BUSI 642 Week 6 Case Study Paper Example

When New Hires Earn What Veterans Earn: A Case Study on Pay Compression and Bonus Design at an Engineering Firm

The Pay Problem and Its Cause

Carver Lane Engineering, the composite 300-person consulting firm in the case, raised its starting salary for graduate engineers from $68,000 to $78,000 over two years to keep up with competitors. Its engineers with five years' experience earn an average of $80,500, so a licensed project engineer now earns only about 3 percent more than someone hired last month. Noe et al. (2018) describe two goals of pay structure: external competitiveness, paying enough relative to the labor market to attract and retain people, and internal alignment, paying jobs and people in a way that reflects their relative value inside the firm. Carver Lane pursued the first and neglected the second. The result is compression: a ratio of 1.03 between experienced and new engineers, although licensed project engineers sit one full grade above new graduates, where a gap of 12 to 15 percent would be normal.

Options for the Experienced Engineers

The firm has three options. Doing nothing saves money now but invites turnover among the engineers the firm most needs. An across-the-board raise for all incumbents is simple but costly and rewards strong and weak performers alike. For comparison, a 6 percent raise for all of the firm's roughly 140 salaried engineers would cost about $700,000 a year and would leave the compression itself almost unchanged, because new hires' salaries would follow the market up again next year. A targeted market adjustment, moving each experienced engineer to at least the midpoint of a rebuilt grade range, about $88,000, costs less and restores the structure.

Evidence on how people react to pay comparisons favors acting. Cullen and Perez-Truglia (2022) ran a field experiment with 2,060 employees of a large firm in Southeast Asia and found that employees' beliefs about others' pay changed their own behavior: learning that peers earned more lowered effort, while learning that managers earned more raised it. Compression is a peer comparison problem disguised as a budget problem. An experienced engineer who learns that the new hire down the hall earns nearly as much is likely to respond as the employees in that study did. I recommend the targeted adjustment, at an estimated cost of about $410,000 a year for 55 engineers, an average raise near $7,500, phased over two pay cycles. The adjustment should be paired with a rule for the future: when the starting rate rises, the firm reviews the ranges above it in the same cycle, so compression cannot quietly return. Managers should explain the adjustment personally to each affected engineer, since an unexplained raise can read as an admission of past unfairness rather than a correction.

A Bonus Plan That Rewards the Right Things

The owners propose individual bonuses tied to billable hours. Noe et al. (2018) caution that individual incentives can undermine cooperation and reward what is easy to measure rather than what matters. Billable hours would reward engineers for working slowly and discourage helping colleagues. I recommend a team bonus tied to project margin and client satisfaction, with up to 8 percent of salary at risk, paid annually. Recent evidence also suggests caution about the form of incentive. Adams (2026) found no overall association between performance pay and anxiety or depression in U.S. survey data, but bonuses were associated with higher rates and stock options with lower ones. A modest, team-based bonus limits individual pressure while still linking pay to results. The plan should be piloted for one year in two project groups, with the margin and satisfaction targets set in advance and published to the teams, so that engineers know exactly what earns the bonus and the owners can judge whether it changed anything before extending it firm-wide.

Disclosure, Fairness and Scripture

The case asks whether Carver Lane should publish pay ranges. Several states now require ranges in job postings, and the firm recruits in some of them. Cullen (2024) reviewed the evidence and found that revealing coworkers' individual pay can narrow gaps but also provoke counterproductive comparisons, while showing pay across levels and employers can improve motivation and job matching. Obloj and Zenger (2022) studied salary transparency in U.S. public universities and reported that disclosure went along with flatter pay and a narrower gender gap, but also a weaker link between pay and performance. I therefore recommend publishing grade ranges and the criteria for movement within them, not individual salaries.

Jesus' parable of the vineyard workers, in which the owner pays those hired late in the day the same as those who worked since morning, shows how strongly people feel about equal pay for unequal work; the early workers grumbled (English Standard Version Bible, 2001/2016, Matthew 20:1-16). The parable teaches the generosity of God's grace rather than a wage policy, and the owner kept his agreement with every worker. An employer who is not God should take the lesson to keep every promise and explain its pay decisions openly, so that experienced engineers can see that the firm values them fairly.

References

Adams, B. C. (2026). Performance pay and mental health: Differences by pay scheme. Industrial Relations: A Journal of Economy and Society. Advance online publication. https://doi.org/10.1111/irel.70027

Cullen, Z. (2024). Is pay transparency good? Journal of Economic Perspectives, 38(1), 153-180. https://doi.org/10.1257/jep.38.1.153

Cullen, Z., & Perez-Truglia, R. (2022). How much does your boss make? The effects of salary comparisons. Journal of Political Economy, 130(3), 766-822. https://doi.org/10.1086/717891

English Standard Version Bible. (2016). Crossway. (Original work published 2001)

Noe, R. A., Hollenbeck, J. R., Gerhart, B., & Wright, P. M. (2018). Human resource management: Gaining a competitive advantage (11th ed.). McGraw-Hill Education.

Obloj, T., & Zenger, T. (2022). The influence of pay transparency on (gender) inequity, inequality and the performance basis of pay. Nature Human Behaviour, 6(5), 646-655. https://doi.org/10.1038/s41562-022-01288-9