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Executive Compensation: The Case of General Electric

By Nwabueze, Uche; Scott, George et al. | Competition Forum, July 1, 2006 | Go to article overview

Executive Compensation: The Case of General Electric


Nwabueze, Uche, Scott, George, Horak, Wayne, Mohammed, Sarah, Chhotu, Joti, Competition Forum


EXECUTIVE SUMMARY

Executive compensation has become a growing concern of society, especially the stockholders of various companies. This study investigates the need for strategic compensation planning within an organization, in order to align the motives of executives with the overall goals of the firm. This paper evaluates Human Resource Management's role in developing and delivering an effective compensation program. The study concentrates on executive compensation as it relates to share holders' interests. Specifically, the paper elaborates on General Electrics (GE) executive compensation initiatives, detailing the recent modifications and their effects. Finally, the paper will provide an insightful corporate governance framework, which can be applied within an organization to monitor executive compensation.

INTRODUCTION

Studies indicate that compensation is a significant variable in determining employee job satisfaction. This comes as no surprise, as pay directly impacts the livelihood of employees. Employees desire compensation systems that are fair and equitable, which are representative of their skills and knowledge. Clearly, managing compensation is a vital function of Human Resources Management (HRM), as pay undoubtedly impacts employee motivation, and therefore, performance. Compensation is a significant portion of a company's operating cost. For example, compensation contributes to 20 percent of total expenditures in manufacturing firms and often exceeds 80 percent of total expenditures in the service industry. Therefore, strategic HR is necessary in managing a firm's compensation program in order to simultaneously motivate employee productivity and control labor costs (Bohlander & Snell, 2004).

HRM can manage compensation through both direct and indirect methods. Direct compensation includes employee wages and salaries, incentives, bonuses, and commissions. Additionally, indirect compensation encompasses benefits, and other non-financial forms of compensation, including recognition programs, work environment, and flexible work hours to accommodate personal needs (Bohlander & Snell, 2004).

Strategic compensation planning enables a company to enhance employee motivation and align employee efforts with the objectives, philosophies and culture of the organization. Strategic HR links compensation to the organization's mission and success. This ensures that the goals of all employees, despite position, are aligned with those of the entire organization. Additionally, strategic compensation planning impacts other HR functions. In regard to recruitment, compensation can either increase or limit the supply and caliber of applicants. If pay rates create a large applicant pool, the organization can be more selective in hiring employees, ensuring that the right people are hired. This further reduces employee training costs, preventing training from being wasted on the individuals who are not a good fit for the organization or for the job.

Organizations establish specific goals to merge their company motives with their compensation programs. Common goals of strategic compensation planning include: rewarding employees' past performance, remaining competitive in the labor market, maintaining salary equity, meshing employees' future performance with organizational goals, controlling the compensation budget, attracting new employees, and reducing turnover.

According to the Business Legal Reports, an effective compensation program requires three major components; job analysis, job evaluation, and job pricing. Even after the program is created, it needs to be regularly maintained and updated to ensure internal and external equity. Salary banding, employee classification, salary increases, performance appraisals, and longevity increases are all a part of an effective compensation plan (BLR).

The first step in creating an effective compensation plan is job analysis.

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