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Overview: This chapter looks at the role of managers within the organization and the kinds of
compensation programs, combining base pay and incentive pay, that are used to motivate and reward
this important group of employees.
INTRODUCTION
Managerial employees represent the most common group to be identified as requiring special
compensation programs. This is for a number of reasons.
1. Managers are a small part of the total number of employees in any organization but represent
a disproportionately high percentage of total wage costs.
2. They are a group of vital importance to the operation of the organization, and it is important
to attempt to individualize compensation for each manager.
3. It is possible to develop measures of individual performance such that incentives are
appropriate and desirable, since it is of utmost importance that managers associate
themselves with organizational success.
Within the management group (for our definition) exists the "executive group". Common to many
position naming systems, these positions carry the lead title "Top", or Vice President (except in
financial institutions), "Chief", or other nomenclature that differentiates their position within an
organization hierarchy. In many international locations and within smaller-to medium-sized North
American firms, the terms manager and executive are interchangeable. This is not the case for large
U.S. publicly traded corporations, and it is clearly not the case for the compensation levels and
practices paid and used. "Executive compensation" is a subject on to its own, and for this reason will
be dealt with separately in the next chapter (chapter 19).
The focus of this chapter is on the group of managers that falls between these top executives and the
non-supervisory employees. It extends from first-line supervisors up to high-level middle managers.
They are the "in between" employees who translate the strategies of top management into daily
operations. They need to understand and be able to deal with the two groups above and below them
effectively if the organization is to prosper. The past number of years has been hard on these
managers. In the traditional organization these managers were the translators of top management's
desires to the workers. The downsizing of organizations has most often resulted in the reduction of
many management levels within those organizations, resulting in mass layoffs, roll changes and
considerably more stress in this group of employees.
MANAGERS: THE JOB AND THE PERSON
As a beginning point we will examine the nature of the managerial job and the characteristics of the
people who occupy this role in organizations.
The Managerial Job
Presthus identified one of the basic patterns by which people accommodate themselves to working in
organizations to be that of being upward-mobile. People like this accommodate to organizational life
by associating their goals with those of the organization.1 The major group of people in organizations
who meet this description are its managers. This connection that these people make between
themselves and the organization needs to be enhanced and encouraged through the compensation
plan. This section will discuss the managerial role, the characteristics of managerial work, and the
differences in levels of managerial work.
The Managerial Role. In a way all managers are like what has been said of the foremen, they are
the people in the middle.2 This emphasizes the fact that managers have to please a number of
constituencies in order to get their work done. Broadly speaking, managers have an internal role and
an external role.3 The internal role has to do with directing an organizational unit. In interpersonal
terms, Katz sees this as a leadership function.4 The external role requires the manager to deal with
people outside the organizational unit to accomplish the unit's work. This role is not as clearly defined
as the internal role but involves developing relationships, gathering information, and deciding where
the organization is going and how to get there. In this, the manager is often like the salesperson--on
the margin of the organization. To the extent that this is the case, variable pay plans would seem
appropriate.
Mintzberg has elaborated further upon the roles of a manager.5 He has developed ten roles, divided
into three categories--interpersonal roles, informational roles, and decisional roles. Each of these
categories has roles that can be considered internally and externally oriented, as illustrated in figure
18-1. Externally, the manager represents the organization to the world, deals with the world, and
decides the direction the organization or the unit needs to take. Internally, the manager directs
organizational activity and allocates resources to accomplish goals. All this is central to the
organization's success. Not all managerial jobs contain all ten roles equally, nor do all managers
perform all roles equally. This leads to a great deal of variety in the definition of the managerial job,
with the manager having a good deal of influence over their definition.
Source: T. J, Atchison and W. W. Hill, Management Today, New York: Harcourt Brace Jovanovich, Inc.,
1978, p. 7.
Levels of Managerial Work. Organizations are hierarchical, which is what creates the managerial
role in the first place. Large organizations have a number of managerial levels. In fact, the
organization chart is usually a chart of the managerial jobs in the organization. Compensation plans
for the managers in an organization generally follow this organizational hierarchy closely. The
hierarchy contains three levels of managers: top management (executives), middle management, and
lower management (supervisors). The latter two will be discussed here.
Lower Management. At the bottom of the hierarchy are the supervisors. They are first-line
managers. That is, they direct the work of non-managerial employees. This job is more internally
oriented, in two ways. First, the supervisor is more intimately concerned with a small group of workers
and the work of that unit. Second, although the supervisor's external contacts are outside the
organizational unit, they are usually still within the organization itself. The pressures of the first-line
supervisor are immediate and influence today's results, in considerable contrast with the top manager,
who is concerned mostly with problems extending years into the future. Because supervisors are so
close to their workers, the job comparison standard for first-line supervisors is often the worker in the
organizational unit. Thus the supervisor's wages are some percentage over those of the workers. In
fact, a series of studies shows that employees have a definite idea about the "appropriate" distance
between organizational levels. Mahoney's review of these concepts and studies indicates that about a
33 percent distance between organizational levels feels right to people.8 A study by one of the authors
shows a lower differential at the supervisory level, closer to 20 percent.9
Middle Management. As the name implies, this consists of the organizational levels between the
supervisor and top management. These managers manage other managers and act as an information
channel between top management and supervisors. Their perspective is ordinarily intermediate. They
are usually responsible for a specific function in the organization and spend much of their time
coordinating this function with other groups in the organization. A great number of the contacts of this
group are lateral, so that getting work done is through means other than the use of authority.10 This
creates considerable ambiguity for the middle manager, a feeling that he or she is responsible but
does not have the necessary control. These contacts make peer comparisons important for this group.
Compensation for this group is often related to the function that is being managed, and since there
are large enough numbers of managers, managerial wage surveys make sense. It should be noted
that this group has been reduced in numbers dramatically in the past twenty years as organizations
have downsized and eliminated organizational levels to reduce bureaucracy.
Managers
It is difficult to identify any particular personality pattern as being common to managers. However,
there are a number of aspects of managers relevant to the development of a compensation program
for them that need to be explored. These are their commitment, decision orientation, and power
needs.
Commitment. From the discussion thus far it should be clear that commitment is one thing managers
have and organizations need. Managers associate themselves with the organization and spend a great
deal of time at their work, usually up to 60 hours a week. But even if they are not formally working,
managers find it is hard to turn off the job. They think about their job even when they are supposed to
be at leisure. In terms of the membership model, these people have high inputs and will therefore
expect high outcomes from the organization.
Decision Orientation. Managers are action-oriented. Mintzberg found that managers had a
preference for live action and the use of verbal media.11 This often gives them the appearance of being
intuitive rather than analytical in their decision making. This is in contrast with the reasons why the
professional, who is analytical, is valuable to the organization. The manager ensures that things keep
moving and get done. Decisions are the heart of the manager's job.12 In a way, this is what managers
are paid for. Certainly the time span of discretion, by which Jaques measures job level, implies that
decisions are central to defining managerial jobs.13 Likewise, the Hay system of job evaluation, the
one most commonly used to evaluate managerial jobs, focuses upon three aspects of decisions: know-
how, problem solving, and accountability.14 So an orientation to decision making is probably useful in
trying to evaluate managerial jobs and performance. Furthermore, both Kotter and Mintzberg find that
being knowledgeable about the business and organization and having a wide set of contacts in order
to collect information are important aspects of the manager's job.15
Managerial decision making is not like technical decision making. Katz points out that as managers
move up the organizational hierarchy, they need to have higher levels of conceptual skill. This skill
requires the manager to think in terms of general trends rather than specifics and to be able to see
the forest for the trees.16 This skill may be related to the idea of left-brain thinking.17 The point is that
managers, as they move up in the organization, need to be able to think and make decisions using a
much broader framework and be able to deal with high levels of uncertainty. These skills may be in
very short supply within the society, creating demand higher than supply.18
Power Needs. McClelland found that, unlike sales personnel, managers do not have a high
achievement drive. This is not to say that they do not focus on accomplishing things or are not
ambitious; they do and are.19 But they do not match McClelland’s technical definition of achievement
drive. What McClelland did find out about managers is that they have high power needs.20 They enjoy
controlling a situation and having a strong influence on the outcome of events. This desire for power
can take two different forms, power over and power to. The former is a personal definition of power
that taps the unsavory aspects of the idea of power. The power to is a more institutional expression of
power that focuses on getting the job done in the organization within the rules of the organization.
Compensation programs for managers need to encourage this latter type of power drive.
This power aspect of the manager indicates that managers have and need considerable interpersonal
skill. Most studies show that this is true. Katz sees that this interpersonal skill takes on two forms,
supervisory and peer. Supervisory skill has to do with the leadership of the people in the manager's
organizational unit. Peer skill has to do with the myriad contacts the manager must engage in outside
the organizational unit in order to get the work done.21 Also connected to power is the idea of status.
Managers spend a great deal of time on the job, are committed to the organization, and carry heavy
responsibility. They must find it worth doing. Beyond the high wages there are a number of other
extrinsic and intrinsic rewards available to managers. The management job is held in esteem within
the organization, if not in society as a whole. But there is a hierarchy of managers in the organization,
with those further up having more status than those lower down. The measure of status is most often
reflected in the wages of the person. Thus, managerial compensation is a reflection not only of job
worth but of the rank and status of the manager.
• Base Pay
• Variable Pay
• Benefits
Tied to these factors is a second consideration, the sunk costs that the organization has in the
manager. Ordinarily, the manager is a person who has worked for the organization for a number of
years, and the odds are good that the organization has spent considerable money in training this
person as he or she has moved up the managerial ranks.
A third consideration that supports a high wage level decision is that this is a small group of
employees. So even if wages are high for the group, their overall impact on total wage costs of the
organization may be small.
Fourth, managers are in contact with the outside world a great deal. This means that they are more
likely to be aware of the market rates for their jobs than other employee groups and that they are
visible to other organizations that would be inclined to make an employment offer to them. Any group
that is both important and visible, as is this group, will have to be paid competitively in order to hold
down turnover.
A final consideration that calls for an aggressive pay level decision is the relatively small supply of
managers as compared with other employee groups. There is evidence that although a large number
of students are going on to college and obtaining degrees, many do not desire managerial positions as
much as professional ones.22
Middle-management pay criteria are more likely to be influenced by internal organizational factors,
particularly the organization chart and the salary of the top executives. The organization chart
becomes a guide for determining the appropriate internal references-those at the same organizational
level. The top executive's pay becomes a ceiling in the organization: all other managerial positions can
be measured in terms of their percentage of that person's pay. This is a common way in which middle
management pay is reported.23 For instance, ERI's Executive Compensation Assessor allows one to
compare the top six levels of executive pay from which the percentage difference between the top
executive's pay and other positions may be calculated. This is illustrated in Figure 18-2.
RETAIL
MANUFACTURING CONSTRUCTION
Position TRADE - UTILITES BANKING
- CHEMICAL - HEAVY
APPAREL
Two 283,313 68% 296,071 69% 220,367 69% 130,855 74% 227,555 65%
Three 251,023 60% 257,729 60% 199,829 62% 123,261 70% 212,046 60%
Four 251,867 60% 260,676 61% 197,032 61% 125,590 71% 213,013 61%
Five 257,113 61% 259,656 61% 206,079 64% 124,008 70% 212,468 60%
Six 214,858 51% 228,995 53% 170,270 53% 104,097 59% 182,125 52%
Source: ERI's Consultant Assessor, sub-program Executive Compensation Assessor May 2010
ERI Sources