Compensation refers to the rewards that employees receive on a regular basis for their contribution to the growth or operation of a company. A compensation package is “a total reward system that includes non-monetary, direct, and indirect rewards” (Wemer, Schuler and Jackson 52).
Direct compensation refers to the salaries, wages, or any performance-oriented pay that employees receive periodically. Indirect compensation includes the benefits obtained from programs such as retirement plans, paid leave, and health insurance. Compensation is an important determinant of the competitiveness of every company (Wemer, Schuler and Jackson 53).
It determines the ability of a company to recruit and retain the best talent in its industry. Moreover, it influences the level of employees’ motivation, satisfaction, and performance (Wemer, Schuler and Jackson 54). Companies with effective compensation systems often have low labor turnover and high financial performance. Consequently, most companies are focusing on improving their compensation systems in order to bolster their competitiveness.
However, developing an effective compensation system is often expensive to employers. Besides, employees are interested in a variety of rewards rather than just monetary compensation. In this regard, most companies provide compensation packages that include monetary and non-monetary rewards in order to satisfy their employees. This paper analyzes Ford Motor Company’s compensation system. It will shed light on the extent to which the system helps Ford Motor Company to motivate and to retain its valuable employees.
Ford Motor Company’s Compensation System
Ford is one of the leading car producers in the United States. The company also operates in several countries in Africa, Asia, and Europe. Ford owes its success to its talented and committed workforce that produces high quality products for every market (Ford Motor Company). Ford uses a performance-based compensation system in which its employees’ pay depend on their performance.
In the last decade, the company focused on paying its employees based on the extent to which they achieve predefined performance targets. The targets set for each employee are based on the company’s corporate level strategy. Ford’s corporate level strategy is to develop “one team that executes one plan to deliver one goal” (Ford Motor Company). The aim of this strategy is to enable the company to maintain its profitability by assigning specific responsibilities and performance targets to every employee.
Ford’s compensation philosophy is “…compensation and benefits programs are an important part of the company’s employment relationship, which includes challenging and rewarding work, growth, and career development opportunities” (Ford Motor Company). As a multinational corporation, Ford has developed a compensation system that is cost-effective and conforms to international best practices. Rewarding performance is an integral element of the company’s compensation philosophy.
Thus, Ford rewards its employees for maintaining exceptional performance and improving its competitiveness in various markets. The objective of Ford’s compensation system is to “attract, retain, and motivate, as well as, to reward achievement of business results” (Ford Motor Company). Moreover, the strategy aims at improving employees’ income security.
Ford’s compensation system is guided by the following principles. First, the system is expected to enable the company to develop a pay-for-performance culture that motivates employees to achieve their targets (Ford Motor Company).
Second, the compensation system is meant to enable the company to position itself competitively by attracting, motivating, and retaining the best talent in the car manufacturing industry.
Third, the company must be able to afford the compensations in the medium-term and long-run. Additionally, the compensations should not be adversely affected by short-term changes in the external environment (Ford Motor Company).
Fourth, the compensation system is expected to take into account the diversity of Ford’s employees and their financial needs (Ford Motor Company). Finally, the company expects to achieve efficiency and effectiveness through its compensation system. In particular, the system is expected to create economies of scale and to reduce the cost of compensating employees. Additionally, it must have clearly defined metrics, which are used to determine the rewards that each employee should receive.
Based on the principles discussed in the foregoing paragraph, Ford has developed a compensation mix that consists of both direct and indirect rewards. The direct rewards include base pay, incentive bonuses, and stock options (Ford Motor Company). Base pay includes the salaries or wages paid to the company’s employees, whereas incentive bonuses include additional payments that are made occasionally, to acknowledge exceptional performance.
Stock options give the company’s employees an opportunity to own its shares (Ford Motor Company). The indirect compensations provided by Ford include retirement benefits, perquisites, and social security benefits. Taken together, these rewards help the company to attract, retain, and to motivate its employees.
How the Compensation System Helps in Motivating and Retaining Employees
Ford’s employees earn salaries that commensurate with their performance. The salaries vary with employees’ skills and positions within the company (Ford Motor Company). Ford’s compensation committee is responsible for determining the salaries of the most valuable employees such as the company’s executives. The company uses salaries to motivate and to retain its employees in the following ways. First, it ensures that the salary received by each employee fairly reflects his or her effort (Ford Motor Company).
In order to ensure fairness, the compensation committee takes into account several factors before raising the salary of an employee. To begin with, the committee considers the responsibilities assigned to the employee and his achievements in the last financial year. This ensures that each employee is paid according to the responsibilities assigned to him, as well as, the effort he channels towards performing his duties.
As a result, the company is able to avoid exploiting its employees by underpaying them. Moreover, paying employees according to their performance motivates them to improve their performance. For instance, the company provided a merit salary increment of 3.1% to its employees in 2012 in order to motivate them to maintain exceptional performance (Ford Motor Company).
The committee also considers salaries paid to individuals with similar responsibilities within the company before increasing salaries (Ford Motor Company). This improves internal equity in compensation among employees, thereby eliminating the dissatisfaction that might arise because of pay discrepancies.
Similarly, the compensation committee takes into account the salaries paid to employees in a particular position in different companies. The aim of this strategy is to ensure that the salaries of the company’s employees are equal to or better than those of its main competitors (Ford Motor Company).
Thus, the company is able to retain its employees by providing competitive salaries. For instance, the salaries paid to Ford’s executive officers in 2012 exceeded those paid to nearly all motor companies in North America (Ford Motor Company). The compensation committee also ensures fairness by considering employees’ job tenure and skills. By considering skills, the committee ensures that employees are rewarded for their effort to improve their expertise.
This motivates the employees to improve their expertise through higher education and on-the-job training programs. Furthermore, the committee considers the time since last salary increment to ensure that employees with similar responsibilities have comparable salaries (Ford Motor Company). Generally, ensuring fairness in compensation helps the company to reduce employee dissatisfaction. This motivates employees to improve their performance and to continue working for the company.
Second, Ford motivates and retains its employees by improving their financial security (Ford Motor Company). In particular, the company pays high salaries to its valuable employees throughout the business cycle. Accordingly, it cushions its employees from the negative effects of economic decline that often results into a reduction of their variable pay. This leads to income certainty among Ford’s employees.
Generally, employees are likely to continue working for a company if the certainty and reliability of their income is guaranteed (Wemer, Schuler and Jackson 78). In addition, providing income stability, especially, during economic decline is likely to reduce employee turnover significantly. It is against this backdrop that Ford focuses on improving its employees’ financial stability through high salaries.
Ford uses annual incentive bonuses to motivate and to retain its employees. The compensation committee has identified several metrics to help it determine the amount of incentive bonus that should be paid to each employee.
These include profit before tax, market share, cost reduction, sales, and product quality (Ford Motor Company). The employees receive incentive bonuses that commensurate with the extent to which they achieve the targets associated with the aforementioned metrics. In this regard, the compensation committee uses a sliding scale to compute the employees’ bonuses.
For instance, 35% of the incentive bonus paid to the company’s executive officers depends on profit before tax targets, whereas the sales and cost reduction targets account for 35% and 10% of the bonus respectively (Ford Motor Company). In 2012, the company’s executives achieved 75% of their performance targets, which involved improving sales in Europe. Consequently, they were paid 75% of the total value of the incentive bonus that they were promised (Ford Motor Company).
In this case, the incentive bonus system motivates the executives to improve their performance so that they can earn more. Since most employees are interested in increasing their earnings, they will strive to exceed their performance targets in order to earn the highest level of bonus. Currently, the compensation committee has set the highest level of incentive bonus at 200% in order to motivate employees to exceed their targets.
Apart from incentive bonuses, Ford awards incremental bonuses to its valuable employees. In 2012, the company established a performance fund, which it uses to reward its executive officers for individual achievements (Ford Motor Company). Under the incremental bonus system, the employees set their personal performance targets in every financial year and strive to achieve them.
At the end of the financial year, they receive incremental bonuses that correspond to the extent to which they achieve their targets. Thus, incremental bonuses also play an integral role in motivating Ford’s employees to achieve their targets. The incremental bonus system motivates employees to set challenging personal targets that lead to improvement of the company’s overall performance.
For instance, the senior management employees who were awarded incremental bonuses in 2012 had exceptional performance that led to an increase in the company’s value and profitability (Ford Motor Company). Apart from setting challenging targets, incremental bonuses motivate employees to focus on innovation in order to improve their performance. As a result, the employees’ commitment to the company improves, thereby reducing labor turnover.
Despite their potential to motivate employees, the bonus systems discussed in the foregoing paragraphs are likely to reduce employees’ motivation. For instance, employees who achieve the minimum level of performance are not entitled to any bonus. In this case, underperformers are likely to have little or no motivation to continue working hard, especially, if their failure is attributed to external factors (Wemer, Schuler and Jackson 86).
In addition, employees who are not able to achieve their targets are likely to leave the company since they will not be able to improve their income by receiving bonuses. In order to address this challenge, the company ensures that all its employees have equal opportunities to perform according to their abilities in order to achieve their targets.
Performance Unit and Stock Option
Ford’s equity-based compensation package consists of performance unit and stock option grants (Ford Motor Company). The equity-based compensations are used to reward the company’s senior management team.
Half of the employees’ total equity-based compensation consists of performance unit, whereas the remaining half consists of stock option. The company believes that equity-based compensation is one of the best ways of ensuring that the executive management team remains focused on achieving short-term, medium term, and long-term objectives of the business (Ford Motor Company).
Ford’s stock option scheme vests over a period of three years. In addition, the stock option plan has a term of ten years, which makes it suitable for use as a long-term incentive scheme. The stock option plan plays an important role in retaining employees since their award is subject to the three-year vesting requirement. In particular, the employees are required to work for the company for at least three years in order to receive the rewards (Ford Motor Company).
In addition, the company uses the stock option plan to motivate its executives to focus on achieving its long-term objectives (Ford Motor Company). For instance, developing new car models and gaining market share in new markets requires a lot of time. Thus, employees have to stay with the company for a long time in order to achieve long-term goals such as developing new cars. In this regard, awarding stock options with a ten-year term helps in influencing the employees to continue working for the company.
The performance units “are earned based on a one-year performance period, but are paid out in service-based restricted stock units, which vest over a two-year period” (Ford Motor Company). The one-year period requirement helps the company to motivate its employees to concentrate on achieving essential short-term business objectives.
In addition, it motivates the employees to focus on continuous improvement of their performance in the short-term. The two-year vesting period requirement plays a key role in retaining the company’s senior management team. To elucidate, the executives have to work for the company for the two years in order to receive the performance unit compensation (Ford Motor Company).
In order to motivate employees to improve their performance, the company awards the equity-based compensations according to the employees’ achievements. The employees receive the equity-based compensations according to the percentage of their targets that they are able to achieve in a given financial year. Thus, employees who achieve 100% of their targets receive the highest level of equity-based rewards, whereas those who fail to achieve their targets are not rewarded (Ford Motor Company).
The company also awards incremental incentive grants to some of its employees who are responsible for the achievement of important business objectives. The incremental incentive grants are mainly used to motivate employees since they are directly tied to performance. In this regard, an employee receives the full amount of the grant if he or she achieves a predetermined performance target (Ford Motor Company).
However, the company does not award any incremental incentive grant if the employees fail to meet their targets. Generally, the equity-based compensations enable employees to be involved in the company as shareholders. As a result, they are likely to improve their commitment and to continue working for the company in order to enhance the returns on their investments. This leads to high retention rate among employees who receive equity-based compensation.
Perquisites and other Benefits
Ford provides a wide range of perquisites and other fringe benefits to its most important employees, which include the following. First, the company provides personal travel allowance to its chairperson and chief executive officer (Ford Motor Company). This involves paying the charter costs when the executives travel on private aircraft for official or personal trips.
The company also pays the travel costs of the executives’ family members. Second, the company provides its managers with at least two cars which they use free of charge. Third, Ford provides home security services to some of its managers. It also pays up to 75% of the managers’ counseling and real estate planning services (Ford Motor Company).
Finally, the company provides tax reimbursements to its employees who are transferred to other countries or regions. The reimbursements are expected to help the employees to meet the costs of relocating to their new workstations. These benefits help the company to motivate and to retain its employees in several ways.
To begin with, the benefits improve the comfort of the employees, which in turn improves their wellbeing. For instance, providing home security services enhances the safety of the most important employees and their families.
Similarly, paying for counseling services enables the company’s senior managers to access professional guidance on personal challenges that may lead to stress (Ford Motor Company). Several studies have established a positive correlation between improved employee wellbeing and staff motivation. Thus, Ford’s employees are likely to be highly motivated as the company improves their wellbeing.
The benefits also make the employees feel appreciated by the company. For instance, paying for the private travelling costs of the executives and their family members is a token of appreciation for their contribution to the company. This improves the employees’ commitment to the company, which in turn reduces labor turnover (Wemer, Schuler and Jackson 104). The benefits also play an important role in improving the employees’ work conditions.
For instance, the managers are able to travel in a cost-effective and comfortable manner by using the company’s cars. Undoubtedly, work condition is one of the major determinants of employees’ motivation and retention (Wemer, Schuler and Jackson 107). Employees are likely to be highly motivated and to continue working for companies that provide excellent work conditions and vice versa (Wemer, Schuler and Jackson 109).
Ford has a general retirement plan, which enables its employees to enjoy tax-qualified benefits upon retirement (Ford Motor Company). Moreover, the company provides nonqualified retirement schemes for some of its employees.
These include the benefit equalization plan (BEP) and the supplemental executive retirement plan (SERP) (Ford Motor Company). In 2004, the company introduced a tax qualified retirement plan to enable it to achieve its objective of improving its employees’ income security and to cushion them from catastrophic loss (Ford Motor Company).
The retirement plans provided by Ford helps its employees to amass tax-advantaged wealth for their retirement (Ford Motor Company). The resulting increase in income stability upon retirement motivates the company’s employees to improve their productivity. The retirement plans have a significant influence on employees’ behavior.
They serve as incentives to young employees to continue working for the company for a long period in order to accumulate retirement income. Moreover, the company’s aging employees are motivated to retire in time because they have income security (Ford Motor Company). Aging employees often opt to retire in time if they have adequate income to spend after retiring (Wemer, Schuler and Jackson 130).
Timely retirement is important to the company because it enables it to reduce staff costs. To elucidate, the costs of retaining aging employees is often high because of their deteriorating health and low productivity. Thus, the retirement plans are integral to the company’s success by improving the employees’ income security and motivating them to retire at the right time.
Apart from motivating the employees, the retirement plans enable the company to attract and retain workers with the desired behaviors. As a manufacturing company in a highly competitive industry, Ford is interested in employees who are willing to work for it for a long time (Ford Motor Company). This helps the company to achieve its long-term objectives such as product development.
Thus, the retirement plans enable the company to attract and retain employees who are interested in income stability and protection from catastrophic loss. Empirical studies have shown that employees who consider their retirement plans to be important are likely to continue working for their employers (Wemer, Schuler and Jackson 203). This explains Ford’s commitment to provide highly rewarding retirement plans for its employees.
Compensation plays an integral role in attracting, retaining, and motivating employees in virtually all companies. Most employees take into account the importance of the compensation packages provided by their employers when making their career development decisions. Thus, Ford has focused on providing a competitive compensation package to retain and to motivate its employees. This involves paying salaries that are equal to or higher than those paid by the major car manufacturers in the United State.
Additionally, the company’s compensation system promotes fairness, and income security, thereby reducing employees’ dissatisfaction. As a result, the company is able to retain its valuable employees. Ford’s compensation package consists of different rewards, which include salaries, stock options, perquisites, and retirement plans. In order to motivate employees to improve their productivity, the company compensates its employees according to their performance.
Ford Motor Company. Notice of 2013 Annual Meeting of Shareholders and Proxy Statement. Ford Motor Company, 9 May 2013. Web.
Wemer, Steve, Randall Schuler and Susan Jackson. Human Resource Management. London: Cengage Learning, 2012. Print.