BUSI 645 Week 8 DB Forum 4 Example

Discussion Board Forum 4

BUSI 645 Compensation Management, Discussion Board Forum 4 (thread and 2 replies)

Thread by [Student Name]

The forum prompt, the software company and the two classmates' threads are composites standing in for the course's own; the textbook and research cited are real, and the requirements follow Liberty's public course guide for BUSI 645.

Thread

The composite software company where I work in total rewards has 300 employees, about a third of whom moved away from our Raleigh office during the shift to remote work. Some moved to smaller towns where housing costs half as much, and our finance team has proposed cutting their salaries to match local pay. Martocchio (2017) explains that market-competitive pay is set by pricing jobs against the labor markets where an employer competes for talent. The question is which market a remote software engineer competes in now: Raleigh, the new town or the national market for remote engineers.

Remote work is no longer a temporary arrangement that we can wait out. By mid-2023, according to Barrero et al. (2023), Americans aged 20 to 64 were spending 28 percent of their paid workdays entirely at home, roughly quadruple the share in 2019, and executives surveyed expected that share to edge up rather than fall over the next five years. Our pay policy has to be built for that reality.

The course also reminds us that total compensation includes more than salary, and flexibility has a price. Mas and Pallais (2017) ran a discrete choice experiment in hiring for a national call center and estimated that a typical applicant would trade away 8 percent of pay for the option to work from home and 20 percent to avoid schedules set by the employer on short notice. If remote work is worth something to employees, then a remote job already pays more than its salary shows. That suggests we do not need to cut salaries to capture the value of lower living costs; employees are already receiving a benefit the company provides at little cost.

There are three common options. A single national range is simple and feels fair, but it may overpay in low-cost areas. Fully location-based pay ties each salary to a local survey, which is precise but complicated, and employees experience a cut when they move as a penalty. A tiered approach groups locations into a few bands. I recommend two tiers: one for high-cost metropolitan areas, including Raleigh, and one national tier about 7 percent lower for everywhere else, applied to new hires and to future moves, with current employees who already relocated protected at their present salary for two years. The protection matters because cutting the pay of people who moved under the old rules would damage trust far more than it saves. A rough calculation supports the choice: the 7 percent tier applied to the roughly 100 relocated employees at an average salary of $110,000 would save about $770,000 a year, but losing even six senior engineers, at a replacement cost often estimated near half a year's salary, would erase a large part of that.

Martocchio (2017) asks pay systems to satisfy two tests at once, fairness across jobs inside the firm and competitiveness against outside markets; a two-tier structure preserves the same grades and ranges for everyone while adjusting the dollar values modestly. I would like to hear whether classmates' employers have cut pay for relocating employees, and how employees reacted.

Reply to Jasmine

Jasmine, your thread argued that public companies should cap CEO pay at a fixed multiple of median employee pay, because pay ratios in the hundreds signal that executives set their own rewards. Bebchuk and Fried (2003) give academic support to that worry. They contrasted the view that boards design pay to give managers efficient incentives with what they called the managerial power approach, under which the pay package is itself a symptom of weak oversight, because executives have sway over the directors who approve it.

The evidence is not one-sided, though, and a cap would have to answer it. Mueller et al. (2017) studied public and private firms and reported that companies paying their top jobs much more than their bottom jobs tended to be bigger, had higher valuations and stronger operating performance, results the authors interpreted as reflecting differences in managerial talent. A fixed cap could force such firms to underpay leaders they need.

Martocchio (2017) describes the tools boards already have, such as independent compensation committees, performance-based long-term incentives and disclosure of the pay ratio. A cap would also be easy to evade, for example by shifting pay into deferred or equity forms that are harder to compare, so the details of any rule would matter as much as the number. A middle path might strengthen those tools, for example by requiring that most executive pay depend on long-term results, rather than imposing a single cap. Would a cap apply to private companies too, or only to public ones, and who would enforce it?

Reply to Derek

Derek, your thread proposed that your marketing agency replace most of its salaried designers with independent contractors to cut benefits costs and gain flexibility. You are right that such arrangements have grown, and many agencies in your industry already use freelancers for part of their work. Katz and Krueger (2019) found that the share of U.S. workers in alternative arrangements, such as temporary help agency workers, on-call workers, contract workers and independent contractors or freelancers, rose from 10.7 percent in 2005 to possibly as high as 15.8 percent in late 2015. Workers finding customers through online intermediaries were only about 0.5 percent of all workers.

The risk in your plan is legal as much as strategic. Martocchio (2017) explains that classification turns on the real working relationship rather than the contract's label, and above all on how much the firm directs the manner and timing of the work. Designers who work set hours, use agency equipment and follow the agency's processes may be employees in law no matter what their contracts say, which would expose the agency to back taxes, overtime claims and benefit liabilities.

Contractors also bring a business risk your thread did not mention: the best freelancers work for several clients and may not be available when your agency's deadlines cluster. A safer approach might keep a core of salaried designers and use true freelancers for overflow projects with their own deliverables and schedules. Has your agency consulted an employment attorney about how the current designers' work is controlled, and has it estimated the cost of a misclassification claim?

References

Barrero, J. M., Bloom, N., & Davis, S. J. (2023). The evolution of work from home. Journal of Economic Perspectives, 37(4), 23-49. https://doi.org/10.1257/jep.37.4.23

Bebchuk, L. A., & Fried, J. M. (2003). Executive compensation as an agency problem. Journal of Economic Perspectives, 17(3), 71-92. https://doi.org/10.1257/089533003769204362

Katz, L. F., & Krueger, A. B. (2019). The rise and nature of alternative work arrangements in the United States, 1995-2015. ILR Review, 72(2), 382-416. https://doi.org/10.1177/0019793918820008

Martocchio, J. J. (2017). Strategic compensation: A human resource management approach (9th ed.). Pearson.

Mas, A., & Pallais, A. (2017). Valuing alternative work arrangements. American Economic Review, 107(12), 3722-3759. https://doi.org/10.1257/aer.20161500

Mueller, H. M., Ouimet, P. P., & Simintzi, E. (2017). Within-firm pay inequality. The Review of Financial Studies, 30(10), 3605-3635. https://doi.org/10.1093/rfs/hhx032