Employee Compensation Plan at P&G
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Question : Write a six to eight (6-8) page paper in which you:
Briefly describe the company you researched, its compensation strategy, best practices they are applying, and compensation-related challenges they are facing. Analyze how your company applies compensation practice to determine the positive or negative impact to the company and its stakeholders. Examine the ways in which laws, labor unions, and market factors impact the company’s compensation practices. Provide specific examples to support your response. Evaluate the effectiveness of traditional bases for pay at the company you researched.
Answer :
1 Procter & Gamble (USA)
The Procter & Gamble Company of the United States of America is a publicly traded company. It was incorporated in May 1905. The name of P&G CFO and Vice Chairman is JON R. Moeller. P&G employed more than 92,00 employees. The headquarter located at Cincinnati, Ohio, in the United States of America. P&G aims at providing packaged consumer goods to its customers all around the world. There are almost two dozen brands of P&G. these are Braun, Gillette, Head & Shoulders, Olay, Always, Oral-B Gain, Pampers and Tide. these brands added billions of dollars in the company every year. Company has captured the following market segments: beauty, Health care and Hygiene, Kids and female products and laundry products (pg.com, 2019) .
P&G is famous for its superior quality products and strong brandings. It is dedicated to making the lives of individuals around the globe easier and better. P&G products are selling to around 180 countries through different dealerships and distributors in pharmacy stores, departmental store and beauty stores. P&G is the highest revenue generating company with potential growth opportunities. Its competitors are Pfizer Inc, Revlon Inc. S.C. Johnson &Son Inc, Colgate Palmolive Company (Kenneth & Eades, 2017) .
2 P&G compensation philosophy
Procter& Gamble compensation philosophy comprise on the following principles:
i. Company pay more to its employees when there is an excessive load of work and pay less when the workload is less.
ii. Company pay its employees by using the target competitive rate in the market of similar size and nature companies
iii. P&G pays according to business strategies that create value for its shareholders and helps in the growth of the business.
The above principles appreciate the right behaviours, enables the company to create value for its shareholders. These principles also encourage the training and development of employees (Joseph, Kruse, & Freeman, 2018) .
3 Compensation strategy
P&G is among the top 25 companies in the world that provide strong compensation and benefits to their employees. P&G compensate their workers using different criteria, based on the employee’s performance. One of the basic objectives of P&G is to create value for its shareholders at different levels of leadership. The company design compensation program which is competitive to the market. P&G compensation program consists of four components. Salary (base Pay), Long term incentive programs, short term achievement reward and two long terms. These are a total of 96% of Named Executives Programs. Procter & Gamble paid their exempt employees such as professionals, managers a fixed salary whereas non-exempt jobs gets a daily wage from the company. P&G compensate their shareholders in place of senior executives. It uses different performance criteria such as STAR and three years compensation equity program (PSP).
P&G maintains a moderate balance between its short term and long-term incentive plans. It also pursues the policy based on work hours. P&G also use a clawback policy of compensation in which certain payments of compensation are translated in the form of financial statements.
This policy guides the correct amount of compensation (indiatimes.com, 2016) . Procter & Gamble provides their workers with Flexible work hours to maintain a balance between their personal and professional life. Employees are paid with Competitive salary in the market. P&G also provides health insurance to their Employees. It also facilitates them by giving paid time off and paid vacations. Procter& Gamble facilitate their female employees by giving them maternity leaves according to the US Labor Act.
4 Compensation related challenges
Procter & Gamble faces certain types of challenges related to its compensation practices. It does not make employment contracts with their executives that contain severance pay like golden parachutes. While in the market many companies are providing their executive's severance pay. This is a great challenge for Procter & Gamble. Many stakeholders intend to remove their shares from the company. It also affects the company goodwill in the market.
Many companies in the US are providing their executives with retirement programs like giving them a special amount of money at the time of retirement which makes their living easy. But Procter & Gamble does not offer their executive with retirement programs. It is very challenging for the company. Retirement programs benefit the individual in their life after the job. People work with a sense of security. They feel more secure while doing their jobs. Procter & Gamble does not cover any kind of personal tax payments for their executives. P&G also face a hard time in this aspect (Hannes, Chan, Bakker, & Demerouti, 2015) .
5 Applications of compensation practices
Procter& Gamble set goals based on the time period like long term and short-term plans. Long term plans ranges from 6 months to 1 year and long term plans are of 3 years.
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5.1 Base Pay
Base pay is offered according to the last working day. P&G also encourages their employees that they can terminate the employment contract according to their will.
5.2 Annual Incentives
STAR (Short Term Achievement Reward) employees that work in the last days of the accounting year are eligible for it. It is the incentive given to more than 10,000 employees on achieving one-year goals of the business. STAR is comprised of three factors Target performance of STAR, business unit and total performance of the company. STAR is calculation formula is STAR target*business unit factor (%) * total performance of company STAR award ($)
The company also pays short term bonuses to those employees who choose stock options upon their will.
Equity awards depend on the reason for the termination of employees.
Incentives based on annual earnings per share of the company
Organic sales are based on business sales targets.
Incentives based on the individual assessment of employees
The company paid out STAR below average for the last 5 years to smooth its operations and increase productivity.
5.3 Long Term Incentives
PSP (Performance Stock Program), incentive paid for 3 years narrower business cycles in operating metrics, to the group of executives.
1. Cash flow, operating profit, Earning per Share growth rate according to target sales
2. PSP is paid out with an average of 31% to last 5 years.
Performance Stock Program (PSP) it is primarily performance-vested equity. The value is determined by units of performance stock and the stock price. There are four types of PSP: Before tax operating profit, Organic sales growth, Earnings per Share and free cash flow.
Key Manager Stock Program represents the low percentage of long-term chances compared to the previous fiscal year. Company has increased the percentage of long-term changes associated with PSP.
5.3.1 NEO performance-based reward
This reward is based on 5 years of performance.
61% of the target sales must be achieved.
The company paid 88% of its employees NEO rewards.
5.3.2 Newly developed compensation Incentives
Incentives are offered to employees to increase accountability.
It is directly aligned with the target sales
Sales Professionals performance depends on the sales of the product category.
Product sales in the region depend on the specific product region (Tim, Dries, Vos, & Bal, 2015) .
5.4 Retirement plans and benefits
Procter &Gamble has the primary training program named Profit Sharing Trust and Employee Stock Ownership Plan (PST) for us employees. The plan is for the employees who work full time. Company deposits an annual amount according to the dividends earned. The amount of money that is deposited depends on the salaries of individuals and their year of services. Some employees do not receive the full amount because of federal taxation. These employees are involved in PST restoration programs. These plans include early group life insurance, financial assistant, vacations that are not used, Expatriate training and relocation program. Procter & Gamble offers retirement benefits to non-US based employees. International Retirement Plans renders benefits to the employees with pension plans and retirement plans
benefits (Evangelia, 2015) .
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5.5 Executive benefits
These are the benefits that the company offers to its senior executives. These benefits are the total of 2%of the NEO total compensation. These benefits include security system of homework place security, physical health examination. Company aircraft is used for company business purposes.
5.6 Other compensation programs
Involvement of independent advisor
Abolition of low pay practice.
6 Positive and negative impacts of the compensation strategy on the company
6.1 Positive impacts
Procter Gamble compensation packages also include some benefits like group life insurance and, health insurance. Group life Insurance covers the life of the employee and gives them accidental coverage. These types of compensation affect the productivity of the employees. Employees developed a sense of safety. And they enjoy doing their jobs. Employee’s commitment to their work benefits the company in many ways. Procter &Gamble facilitate their employees by providing them with flexible working hours. Procter& Gamble has been showing an outclass performance throughout the world and has achieved many awards. P & G has also made many world records. The company is a leading brand of USA. All the progress and advancement in the company has expanded the roles and responsibilities of the executives. It
also has put some pressure on them but no matters as they are getting a handsome amount as their salaries.
Negative impacts
There are also negative impacts of the compensation strategy in the company. Executives feel pressure for meeting the latest updated requirements and as a result, the put pressure on the sales team to enhance their marketing activities to increase sales of the company. Competition in the market for hiring more trained staff. The company also has to pay more to the employees. This is the world of research and technology development. It is very necessary for the company to use the latest technology to bring innovation in their products, packaging. Cost of Research &Development is increased. Government policy and state laws also affect the company
compensation policy .For example, if the government set a pay range for non-exempt and exempt employees than the company has to follow the rules and pay according to the set scales of government (Andreas & Weigl, 2015) .
7 Positive and negative impacts of the compensation strategy on stakeholders
7.1 Positive Impacts
Procter Gamble is continuously striving for creating long –term value of stakeholders. The company always takes stock options according to their shareholder's will. Procter & Gamble has executed large numbers divestitures in a short time period. Procter& Gamble has created a stronger and focused identity among its shareholders. Because the company had always good terms with their stakeholders. Procter & Gamble has almost delivered $10 ban savings to its stakeholders. The company pays it, stakeholders, periodically. Stakeholders have a right to make important decisions with company management. P&G has made changes in its organizational structure and management. The company do not make contact with its Named Executives Officers (NEO). It increases the success level of the company in the long run. The company strategy reinforces the stakeholders to take part in the success of the company. The company has a record of paying a larger number of dividends to its employees. The company gives complete ownership of the business to category leaders.
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7.2 Negative Impacts
There are few negative impacts of P&G strategy on its stakeholders. A board of management is established that held shareholders accountable. This board focuses specifically on the company aims and goals. This board requires the active participation of stakeholders. The management board has transferred organic sales from sales volume growth. These risks lower the morale of the stakeholders.
8 Market Factors, Laws & Labour Unions Effect on Compensation Strategy
It is very obvious that market conditions, law and labour affect the policies of the company. The Federal of employment law has limited the number of employees that work in a company. Employees are recognized according to their employment contract. Employers cannot forbid their employees from joining a labour union. Labour union affects the company (P&G) repute. Many market factors such as inflation affect the company compensation system. In some cases, sales are decreased during the inflation period. Thus, the company (P&G) has to face the crisis. Political, economic and social factors also affect the company compensation policy.
The change in government rules also affects the compensation strategy. The government may impose larger duties or changes the tax policies. The company should have to follow these rules even if the company has to make changes in its policy. Social and cultural factors also affect P&G in several ways. Ownership of the market differs from company to company .In P&G employees are compensated according to their performances. Global economic conditions also affect the company’s compensation policy
9 Effectiveness of traditional base pay of the company
Procter & Gamble is compensating its employee’s very well. The traditional base pay of P&G is based on living standards. Base pay is evenly distributed among the employees. Traditional base pay is interrelated with seniority basis. The employee who is more senior in rank gets more pay. Employees received pay according to their performances. Good performers receive high pay rates and similarly, low performers get low pay. There is always 3 to 4 per cent increase in traditional base pay annually. Often it includes a set salary range. For example, P&G pays exempt employees a fixed salary.
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