High DOL implies high risk-high return profile. Low DOL means low
Sufficient investment should be made for ‘A’ players holding ‘A’ posi-
risk-low return profile. DOL increases when the fixed component
within a given compensation package increases. So a company
can do well if it can cleverly predict the near-future business
trend and negotiate it through its reward system. If the business
risk is low a proactive firm should increase the DOL (fixed component) and lower variable component to increase the return. If
the business risk is high then a proactive firm should lower DOL
(fixed component) and increase the variable component (connected to individual or group performance) to minimize the risk.
That is the company tries to transfer some of the business risk to
the employees by increasing the variable component.
tions. ‘B’ players need to be nourished so that they can take up ‘A’ positions in future and offer support and feeder roles. ‘C’ players need to be
trained or replaced if necessary. So reward system should not only focus
on only on performance but on the strategic impact or economic value
addition (EVA).
Executive Pay: Long-term v/s short-term performance
Executive compensation tries to redress principal/agent problem but it
has failed miserably as is evident from numerous scandals (e.g. Enron)
or the recent recession fuelled by mortgage defaults. [Principal/Agent
problem states that the Principal (owners or shareholders) needs the
Agents (Executives) to work for their interests]. So the executives are
often paid above the average and also given stock options and have
seen continuous increase in compensation whether the company performance increases or otherwise. The executives have in fact been able
to undercut the arm’s length in negotiations due to tremendous power
they enjoy [Managerial power theory]. Also if they leave they are given
hefty severance package (golden parachutes). The reward system has