Performance-Based Compensation

Walker and Dunlop is a medium, sized company with a total of 402 employees. It specializes in financing commercial real estate ventures in the US. Multi-family lending is its primary focus. It creates, renovates, services and sells a variety of multi-family properties as well as other real estate financial services. Its operations are done through principal investment groups and capital markets. The company is headquartered in Bethesda and was established in 1937 by Oliver Walker and Laird Dunlop (The Wall street Journal, 2014). The intention of this paper is to create a payment policy that supports productivity for the company. In so doing, the company should be able to secure high-quality employees with the capability of working in the company’s competitive business environment.

Most companies use a guaranteed compensation plan where employees get compensated a standard amount regardless of their productivity within the year. The downside of this form of compensation is that it is incapable of motivating productivity (Thurm, 2013). In a situation of a bank’s unit managers, for example, the bank senior executives are incapable of observing the productivity of the unit or production managers. Owing to this, the senior management cannot write an effective employment contract founded on the productivity of the unit managers. This situation is referred as a moral hazard and often raises a conflict of interest between the production unit managers and the senior management.  This is because the decisions of the unit managers affect company’s earnings and performance while it is not controllable by the senior management.

In such situations, a company must design a compensation plan that prompts production managers to make decisions that maximize the profit and value of the organization. One way to resolve this is to offer the employees a Performance-based remuneration scheme. In such a scheme, high performance leads to a higher remuneration. While a fixed salary scheme does not offer employees an incentive for increasing the performance of the company, the Performance-based remuneration scheme does (Yermack, 2004). It helps to align the interests of the employees to those of the banks.

Even with its downsides, a guaranteed compensation plan is often integrated into the company’s compensation scheme for various reasons. It is, usually, employed when employees are new on the job. During the early period of employment, employees may be compensated using a guaranteed compensation plan. This allows for employees to be compensated for the period when they have little influence on performance.

In the case of Walker and Dunlop Inc., the company can employ the same mechanism for its employees. This will enable employees to strive for performance both during their early months of employment and at their final months of employment (Yermack, 2004). The early months of employment help for employees to acquaint themselves with their jobs. For the sales force, this period is used to acquaint themselves with their market. The sales force also creates a customer base during this period. This way, the employee is not influenced to stop working before they are able to prove their capabilities.

The company can employ a combination of the guaranteed compensation plan and a Performance-based compensation plan. The Performance-based plan serves as the primary remuneration plan while the guaranteed compensation plan is the secondary method. The performance payment plan is favored for its distributive justice (Yermack, 2004). It ensures that all employees are compensated according to their contribution. The performance-based remuneration plan is also often compliant with the law and is, therefore, a good mechanism for maintaining the company’s reputation. The company is also able to improve its performance through the payment plan.

Aligning a compensation strategy with Company goals

Various components should be addressed in a bid to align the compensation strategies with company goals and objectives. Most importantly, a compensation strategy should help in the creation and maintenance of the company culture that is intended for the company. How the company structures and its systems and manages its internal and external equity issues will influence its organizational culture.

Developing a compensation philosophy

A compensation philosophy’s development is intended to guide the complexity and design of the company’s compensation programs through the identification of a company’s goals and objectives, consideration of the company’s competitiveness in employee attraction and retention, emphasizing on internal and external equity and whether pay raises are tied to performance (Yermack, 2004). A philosophy that is consistent is strongly founded for both the employee and the organization. It also offers an idea of what to offer as a starting salary for new employees. This can lead to new employees being hired with starting salaries that are too high compared to existing employees. Also, the hiring executives can award starting salaries that are too low to be competitive.

Once the over-arching philosophy that is aligned to the organizational culture and the strategic plan is developed, it is important for the company to determine if there should be differences in the payment structures of the front line staff, professionals or management (Thurm, 2013).

Objectives: In regard to objectives, the management should determine the role the compensation program should play to assist in the victory of the business. First, the company could consider being regarded as the employer of choice. Companies that are highly regarded by employees are likely to attract talent. Second, the organization should know whether to prioritize generous benefits or top salaries. Thirdly, the company should determine whether or not to tie compensation to performance. Finally, should determine the level of flexibility in work hours, educational support and shifts.

Market competitiveness: A company’s compensation plan should be comparable to the compensation plan of its competitors. This way, employee turnover will be reduced and the company can compete for talent with its competitors. Second, the organization should determine if it offers its compensation at, below or above the market salaries. Thirdly, the organization should determine the strength of its competition plan. In this regard, it should determine the aspects that distinguish its compensation plan with those of the employees. Finally, the company should determine the comparison between its cash compensation and its benefits program (The Wall street Journal, 2014).

In ensuring that compensation and business strategy are still in alignment, the company should regularly review the linkage. This will also help the organization to determine the effectiveness of the compensation plan. If the company finds that its business strategies are closer to the business goals than they were at the commencement of the planning process, then the plan could be working and the alignment could still be in existence. On the other hand, if the company has not seen much progress in the recent past, it may require reviewing its compensation plan.

There are two common pitfalls that may cause a compensation plan not to bear fruits. First, there is the issue of the moving target. This arises when the company’s managers do not have a set of goals and objectives (Stegeman, 2000). This implies that employees’ target are often not in sync with the current goals and objectives of the company. Second, the organization may be awarding employees for benefits that they have not achieved. For example, a company may reward it employees for showing progress towards the organizations goals. Since past performance does not guarantee future performance, employees may eventually not deliver on their plans.

Aligning employee compensation packages with performance

The move to introduce pay packages that align executive compensation plan with performance is a new trend. It intends to align the interests of the executive with those of the shareholders. The executives are therefore motivated to implement decisions that are aligned with long-term growth. According to Bowling (2014), the compensation plans of the executives in most companies is similar to how baseball teams figure out how to pay their players. First, employers look at professional backgrounds. This ensures that individuals’ salaries are not lower than they would be compensated in a competitor’s company. Second, how an employee benefits a company is also important for the determination of a suitable compensation plan. Finally, companies also use the statistics that show how the company has grown during the leadership of an individual executive (Main, Bruce & Buck, 1996). Those employees who cause more growth in the company are awarded better packages.

According to a report by Thurm (2013), over 50 % of all executives were paid based on the organizations’ stock-market or financial performance in 2012. In 2009, 35 % of these companies would have paid their employees using Performance-based plans. This departure from traditional payment plans shows a rising level of participation of employees in the remuneration of senior executives.

At Walker and Dunlop, the company can introduce a compensation approach that is attached to the company’s stocks. This can be done by including a salary, bonuses, and the equity value at the time of issue. The returns of shareholders should include the value of dividends and the changes in price changes (Jensen, Murphy & Wruck, 2004).

Advantages of Performance-based compensation plans

Performance-based compensation plans are advantageous for both employees and employers who use them. First, Performance-based compensation plans are consistent. Employees understand the process that is employed in calculating pay raises. They also recognize precisely how much they require to work to earn certain benefits (Bowling, 2014). Employees also understand, for example, that they need to meet their employer’s performance expectations to get pay raises. If they exceed these expectations they increase chances of getting other incentives as well. Consistency in this regard requires that employers and managers calculate the performance appraisal of their employees in a way that has been approved by the HR department.

Incentives are provided for performance. Employees do their work in such a way as to qualify for higher incentives, and higher ratings. This is done by working harder and smarter. According to Mayhew (2014) employees do not only work hard to achieve higher results. They also strive to ensure that they never show results that are way below their current performance. This method therefore exploits the full potential of employees hence eliminating the need for employing more employees. Employees achieve high ratings and then work to maintain them.

Both employers and employees benefit from the performance-based compensation plans. This is best achieved through the approval of guidelines and incentives to ensure that an employee rating is maintained (Armstrong & Murlis, 2007). The best method of issuing incentives is by compounding employee salary rather than giving a one-time bonus that does not impact on the long-term earnings of an individual. Employers who introduce mechanisms to increase or maintain employee performance are better placed to reduce employee turnover while at the same time improving organization performance.

In conclusion, most companies are adopting remuneration schemes that are based on the performance of both the company and individual performance. Employees are awarded salary increments in line with their performance. Senior executives, on the other hand, are awarded remuneration according to the overall performance of the company and the areas they lead or manage. Walker and Dunlop may employ this mechanism in its payment plan. This would call for employees to be compensated for their performance. This would especially work for the sales team as their performance is measurable. Senior executives, on the other hand, can be paid depending on a number of factors including the change in share value, the overall financial performance of the organization and the background of the executive.

References

Armstrong, M., & Murlis, H. (2007). Reward management (1st ed.). London: Kogan Page.

Bowling, C. (2014). Performance, shareholder input play prominent roles in executive pay packages – Louisville – Business First. Business First. Retrieved 11 October 2014, from http://www.bizjournals.com/louisville/print-edition/2014/06/27/performance-shareholder-input-play-prominent-roles.html?page=all

Jensen, M., Murphy, K., & Wruck, E. (2004). Remuneration: Where we’ve been, how we got to here, what are the problems, and how to fix them. Harvard NOM Working Paper.

Koss, S. (2008). Solving the compensation puzzle: Putting together a complete pay and performance system. Society for Human Resource Management.

Main, B., Bruce, A., & Buck, T. (1996). Total board remuneration and company performance. The Economic Journal, 1627–1644.

Stegeman, H. (2000). Individual remuneration (1st ed.). The Hague: CPB Netherlands Bureau for Economic Policy Analysis.

The Wall street Journal,. (2014). WD Company Profile & Executives – Walker & Dunlop Inc. – Wall Street Journal. Retrieved 11 October 2014, from http://quotes.wsj.com/WD/company-people

Thurm, S. (2013). ‘Pay for Performance’ No Longer a Punchline. WSJ. Retrieved 11 October 2014, from http://online.wsj.com/news/articles/SB10001424127887324373204578372444079319544

Yermack, D. (2004). Remuneration, retention, and reputation incentives for outside directors. The Journal Of Finance, 59(5), 2281–2308.