Compensation Plan Essay
Coca Cola uses a market-based compensation plan in which employees receive compensation that is comparable to the market rate. The market-based system is used for hourly employees and for entry level managers that receive a salary. The company also uses a merit pay system for increases, with employees able to earn a rate of compensation above the market rate based on their performance as evaluated in standardized reviews (Coca Cola, 2012).
Managers holding positions above a specified level as well as employees in certain critical areas are salaried. Some of these managers also receive stock options as a part of their compensation based on performance, which is intended to align the interests of senior managers with the interests of the shareholders.
Appropriateness of Compensation Plan
The existing compensation plan is appropriate for Coca Cola because it balances the financial goals of the firm with the expectations of employees.
With a market-based compensation system the employee theoretically exchanges job security and control over the labor process in exchange for a salary that is comparable to the amount they could receive in other organizations performing similar tasks (Bamberger & Meshoulam, 2000, p. 43). This approach is suitable for compensation plans for hourly employees performing routine tasks that are unskilled or semi-skilled in nature. It is also suitable for organizations that are not heavily unionized.
Coca Cola vigorously opposes unionization and uses its wage and benefits package as one of the strategies to prevent unionization, which has been successful in many of the firm’s domestic facilities. The approach also provides the firm with flexibility to adjust wages to local market conditions, paying employees more or less based on the prevailing wage in the region. The approach of paying managers and key employees with a salary is appropriate for Coca Cola because these employees are a source of competitive advantage for the firm. Find Pay for performance examples
The salary approach enables the Coca Cola to adjust the amount of compensation as necessary to attract and retain individuals with the necessary talents and skills to create a unique value proposition (Bamberger & Meshoulam, 2000, p. 43). The use of stock options as part of the compensation plan is also appropriate for increasing commitment of managers to the firm, which reduces turnover.
Most Beneficial Internal/Market Ratio
The most beneficial compensation system for Coca Cola is to maintain a ratio of internally consistent and market consistent compensation systems of 1:1.
The internally consistent system is necessary to ensure that Coca Cola compensates their employees based on factors such as their experience, skills and characteristics. This approach is necessary to ensure that the compensation system is equitable throughout the company. It is necessary to ensure that the employees remain committed to the firm and that they perceive the firm is treating all employees fairly. Because many of the positions at Coca Cola do not involve highly skilled labor, employees can find similar positions at other organizations.
The internal consistency is intended to reduce turnover. Establishing internal consistency in which the pay scale reflects the employee’s skills also encourages employees at Coca Cola to obtain more training, which benefits the firm in the long run by increasing the amount of knowledge assets. The market based compensation system should be balanced with the internally consistent system because of the company’s need to attract external talent, particularly for key positions.
Although the internally consistent system can be adjusted for differences in cost of living in various regions where the company operates, these adjustments may not be sufficient to attract employees in markets that may be highly competitive for talent. As a result, the market based compensation system is essential for Coca Cola’s ability to attract and retain employees. It also provides the firm with the ability to expand into new geographic areas at the current market compensation rates, which may be lower than the compensation rates of existing employees in other geographic areas (Bamberger & Meshoulam, 2000, p. 43).
Current Pay Structure and Recognition
The current pay structure at Coca Cola with its emphasis on market-based compensation with merit increases based on performance is reasonably successful for achieving the objective of attracting and retaining labor. The pay structure, however, creates as a substantial differential between the pay received by employees and managers. The general strategy used by the firm is to initially hire employees at a compensation rate that is relatively low and comparable to the low-end of the market, then offer them opportunities to increase their pay based on their performance.
The approach theoretically creates an incentive to improve performance while allowing the firm to identify employees that make an extraordinary contribution to the organization. Coca Cola prefers to hire from within, which creates opportunities for advancement that can lead to higher compensation levels for employees. To some degree, this policy blurs the boundary between hourly employees and salaried management in the organization, and functions as an additional deterrent to unionization. The firm selects internal applicants for promotion based on performance reviews.
In practice, selection for advancement in the organization functions as recognition for employee contributions to the firm. Each department has numerous pay grade levels, which is consistent with the use of performance-based advancement opportunities in large firms (Gerhart, Minkoff, & Olson, 1995). Coca Cola bases the pay level in each grade on the market value of the work that is actually performed (Ingram v. Coca Cola, 2005). As a result, it is possible to reward exceptional managerial performers with a pay grade jump within the department.
The firm also uses a recognition system that rewards superior performance with a gift card voucher that can be redeemed for merchandise at stores. Although this has a far lower impact on performance than the opportunities for advancement, it nonetheless creates a recognition incentive for employees. Coca Cola also uses a merit increase approach for hourly employees. The hourly employees are eligible to receive an annual merit pay increase based on their performance. The merit pay increase is discretionary, but the firm ensures that the cycle for merit increase remains the same in all business units (Ingram v. Coca Cola, 2005).
The general approach used by the company is to allocate a specified amount of merit pay with the performance reviews of employee determining the amount of the increase. The approach is effective for creating some degree of competition among employees to perform in a manner that qualifies them to obtain a share of the merit pay increase that are available each year. Recommendations One recommendation for Coca Cola is to establish a gain sharing approach to rewards management to improve incentives for performance.
The gain sharing approach assigns both cost savings and revenue increase objectives to the organization as a whole and individual business or work units. If the costs are reduced and revenues enhanced in accordance with the objective, the gains are shared with employees in the form of a bonus. The gain sharing approach is intended to foster long term organizational development in addition to providing employees with a motivational incentive linked to performance. The gain sharing also theoretically improves organizational commitment among employees (Secord, 2003, p. 404).
Another recommendation for Coca Cola is to develop a distinction between line staff and professionals for compensation purposes. Because Coca Cola is involved in the beverage industry, it requires personnel with expertise in the development and testing of new beverage products to remain competitive. The personnel involved with this type of work are not in the traditional management hierarchy and is not likely to seek promotional opportunities that leads to general management work.
At the same time, the personnel have specialized skill that differ substantially from the skills used by line staff. As a result, the firm should develop a separate pay grade system for professional staff that is not based on promotion into managerial work.
Employer-Sponsored Retirement and Health Plans
All positions at Coca Cola provide employees with a defined contribution 401K plan. The firm also offer employees with a 100% company funded defined contribution plan, although some of the more seasoned employees have a defined benefit plan.
The retirements plan allows employees to select the type of investment in which their retirement funds will be invested. Available investments include stocks, mutual funds, and annuities offered by insurance companies owned by Coca Cola. The firm makes a 3% matching contribution to the 401k plan. The matching contribution is discretionary and has been suspended during periods when the firm’s revenues have been less than anticipated. The firm has separate 401K plans for employees covered by collective bargaining agreements, with thee plans offering only the contributions required by union agreements.
The bargaining employees’ plan covers only a small percentage of the firm’s employees. The pension plans offered at PepsiCo, Coca Cola’s major rival, are substantially similar. This firm offers a defined contribution plan fully funded by the company and a 401k plan with a small percentage matching contribution (PepsiCo, 2012). Coca Cola provides employees with healthcare benefits in the form of a high deductable policy with employees able to contribute to a Health Savings Account to offset out-of-pocket expenses associated with medical or dental care.
The company covers some of the cost of the healthcare insurance, but the majority of the expense is now borne by the employee. PepsiCo uses a flexible spending account approach to healthcare benefits, with the employee allocated a specified amount of funds for the benefit. The employee then decides the amount of health, dental, disability, or other type of insurance is appropriate for their situation. This approach is intended to meet the needs of employees of different ages.
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The existing market-based compensation plan at Coca Cola is appropriate for employees because the most of the employees perform routine semi-skilled tasks. The firm should evenly balance its internally consistent compensation system with the market consistent compensation system to ensure that employees perceive the compensation system as equitable while supporting the ability of the firm to attract employees with competitive wages.
Coca Cola should adopt a gain sharing rewards system to increase motivation. The firm should also create compensation distinctions between staff and non-managerial professionals to provide the professions with advancement opportunities outside the managerial career track. The firm’s retirement plan is similar to that of its main competitor PepsiCo, but its healthcare benefits do not provide the same degree of flexibility as the benefits offered by PepsiCo.