Compensation Practice Term Paper

Verizon Compensation Strategy

Compensation Practice

Verizon Communications is a publicly traded company registered in the United States as a telecommunications and broadband company. It trades under the name Verizon. It is a market leader in the telecommunications industry and strives to provide excellent services that satisfy consumers. Worker compensation has always been an important aspect of Verizon's overall strategy to keep employees motivated and provide excellent service to consumers. In 2010, the company did a review of their compensation strategy with the aim of improving it. The 2010 compensation decisions, designed by a committee and approved by shareholders, took effect in 2011.

Briefly describe the company you researched, its compensation strategy, best practices they are applying, and compensation-related challenges they are facing.

Verizon's compensation strategy is founded on providing fair compensation to its employees. All of Verizon's employees get a base salary that is pegged on market rates and incentives are pegged on individual and company performance. These incentives are a combination of gain sharing, sales commissions, team awards, and group and store bonuses aimed at motivating the workforce. Their entry-level sales employees are provided with a competitive salary package and commissions to motivate them to build their customer base by focusing on building relationships. However, some employees, especially at middle and senior levels are given more flexibility in their packages as the company strives to match competitor's salaries. All groups are given bonuses structured in a way that correlates with their core activity to incentivize their performance.

Apart from the individual bonuses, all employees get bonuses based on team, group, store, and overall company performance. These are usually allocated on a quota system whereby the team with the best performance gets the largest amount, which is then split among the team members. This team-based gain sharing is a group inventive program, which is aimed at driving improvements in productivity, efficiency and effectiveness of teams. It is run as a short-term incentive plan to motivate teams to work together towards goals. It is also an essential retention tool for employees since they receive competitive compensation. This plan is effective since employees who have worked for as little as one day within the compensation year are eligible to receive this incentive. However, union employees are often not eligible for this plan because this is often not part of their collective bargaining agreement. Though it is essentially a short-term incentive plan, it creates long-term value for the shareholders because the overall increase in performance is often sustainable.

Verizon also runs a long-term incentive plan, which rewards employees or creating long-term value over a period of three years. This is an important retention tool for employees and helps Verizon build long-term performance through applying effective long-term strategies. After the three-years performance cycle, Verizon's employees are awarded company stock at the company's stock price. This incentivizes employees to create value in the company stock since the better the stock price, the greater the amount they receive.

The company has incorporated several compensation best practices in their compensation strategy. One is by eliminating guaranteed supplemental retirement benefits and pension for employees, eliminating executive arrangement for employment, eliminating CEO cash severance benefits, eliminating triggers for change in payments of control equity and adopting a policy to recapture or cancel incentive payments to executives engaging in misappropriation or other financial misconduct. The company's CEO is also required to maintain their share ownership at least seven times their base salary.

As a company, Verizon faces different challenges in applying their compensation strategy. One major challenge for the management team is that the overall compensation package offered to employees is often high and leads to significant reduction in profitability though it increases revenue and cash flow. This challenge is large for the company, however, when they appropriately motivate executives, revenue increases to a point where increased expenditure on compensation does not reduce profits. Therefore, in the end their compensation strategy is effective in helping the company achieve its strategic goals while encouraging profitable operation.

Analyze how your company applies compensation practice to determine the positive or negative impact to the company and its stakeholders

Verizon's compensation strategy is reflective of the company's strategic goals and helps to improve their growth in the short- and long-runs. It also ensures efficient use of shareholder's capital. Through the short- and long-term incentive plans, the company creates value that affects its overall performance in the short- and long-runs. The company's performance-based culture is linked to the interests of the shareholders.The company incentivizes employees and management executives to perform to greater standards by providing them with fixed compensation in the form of a base salary that is only a small percentage of their overall compensation opportunity. These incentives are also based on the company's performance objective whereby when the company meets its objectives, the executives receive better compensation. Another important aspect of their compensation strategy is that Verizon's long-term plan is usually about three-times their short-term plan. This means that the opportunity that employees and executives have to receive compensation in the long-term is about thrice the total they receive in their short-term plans. This incentivizes employees to create long-term shareholder value while strongly aligning the interests of employees and executives to those of shareholders.

Examine the ways in which laws, labor unions, and market factors impact the company's compensation practices. Provide specific examples to support your response.

Federal income tax laws greatly affect Verizon's compensation strategy. According to federal laws on income tax, public companies are generally prohibited from deducting compensation above one (1) million paid to a named company executive with the exception of the chief financial officer Tosi & Greckhamer, 2004.

This and other accounting laws creates issues regarding tax deductibility for performance-based incentives for the company and affects Verizon's short- and long-term plans since the company deems itself to have flexibility in determining when to ward compensation that does not quality for tax deductibility. In determining compensations packages, the company has to effectively review accounting rules and tax laws in order to determine whether compensation action under their short- and long-term plans are in the best interest of shareholders in terms of future stock performance and profitability.

Market factors also affect Verizon's compensation packages considerably. Verizon prides itself in providing employees and executives with competitive packages if not being the leader. Therefore, the company has to keep an up-to-date analysis of the market rates for each position in order to determine whether their current compensation packages are competitive in the market. When demand for employees is high, the compensation packages greatly increase because the number of employees available often remains constant. This affects Verizon's compensation strategy since they are required to increase their packages to remain competitive in the market and retain its employees.

Verizon, however, meets this by incorporating other motivational factors other than monetary compensation. A good example is their employee value proposition model. The company regularly analyzes the employee's employment experience while at the company and places emphasis on aspects such as career development opportunities. This is a person-centered approach for determining their value to the company and in return their compensation package. For employees who have better scores in the employee value proposition, they are given greater rewards in terms of reward, advantage, and opportunity to meet their needs. This helps the company keep costs low while motivating employees effectively.

Other strategies such as the 401k savings plan that offers a generous match up of 6% of the employee's base salary and other packages such as health and wellness packages make the company attractive to employees. The company spends close to $300 million in education, development and training of employees and almost $100 million in assistance for tuition. This ensures employees focus on their long-term career prospects thus improving employee retention rates.

Evaluate the effectiveness of traditional bases for pay at the company you researched

For Verizon Communications, as for most other corporations, base pay is the largest component of their total compensation package. This is because incentives and commissions are performance-based and thus when the company does not meet its objectives, these are paid out in small amounts or not paid out at all. According to Cheng and Farber (2008)

, base pay for any organization defines the standard of living of employees and should be internally equitable, externally competitive, affordable for the company, defensible in a court of law, and appropriate for the organization, city and workforce. Williams, McDaniel, and Ford (2007)

and Verizon's compensation package has all the characteristics of a good base pay. It is internally equitable, competitive when compared to other organizations in the industry, affordable for the company and has all other qualities. It is based on merit whereby the base salary is pegged on the role that they play in the company or organization. Other factors that come into play are the degree to which the employee is good at their job, their value as determined by the employee value.....