Question

What is a three level performance based compensation stucture and how does it apply to the 3 levels of administration (managers, vice presidents and CEO's)

Answer 1

3 Level performance based compensation structure is based on the principle of directly linking the compensation paid to an employee, based on the work performed by him or her. There are 3 levels in which the performance gets divided – Level 1, Level 2, Level 3. The incentives as well as hikes and bonuses are based on Level acquired by the employee due to his performance.

Managers must be paid on the principle of performance based compensation structure. This is so because, the differential in compensation will boost the morale of the managers and they will work to enhance their overall performance.

Vice Presidents are usually the SMEs of business and the department, they must be paid good so that the talent is retained with the company itself. So after setting the high base pay for the level of VP, pay for performance attribute can be made applicable where the VP is paid a hike and bonus, as per the targets achieved by him.

The CEO compensation must be performance based to keep it fair and ethical. If the company is not performing well, then the CEO does not deserve to draw higher salaries. This will also improve the answerability of the CEO towards the company’s performance.

CEO’s compensation must be directly linked to the risks that the company takes, under his leadership. If the risk fares well, then the CEO can have a part in the profits. However, if his decision was not effective and the company went to losses, he must bear the burden of his losses as well. In such case, the compensation cut will be directly related to the company’s performance. Pay for performance must be the golden mantra used in CEO’s compensation ruling.