This chapter connects pay to the important (and costly, from an organizational standpoint) subject of employee turnover. It opens by discussing how the level of pay relates to workers’ turnover rates. A discussion of the timing of compensation (over the course of the worker’s career or tenure with the employer) follows, the key point being that deferred compensation encourages retention. Employers might renege on deferred-pay contracts, which introduces risk for workers. The chapter covers workers’ perceptions of risk as they pertain to the timing and design of pay and to sorting effects. When pay is deferred, workers sometimes advance to a career stage in which their pay outpaces their productivity, at which time employers would like them to quit. Inducing workers to leave can be tricky, particularly given the external and internal constraints covered in Chapters 4 and 5. Sections 12.5 and 12.6 concern severance packages and buyouts, which basically involve paying workers to leave. The conditions under which such payments are offered and accepted are covered. The chapter ends with coverage of corporate raids and when a manager should match an outside offer received by an employee.

The chapter's premise is that understanding how something works requires studying it when it’s broken. The book is about labor contracts, i.e., formal or informal agreements between employers and employees. Sometimes employers breach these contracts by failing to pay their workers. Some workers (e.g., undocumented immigrants) are particularly vulnerable to “wage theft”. The timing of the parties' exchange of work and pay, and how it relates to wage theft, is discussed. Regulatory remedies to the wage-theft problem are studied, and it is shown that such regulations can lower workers’ average pay level by reducing the risk premium that compensates workers for wage-theft risk. Other remedies are given that involve no government intervention. Employers’ passive cuts to workers' real (as opposed to nominal) pay, via the erosive role of inflation, are discussed. Wage theft is offered as an example of a compensating differential (because it is an undesirable job attribute) before that topic is introduced. Themes from the wage-theft discussion recur throughout the book (e.g., in Chapter 10, on executive compensation, there is discussion of firms reneging on CEOs’ expected bonus payments).

This chapter covers compensating differentials, the theoretical foundation for most of the book. The key idea follows from Chapter 1's broad definition of compensation as “everything a worker likes about the job”. Jobs have many positive and negative characteristics, and workers vary in how much they value (or dislike) these characteristics. Positive job characteristics are a form of non-monetary pay, and negative characteristics diminish a worker’s effective pay. Holding other job characteristics constant, workers must be paid more to compensate them for a particular negative job characteristic and, similarly, are willing to accept less monetary pay when they enjoy a particular positive job characteristic. Workers sort across different jobs and employers based on their preferences for those job characteristics. The size of the wage differential (arising from a particular job characteristic) that occurs in the market is determined by the “marginal worker's” preferences for that job characteristic. Through a series of extensive examples, the reader is led to a thorough understanding of the marginal worker and compensating differentials, concepts which recur throughout the book.

This chapter on executive compensation and stock options is effectively a continuation of Chapter 9 on performance pay. It provides an overview of executive compensation and an intuitive, non-technical treatment of stock options that focuses on the worker incentives that options create. There is a lot of discussion of risk (of income loss) that builds on Chapter 9, and the “pay for luck” discussion that ends the chapter concerns the possibility of firms’ reneging on CEOs’ bonus payments, which echoes the wage-theft themes from Chapter 2. Section 10.2 covers the executive bonuses known as “80/120” plans, representing them pictorially as nonlinear functions of a performance measure (that are upward-sloping in some parts, as in the performance-pay graphs of Chapter 9). The section on stock options is detailed and explains all of the key terminology and the most important concepts in this area. The distinction between the intrinsic value and the market value of an option is made carefully, with an intuitive, non-technical discussion of the Black–Scholes–Merton options valuation formula, and the role of risk is explained in detail.

This chapter teaches readers to think about training both as a form of current compensation and as an investment in future pay (because training makes workers more productive, allowing them to earn more in the future). Training is a form of current pay because workers value training (precisely because it increases their future expected compensation) and, for that reason, they are willing to accept lower current compensation than they would receive in an alternative job that is otherwise the same but that does not offer training. This evokes compensating differentials (Chapter 3). The portability of training across firms is covered, as well as whether employees or employers should pay for training and whether the skills imparted by training are general (i.e., useful across many employers) or specific to the current employer. The internal rate of return (or breakeven interest rate) is covered in the context of whether it is profitable to train workers. Section 8.5, on practical applications, gives tips for how managers can obtain information on the key components of the training decision, i.e., employee productivity and expected tenure after training, costs, and the interest rate.

This chapter introduces some terminology and themes that pervade the book. Compensation is defined broadly to include everything a worker likes about the job. “Strategic compensation” is about managing the compensation system to advance a specific organizational objective, typically profit maximization. The chapter discusses how this relates to talent management, turnover, retention, and employee productivity. Four recurring themes are introduced: (1) “Incentive effects” and “sorting effects (both of which affect the company’s labor productivity) arise when the compensation system is changed; (2) Market competition largely dictates pay levels, whereas employers have more control over pay design; (3) Competition forces employers to care about their employees’ preferences about pay; (4) Bargaining power also affects pay levels. The metaphor of a “3-legged stool” is introduced, in which compensation depends on workers’ desires, skills, and mobility. There’s discussion of what constitutes “fair” pay and the tradeoffs associated with allowing employees to know each other’s pay versus keeping compensation secret. The appendix offers a detailed treatment of nominal versus real compensation.

This chapter covers internal constraints on pay, as opposed to the external constraints (namely labor law) covered in Chapter 4. Much is said about collective bargaining agreements in unionized settings, and the effect of unions on pay and pay dispersion. From the standpoint of managers, internal and external constraints are nearly identical in that both are sets of rules that must be followed to avoid negative consequences. One difference is that internal constraints are often more amenable to managerial influence; for example, collective bargaining agreements are renegotiated every few years, and management participates. The 3 Cs of compensation constraints are revisited in the context of internal constraints, as are compensation floor and ceilings. Pay compression is discussed, given its prevalence in unionized settings. Diverse preferences in the union membership are addressed in the context of a vote on seniority-based layoffs versus across-the-board temporary wage cuts, i.e., furloughs. Other (non-union) internal constraints are covered, such as those imposed on individual establishments by corporate headquarters, and company-wide design of the benefits package in pay plans.

This chapter provides more comprehensive coverage of promotions than is typically seen in compensation texts. The subject is important for compensation because employees' biggest raises usually involve promotions, so promotions are intimately connected to pay growth. Plus, promotion prospects are valued by workers and might make them willing to accept lower pay than they would receive in (otherwise identical) jobs that offer little or no promotion prospects, which connects to the concept of compensating differentials (Chapter 3). This chapter gets the reader-manager thinking about compensation structures within an entire organization, i.e., how the compensation differs across levels of the job hierarchy. The chapter opens by describing the role of promotions in creating worker incentives, both productive and perverse, and in matching workers to jobs ideally within the company. The question of why promotions usually come with big raises is covered, as is the important and common managerial problem of internal-versus-external hiring. The implications of turnover for promotions (and vice versa) are covered, as are up-or-out policies that require employers to fire non-promoted workers.

This chapter presents a detailed example that applies the compensation analytics concepts developed in Chapter 6. The reader is assumed to be a compensation consultant charged with evaluating whether gender-based discrimination in pay is present in a public university system in the sciences. Section 7.1 walks through the analysis step-by-step, from formulating the business question, to acquiring and cleaning data, to analyzing the data and interpreting the results from voluminous statistical output in light of the business question. Section 7.2 covers exploratory data mining, causality, and experiments. Exploratory data mining covers situations in which the manager does not know in advance which relationships in the data will be of interest, in contrast to the example in section 7.1 in which a statistical model and specific measures could be constructed that were directly tailored to address the business question at hand. Section 7.2 covers the challenges associated with establishing causality in compensation research and how experiments can sometimes be designed to address those challenges. Randomization and some pitfalls associated with compensation experiments are also covered

This chapter teaches readers how to think about government regulations on pay. Although a lot is said about specific US laws, the primary focus is on how to think about regulation in general, so the discussion is portable across countries even where the local laws differ. Section 4.3 introduces a prescriptive mnemonic concept called the “3 Cs” of constraints: Comprehend, Circumvent, Comply. The idea is that managers first need to comprehend the constraints that impede their efforts to maximize company profit. They should then search for creative ways to circumvent those constraints (without violating ethics or the law). Finally, to the extent that they cannot circumvent the constraints, they must comply with them. The ethical issues surrounding the second of these Cs are discussed. Both anti-discrimination laws and wage-and-hour laws are discussed, including FLSA, ADA, ADEA, EPA, FMLA, and others. There is extensive discussion of floors and ceilings on both the monetary and non-monetary components of pay. An example of floors on paid time off draws on the concept of the marginal worker from Chapter 3 to show that regulations limit the variety of pay plans offered in the market.

This chapter responds to the growing importance of business analytics on "big data" in managerial decision-making, by providing a comprehensive primer on analyzing compensation data. All aspects of compensation analytics are covered, starting with data acquisition, types of data, and formulation of a business question that can be informed by data analysis. A detailed, hands-on treatment of data cleaning is provided, equipping readers to prepare data for analysis by detecting and fixing data problems. Descriptive statistics are reviewed, and their utility in data cleaning explicated. Graphical methods are used in examples to detect and trim outliers. The basics of linear regression analysis are covered, with an emphasis on application and interpreting results in the context of the business question(s) posed. One section covers the question of whether or not the pay measure (as a dependent variable) should be transformed via a logarithm, and the implications of that choice for interpreting the results are explained. Precision of regression estimates is covered via an intuitive, non-technical treatment of standard errors. An appendix covers nonlinear relationships among variables.

This chapter covers a core problem that managers regularly face (i.e., negotiating with current or prospective employees over pay). The topic is usually omitted from compensation texts and is covered in separate courses in business programs. But negotiation over pay is such an integral part of strategic compensation and talent management that it cannot be omitted from a book that aims to train managers to think strategically about pay. For example, talent retention (Chapter 12) requires managers to respond correctly when employees receive outside offers from competitors, which immediately triggers bargaining and negotiation over pay. The chapter opens by stressing the importance of defining your objective. The most important ingredient to successful negotiation is information, so the questions of when and how to reveal and collect information are addressed in depth. Sections 14.4 and 14.5 examine threats and bluffs as negotiating tools, as well as how managers should think about and respond to counteroffers. As discussed in the final section, sometimes employers can gain the upper hand during bargaining by complicating the discussion, whereas other times simplification is better.

This chapter on fringe benefits draws on the theoretical support structure of compensating differentials (Chapter 3), given that workers value fringe benefits (i.e., non-monetary components of pay) and are therefore willing to accept lower monetary pay than they would receive in alternative jobs that do not offer those benefits but that are otherwise identical. The chapter opens with a discussion of workers’ valuations of various fringe benefits and how those valuations may differ from the employers’ costs of providing those benefits. From a managerial standpoint, the main problem with using benefits to compensate workers is inefficiency, in that workers often value those benefits at less than their cash equivalents. Against that disadvantage are a number of advantages of paying workers in benefits, and the chapter covers the main ones. Cafeteria plans mitigate the main disadvantage of benefits compensation while simultaneously weakening some of the advantages. The chapter ends with a lengthy section on pensions that provides a detailed distinction between defined-contribution and defined-benefit plans and the implications for worker behavior (e.g., retirement ages).

This chapter treats pay in nonprofits and the public sector, where the organization’s objectives are not as straightforward as in the typical for-profit firm. It also covers small businesses, a subject which is neglected in standard compensation texts but which is important because some readers are or aspire to be small-business managers. The opening section defines the 3 entities under discussion. Organizational missions and workers’ intrinsic motivation are described, which relates to compensating differentials in that workers who value the organizational mission interpret it as a non-monetary component of pay that creates an incentive to work hard to further the mission. The chapter revisits external and internal constraints on pay, training (and recruitment of desired worker types), performance pay, and turnover, thereby tying the book’s earlier concepts together. Subjects that were covered in earlier chapters are re-examined through the different lenses of nonprofits, the public sector, and small businesses. The chapter ends with coverage of “distance” between managers and owners, which tends to be shorter in small businesses than in larger ones, and its implications for pay.