Compensation:%20Benefits,%20wages,%20taxes

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Compensation Benefits, wages, taxes

• Employee Benefits as a Percent of Compensation

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TABLE 5.3 Employee Benefits as a Percentage of
Total Compensation, 1999 (Average Yearly Cost in
Parentheses)
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Characterization of Market

• Indifference curve Combinations of benefits and
  wages that yield the same level of utility
• Isoprofit line Combinations of benefits and
  wages that yield the same level of profit

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Applications

• Cafeteria Plan
• Profit sharing vs. Wages
• Diversification
• Employee Stock Ownership Plans (ESOP)
• Polaroid employees give up 8 of salary for ESOP
  
• Stock valued as high as 60, closes at .09 in
  2001.

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JDI Job Descriptive Index MSQ Minnesota
Satisfaction Questionnaire
Source Heneman, Schwab, Fossum and Dyer,
Personnel and Human Resource Management, 1989.
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Applications

• Pay for performance 14 of compensation
• Commissions
• Piece work
• Bonuses
• Piece rate workers earn more than straight time
  paid workers
• Does this mean piece rates motivate?
• Why arent piece rates more common?

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Performance bonds and deferred compensation
WAGE
MRP
Deferred compensation
BOND
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Performance bonds and deferred compensation
L value of leisure
W Wage MRP if dont shirk
T
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Performance bonds and deferred compensation

• Return from shirking
• At time T LW if shirk and are not caught
  Shirk if L (1-P)W gt W
• L if shirk and are caught If P lt 1, shirk
  at T
• W if dont shirk
• P probability of being caught shirking

L
W
T
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Performance bonds and deferred compensation

• More generally return from shirking
• PV(W) present value of wage stream
• PV(L) present value of leisure consumption
• Shirk if PV(L) (1-P)PV(W) gt PV(W) or PV(L)
  gt PPV(W)

L
W
T
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Performance bonds and deferred compensation

• Shirk if PV(W) or PV(L) gt PPV(W)
• As time T, PV(W) gets smaller relative to
  PV(L) which means people will start to shirk,
  which means that true MRP will be less than W

L
W MRP without shirking
MRP with shirking
T
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Performance bonds and deferred compensation

• Make sure PV(W) PV(MRP)
• Rationale for Mandatory retirement

WAGE
MRP without shirking
Deferred compensation
BOND
T
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Applications

• Defined Benefit Pension Plans
• Employee Retirement Income Security Act (ERISA)
• Pension guaranteed by the Pension Benefit
  Guarantee Corporation
• Pension underfunding
• PBGC at risk for insuring 450 billion of
  underfunded private pensions
• Current public sector underfunding 700 billion
  (more than all state and local property, sales
  and corporate tax)

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Example of a defined benefit plan
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Who Made the Biggest Bucks? Wall Street Journal
April 10, 2006
Richard D. Fairbank, Capital One Financial Corp
249.27 Shareholder return 2.7. Bruce Karatz,
KB Home, 155.9 million. Shareholder return
61. Henry R. Silverman, Cendant Corp., 133.26
million. Shareholder return -21. Richard S.
Fuld Jr., Lehman Brothers Holdings Inc., 104.4
million. Shareholder return 51.6 William E.
Greehey, Valero Energy Corp., 95.16 million.
Shareholder return 128.5. Ray R. Irani,
Occidental Petroleum Corp., 83.96 million.
Shareholder return 38.8. Lawrence J. Ellison,
Oracle Corp., 74.37 million. Shareholder
return 12.3.
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Tournaments

• Firm 1
• CEO 200,0001
• Exec VP 150,0006
• VP 100,00012
• Total 2,300,000
• Expected Value of competing
• VP to EVP .550,000
• 25,000
• EVP to CEO .16750,000
• 8,333

• Firm 2
• CEO 560,0001
• Exec VP 130,0006
• VP 80,00012
• Total 2,300,000
• Expected Value of competing
• VP to EVP .550,000
• 25,000
• EVP to CEO .167430,000
• 71,810

Why bother?
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Tournaments

• Firm 1
• CEO 200,0001
• Exec VP 150,0006
• VP 100,00012
• Total 2,300,000
• Expected Value of being VP
• 100,000 .5150,000
• (.5)(.167)200,000
• 191,700
• Expected gain from competing 91,700

• Firm 2
• CEO 560,0001
• Exec VP 130,0006
• VP 80,00012
• Total 2,300,000
• Expected Value of being VP
• 80,000 .5130,000
• (.5)(.167)560,000
• 176,760
• Expected gain from competing 96,760

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Forbes Magazine CEO Survey of the 800 largest
publicly held firms

• Of 800 CEOs
• 26 Founders
• Of 774 firms not run by founders
• 694 (90) internal promotions
• 80 (10) external hires

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Tournaments

• Why should you have larger raises as job level
  rises?
• Probability of promotion gets smaller
• Number of future contests decreases
• No further option for CEO except moving to bigger
  firm