Compensation Practice at PepsiCo Incorporated - Case Study Example

?Running Head: COMPENSATION PRACTICE School: Topic: Lecturer: presented: Introduction In today’s competitive global environment it is very vital for contemporary organizations to manage their human capital effectively so as to leverage sustainable competitive advantage and achieve organizational success. Traditional companies were very much concerned with productivity and the only means was to achieve it was focusing on the job rather than employees. Use of punishment was considered vital in enabling workers to work hard thus improved productivity but with advent of enhanced technology and human relation movements, organizations have realized the need to treat their employees as the most valuable assets and developed more humane measures of dealing with employees. This entails use of rewards in place of punishment to get the expected results and this was also influenced much by the motivational theorists such as Abraham Maslow (Armstrong & Baron, 2005). The needs of workers must be taken care of for them to be productive. This in turn led to development of performance management systems to evaluate employees and reward them accordingly; compensation is no longer job based but is based on performance. Successful companies thus strive to develop effective compensation strategies to ensure workers are rewarded accordingly and that the business strategies are achieved. According to Heneman (2002 p. 198) the cornerstone of a compensation strategy is the compensation philosophy of the company. This is the strongly held belief about goals of all components of compensation system relative to business strategy. The aim of this paper is to evaluate the compensation practice of a publicly traded company. To achieve this, the company to be discussed is an international company dealing with foods and beverages; PepsiCo, Inc. Its short history will be outlined after which its compensation strategy will be evaluated bearing in mind best practices and challenges faced. Its impact will then be discussed followed by the factors impacting on the practices such as unions, laws and regulations and finally, a brief summary. Company Background PepsiCo, Inc is a leading global food and beverage company with respected brands throughout the world. It was formed in 1965 after the merger of Pepsi-cola Company and Frito-lay, Inc. It acquired Tropicana in 1998 and Quaker Oats in 2001 and an addition of Gatorade thereafter (PepsiCo, 2013). Its mission is to be the world’s premier consumer Products Company focused on convenient foods and beverages with a vision to improving all aspects of the world in financial success which is to be achieved through driving shareholder value. It operates in a very competitive environment but its main competitor is coca-cola company. It boasts of net revenue of over $65 billion as recorded in the financial year 2012. It is managed by a board of directors with Indra Nooyi as the board chairman and chief executive officer since 2006 and has a workforce of 297, 000 scattered in many parts of the world. Its headquarters are in Purchase, New York in the United States. It is committed to delivering sustainable growth through empowering people and as such its compensation philosophy is for employees to act and be rewarded as business owners’ thus recruiting, retaining and motivating workforce. Compensation Strategy Compensation is a vital part of performance management in organizations. This involves rewarding employees for their achievements and also correcting underperformance. A company has a great task of deciding on how to reward employees as this strategy may make or break the company. According to Aquinis (2011) the compensation strategy should be aligned to business strategy to ensure the organizational goals are achieved and to achieve a sustainable competitive advantage. If the business strategy is cost-cutting then the company cannot go on to develop costly compensation strategies such as those involved with monetary rewards. Before everything else when developing a strategy the company should carry out an analysis of its environment both internal and external so as to understand its strengths and weaknesses and develop compensation practices that enhance its strengths (Heneman, 2002). Furthermore, there are many factors in the environment such as competitors, labor unions, laws and regulations that can hinder implementation of certain practices. Benchmarking is also vital to ensure the company adopts best practices and that its compensation practices are in line with market practices or demands. For example, giving employees a wage lower than the market price could lead to high labor turnovers and loss of talented employees. There are various compensation strategies depending on the business strategy the company is pursuing. One of the strategies is the pay philosophy where compensation managers have to make a decision based on retention vs. attraction, lead vs. lag, internal equity vs. external equity (Heneman, 2002). In the first case, a company has to decide whether it aims to attract or retain employees. It aims to achieve quality or keep customers it can use retention strategy but innovative business strategy calls for attraction of qualified staff from diverse backgrounds. However, companies like PepsiCo which aim at sustainable financial performance and growth adopt both strategies for effectiveness. The compensation philosophy of PepsiCo is to recruit, retain and motivate employees hence both strategies are crucial for effectiveness. It also focuses on external equity by putting emphasis on value of the job and the person on basis of market as assessed by market survey. The compensation committee was given mandate to develop compensation strategy with the help of outside advisors. It assesses current and emerging competitive practices, legal regulations and developments and corporate government trends to come up with appropriate compensation in line with market (PepsiCo, 2013). According to proxy report of 2013 the committee indicates that it also relies on surveys of broad range of major companies including fortune 100 to determine the compensation level for executives. Another compensation strategy utilized by companies is pay assessment. This is development of compensation based on skills, education, seniority, performance, results, and behavior of employees, job and person (Heneman, 2002). PepsiCo while recruiting employees makes sure that it recruits persons with superior skills and education level but its compensation is not based on education or skills. It also does not base its compensation on seniority of individuals but performance. All employees are given performance-related pay which depends on achieving the set targets. Failure to achieve the targets leads to deduction of pay. For example, the executives do not have employment contracts as their pay is dependent on achieving targets set by the compensation committee. Te financial performance must be above median (third quartile) to get rewards such as bonus. Other indicators of performance include sales volume, revenue, operating profit, cash flow, capital returns, earnings per share and sometimes customer satisfaction. They must also ensure talent development of employees (PepsiCo, 2013). For example, the CEO Mr. Nooyi was given an annual incentive award of $ 3.3 million for achieving the company targets. As such, results of their performance are emphasized as opposed to their behavior in deciding compensation. Another aspect of compensation strategy is the pay form. Should it be monetary or nonmonetary, fixed or variable, individual or team based? According to Armstrong and Baron (2005) a company should offer both monetary and nonmonetary rewards to employees so as to encourage diversity and take care of individual needs. Some people like monetary while others like nonmonetary rewards such as promotion, recognition, and holidays. However for Heneman (2002) it all depends on the business strategy. Variable pay is also preferred as opposed to fixed pay as it encourages flexibility especially in the current dynamic environment. Another critical factor for success is offering individual and group rewards. Some employees take advantage of team rewards to reap where they did not sow. To avoid this especially in modern organizations where teamwork is the key to success, both individual and team efforts should be recognized (Aquinis, 2011). At PepsiCo, the base pay is individual based and reflects the scope of responsibility. It is reviewed on regular basis and benchmarked against similar positions among peer group companies. Other incentives such as annual incentive and long-term compensation and cash incentives are based on company performance as well as individual effort. They are based on pre-approved earnings targets. Annual incentives are under shareholder-approved 2004 Executive Incentive Compensation plan. Long-term compensation includes stock ownership and stock-based incentive awards and is used to align interests of executives with those of shareholders. They are offered on vesting terms to encourage employees to remain in the company for long. The value of stocks is equal to fair value of PepsiCo common stock. Besides stock options, restricted stock units and cash, employees also receive other benefits such as medical and retirement benefits or pensions. These benefits and incentives align executive interests with shareholder interests. As such, the company through its compensation practice is able to determine if stakeholder interests as well as its objectives are being achieved. Compensation is linked to performance thus if the company goals are not achieved, then employees do not receive incentives. For example, for employees to get annual and long-term incentives the financial targets must be achieved and this ensures stakeholders interests are taken care of. Some indicators of performance include financial results, profitability, earnings per share, sales revenues and how well managers have developed employees (PepsiCo, 2013). Pay is also linked to long term stock performance for all the employees. In 2012 revenue grew by 5%, core currency net income of 6%, and managing operating cash flow of $7.4 billion which was $1.2 billion above target. The company got more than $1bn productivity savings and returned to shareholders through share repurchases and dividends $6.5bn. This is according to proxy report of 2013. While implementing compensation strategy, companies are faced with numerous challenges. One of the challenges faced is trying to align compensation strategy with business strategy. Sometimes goals may not allow for some strategies and this may act as impediment to implementation (Aquinis, 2011). Another challenge is complying with laws and regulations not forgetting trade unions interference. For example, executive deferrals into 401 (k) plan and company matching contributions are limited by IRS regulations and the company does not have excess plan to offset the limitation. Laws on discrimination under equal opportunity Act may affect compensation as the company has to comply or risk litigations (Twomey, 2010). Some employees may also use short-selling techniques to hedge against potential changes in value of PepsiCo stock. The company also uses benchmarking in determining compensation and relies on advisors for such information which may not be adequate leading to wrong computations. Furthermore, market practices keep changing requiring change in compensation strategy thus posing a challenge to the compensation committee. For example, in 2004 PepsiCo was forced to reduce long-term incentives and increase cash incentives due to change in market practices. Conclusion Choosing the right compensation strategy is crucial for a company that wishes to maintain sustainable competitive advantage. Right decisions have to be made before offering employees’ compensation as this determines if the employees will remain loyal and productive or will move to other companies thus increased turnover and reduced productivity. Use of total compensation is also vital to ensure all stakeholders’ needs are taken care of. This entails use of both monetary and nonmonetary rewards. Individual as well as team efforts should also be recognized and rewarded to ensure satisfaction and better results. Most importantly, complying with laws and regulations is vital to avoid litigations as well as conflicts with labor unions. A satisfied workforce is key to organization success. References Aquinis, H. (2011) Performance Management. 3rd ed. USA: Prentice Hall. Armstrong, M and Baron, A (2005). Managing Performance: Performance Management in Action. London: CIPD Heneman, R. L (2002). Strategic Reward Management: Design, Implementation and Evaluation. USA: Information Age Publishing. Twomey, D.P (2010) Labor and Employment Law: Texts and Cases. Mason, OH: Cengage Read More