Compensation Strategy of Bank of America - Case Study Example

?Running Head: COMPENSATION STRATEGY – BANK OF AMERICA Compensation Strategy – Bank of America Bank of America is one of the world’s finest financial institutions which serve a large number of clients based in about 40 countries. It provides financial services starting from investment to corporate banking and equity execution services. In United States it has about 57 million customers and small businesses, which enjoys services from approximately 5,700 retail banking offices and almost thousands of ATMs spread all across the country. Their award winning online banking has served 30 million users. Through their big size, capability and commitment the bank is able to serve the community with superior economic value and services (Our Vision, 2013). Compensation refers to all forms of financial return in terms of tangible services and benefits that the employee receives as a part of employment relationship. It is an integral part of the human resource management that helps in employee motivation and improvement in the organizational effectiveness by paying salary or wage. Salary refers to the payment of the managers or professionals, whose payments are calculated on monthly or annual basis. In contrast, wage is the payment that is received by the workers in hourly or daily basis or for overtime (Bhattacharya & Sengupta, 2009, p. 2).This study deals in understanding the compensation policy of Bank of America Compensation Strategy Compensation strategy is designed depending upon the business strategy and goal. The business goals and objectives are aligned with the Human Resource strategies. The compensation committee devises the compensation plan. The strategy depends upon both the internal and external factors as well as on the life cycle of an organization (Bhattacharya & Sengupta, 2009, p. 3). Bank of America proposes a wide-ranging benefit package to its employees based on the local policies and practices followed by each of the nations. The compensation and benefit packages design by Bank of America provides it with a competitive advantage in the market. The compensation package is designed as such so that it can “attract, retain, motivate and reward” its employees who “commit themselves to excellence” (Bank of America, Careers, 2013). Practices followed by Bank of America The Bank of America follows “pay-for-performance compensation program” (BOA Compensation Principles, n.d.) which, provides rewards for long term and sustainable result that are aligned to the shareholder’s interest. The primary objective is to provide a tie up between payment and performance while at the same time providing a balancing reward with practical business decision and efficient risk management. All the compensation programs are designed to be consistent with the Compensation Principles, which ensures that the compensation practice does not encourage excessive risk, focuses the employees in managing the company towards long term goals and sustainable values for the shareholders and provides an appropriate realization of the rewards overtime (BOA Compensation Principles, n.d., p. 1). The benefits that the generally provide to their employees include health and dental benefits from the first day of employment, “Life Insurance, Accidental Death, Dismemberment coverage and Disability benefits” (Bank of America, Careers, 2013), retirement benefits, leave benefits like paternity leave, fitness centers, employee cafes and Associate discount program. They also provide a three week vacation when the position starts from entry level. Analysis of the compensation principle The pay of the executive is linked to the performance of the company, which in turn is supposed to increase the stakeholder’s wealth. Compensation also influences the employee wok behavior and organizational performance. This is the measure of paying the employee, which affects the quality of work, attitude towards customers and willingness to be flexible, learning new skills or suggesting innovations. This in turn will affect the performance of the company (Bhattacharya & Sengupta, 2009, p.4). The salary, benefits and incentives designed by Bank of America is such that it aligns to the interest of the associates and shareholders. In order to achieve this goal the bank sometimes defers the compensation paid to certain groups of employee and awards them in terms of equity. While compensating in terms of incentives the company considers the performance of the company, business unit and the individual. The compensation policies and principles of the company take into account both the long and short term financial and non financial factors. The compensation determinants take into account the evaluation of the performance of the individual employee in terms of adherence to the organization’s risk and acquiescence policies. The design of the incentive plans are done as such that it supports the sound risk and compliance management. For achieving this goal, a performance metrics is appropriate to the business entities. This metric judge whether the risk is getting adjusted to the appropriate places, determination of the employee awards on the basis of adherence to the compliance related goals. It also judges whether a reduction has to be provided on the variable component of the long term compensation. The reduction in the variable component is subjected to the conduct and performance based claw backs (BOA Compensation Principles, n.d., pp. 1-2). Challenges faced Variation in laws, living cost, tax policies and other factors are always considered while deciding the compensation packages. The compensation policy and packages are different for different countries. This factor may be a challenge for Bank of America. For instance “minimum wage, working time information such as annual holidays, vacation time and pay, paid personal days, standard weekly working hours, probation periods, overtime restrictions and payments covering severance practices” (Randhawa, 2007, p. 385). Company’s internal factors The company faces challenge to design the equity compensation policy that helps to create an ownership culture. This was due to the merger and acquisition between Bank of America and Merrill Lynch. The company is aware of the importance of equity compensation plan for both the employee as well as the organization. They understand that the employees look for holistic approach to increase financial wellness, an amalgamated view of their financial health and the capability to access information and make transactions. But this challenge was successfully met by the company and it believes that Bank of America Merrill Lynch has the customized solution and integrated services and products that would allow the employees to leverage and experience the benefits of the total equity compensation plan (Bank of America, 2013). Market factors In the year 2009 the Federal Reserve asked all the banks to crack down their compensation packages that encouraged the bankers to accept excessive risk. However this decision was acknowledged by the officials and they argue that this step would not reduce the paychecks on Wall Street. This step was taken in order to counter with the financial crisis that affected the market in the year 2008. This decision leads “executives, traders, deal makers and other employees of the biggest banks to regulatory scrutiny of their compensation and represent another increase in government intervention in the marketplace” (Labaton, 2009). According to the chairman of the Federal Reserve Ben S. Bernanke, he said “Compensation practices at some banking organizations have led to misaligned incentives and excessive risk-taking, contributing to bank losses and financial instability” (Labaton, 2009). This rule brought by Fed encouraged risky practices and discouraged pay packages. Due to this rule Bank of America has to pay the bonus payments to the senior executives only when they achieve the corporate performance goal in discussion with Treasury. The bonuses were supposed to be the restrictive stocks that can be sold only when the company repays the government (Labaton, 2009). Contrast between Incentive Pay with Traditional Pay In traditional pay plan, the employee receives compensation based on a fixed hourly pay rate or annual salary. The annual payment is based on the factors like seniority and past performance. Some of the companies use incentive pay programs that replace all or a portion of the base pay in order to control payroll expenditures and to link to pay to performance. Companies use incentive pay programs in varying degrees for different kinds of positions. Some compensation programs consists of both traditional base pay and incentive pay, whereas other programs, usually for sales jobs, offer only incentive pay in which case all pay is at risk. Traditional compensation generally includes an annual salary or hourly wage that is increased periodically on seniority or merit basis. Whereas companies use incentive pay to reward individual employees, teams of employees or whole companies based on their performance (Martocchio & Joe, 1998, pp. 82-83). In case of Bank of America they follow an incentive pay compensation in, which the design of the incentive plans are done as such that it supports the sound risk and compliance management. All the compensation programs are designed to be consistent with the Compensation Principles, which ensures that the compensation practice does not encourage excessive risk, focuses the employees in managing the company towards long term goals and sustainable values for the shareholders and provides an appropriate realization of the rewards overtime (BOA Compensation Principles, n.d., p. 1). Conclusion Bank of America offers a versatile range of benefit programs that helps the employees to meet their diverse need at the various stages of their life and help them to plan for future. They are committed to attract the best talent and retain them by providing attractive incentives. These incentives help them to continue their career with the bank. Beside this the bank also provides their employee with a wide range of benefits and appropriate development programs and professional improvement in order to achieve personal growth. REFERENCES BOA Compensation Principles. (n.d.), Corporate.ir.net, Retrieved on January 31, 2013 from https://www.google.co.in/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&ved=0CC4QFjAA&url=http%3A%2F%2Fphx.corporate-ir.net%2FExternal.File%3Fitem%3DUGFyZW50SUQ9Mzc2ODB8Q2hpbGRJRD0tMXxUeXBlPTM%3D%26t%3D1&ei=kFkKUanqMNDqrQfXv4HQBQ&usg=AFQjCNGSac3tCGuaY9YWBcUZsGtAMsaJ7g&bvm=bv.41642243,d.bmk Bhattacharya, M & Sengupta, N. (2009). Compensation Management. New Delhi: Excel Bank of America, (2013), Equity Compensation Plan Engaging employees through company ownership, Benefit Plans, retrieved on January 31, 2013 from http://www.benefitplans.baml.com/ir/pages/ts_ec.aspx Bank of America: Careers (2013), Explore a career with the Bank of Opportunity. Retrieved on January 31, 2013 from http://careers.bankofamerica.com/canada_benefits.aspx Labaton, S. (2009). Fed Plans to Vet Banker Pay to Discourage Risky Practices, The New York Times. Retrieved on January 31, 2013 from http://www.nytimes.com/2009/10/23/business/23pay.html?_r=0 Martocchio, J.J. & Joe, M. (1998). Strategic Compensation: A Human Resource Management Approach. New Delhi: Pearson Education India Our Vision. (2013). Bank of America. Retrieved on January 31, 2013 from http://about.bankofamerica.com/en-us/our-story/our-company.html#fbid=s_lNK-jKU27 Randhawa, G. (2007). Human Resource Management. New Delhi: Atlantic Publishers & Dist Read More