeping in view the current organization’s compensation structure in order to prevent any disequilibrium with existing employees and current market rate (Gerhart & Rynes, 2003). By using this strategy, the company will pay for the person’s skills more than his performance. Thus, the compensation is based on what the employee is capable of doing instead of his/her actual performance.

Pay for Performance: It is most effective compensation strategy, as it helps organizations to develop a productive, efficient and effective business culture that enhances employee motivation and performance. In this strategy, employees are expected to be performing well and are rewarded based on the outcome of their work (Flannery, Hofrichter & Platten, 2002). The company can also include this strategy in its compensation philosophy by making a principle that all compensation will be based on performance. Use of this strategy over others will be beneficial for AT&T, as it has positive impact on the productivity.

AT&T is using this strategy as a principle under the organizational executive compensation philosophy. The company can also use this strategy for other people worked at AT&T. In order to make this strategy more effective, company can introduce other plans such as employee profit sharing, performance goals and discretionary bonuses.

Recommendations

Following are some suggestions that can be used by the company in order to address or resolve the compensation issue.

 Development of Compensation Team Professionals:

Most of time, compensation policies of two organizations are different form each-other and it is the reason that after merger of such companies, compensation become a challenge for the merged organization. This challenge was also faced by the AT&T, when it was purchased by Bell. In order to address this problem in future, the company should build a team of compensation professionals. The main role of this team will be to completely examine the compensation policies including general salary structure, executives and board of director compensation system, incentives and benefits, job titles and performance evaluations of two firms (Graham, Roth & Dugan, 2008).

This analysis will be helpful for the team in order to determine some guiding principles that further can be used in order to design an effective compensation philosophy. The resulted compensation program will be helpful to resolve different compensation issues for both the organizations.

Proper Disclosure of Executive Compensation:

In order to address the situation, the company should disclose executive compensation in an adequate manner. Board at AT&T should be responsible for understanding the concerns of investors and the public about outsized executive compensation. It should develop reasonable executive compensation plans that linked to performance and aligned with interest of investors. It is also necessary that board get shareholder approval on these plans in order to avoid any conflict situation (Rezaee, 2007). In addition, AT&T should also disclose executive compensation according to SEC rules. Following are four types of executive compensation disclosures that are required under SEC rules.

Discussion and analysis on compensation.

• A summary table on compensation, which disclose compensation relevant to the last three fiscal years.
• Disclosure of equity based awards including both stock and non-stock incentive plan awards (Rezaee, 2007).
• Disclosure of retirement and other post-employment compensation.

following SEC rules, company will be able to ensure its shareholders and other users of financial statements that they are receiving accurate, complete and transparent disclosures regarding company’s executive compensation and related issues. Further, it will also be beneficial for the company in order to develop an effective compensation and benefit system.

Proper Justification to Executive Compensation:

Most of companies, which provide higher executive compensation to their senior executives, argue that executives make the most significant contribution to the success of their organizations. Beside this, the company should justify the executive compensation in a more effective and efficient. The firm can link their performance to the achievement of different strategic objectives (Mercer, 2009). Concurrently, in comparison of giving more stock options to executives, the company can issue more stock options to employees. It will be helpful for the company in order to motivate employee’s productivity.

At the same time, as executives are getting high remuneration and other benefits from the company, if organizations will decrease their ratio in stock option, it will not adversely impact on their performance (Jensen, McMullen & Stark, 2007). In this way, the company should make all people within the organization understand about the pay differences among executives, board of directors, and other people. Concurrently, it should also provide legitimate reasons for the pay differences. All these will be supportive for the company in order to design an effective and efficient compensation and benefit system.

Compensation Consultants:

The company can also use compensation consultants in order to solve the problem of executive compensation as well as to develop an effective compensation and benefit system. In current business environment, most of companies are using outside consultants in order to provide input into the organizational executive compensation process (Bebchuk & Fried, 2003). These consultants help organizations to supply useful information regarding internal and external compensation data and strategies and contribute management to design an effective compensation package.

Consultants will be helpful for the company for justifying executive payment as well as to solve other compensation issues. For instance, at the time, when companies are performing well in the industry, consultants can argue that executives’ compensation should reflect the performance and should be higher than the industry average. On the other side, if the company is performing lower than the industry, consultants argue for CEO compensation not on performance data, but rather on peer group pay that it should be higher to maintain current industry levels (Bebchuk & Fried, 2003). By following all these recommendations in an effective way, AT&T will be able to design a suitable compensation and benefit system for its employees.

Conclusion

On the basis of above discussion, it can be stated that designing of an effectual compensation and benefit system is a crucial task for companies. An ineffective compensation package can cause to several organizational disputes and can result into different harmful business activities such as high employee turnover rate, reduce productivity, loss of market share, etc. It is the reason that organizations focus on making effective compensation system, which align organizational strategic objectives to performance.  GE, Whole Food, Apple, Inc., Google and Wal-Mart are some organizations that use effective compensation strategies in order to solve compensation issues. AT&T can also use these strategies in order to overcome compensation issues found within the organization.

References

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Bebchuk, L. A. & Fried, J. M. (2003). Executive Compensation as an Agency Problem. Journal of Economic Perspectives, 17(3), 71–92.

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Wadhwa, V. (2011). How to Fix Oversize Executive Compensation. Bloomberg Business Week. Retrieved from http://www.businessweek.com/managing/content/mar2011/ca20110324_875444.htm

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