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Compensation
Fourteenth Edition

Barry Gerhart
University of Wisconsin–Madison
COMPENSATION
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Table of Contents
Preface xiv
PART I A Pay Model 19
Introducing the Pay Model and Pay Strategy
Compensation Objectives 19
Chapter 1 Four Policy Choices 22
The Pay Model 2
Pay Techniques 24
Compensation: Does It Matter? (Or, “So
What?”) 3 Book Plan 25
Compensation: Definition, Please Caveat Emptor—Be an Informed Consumer 26
(Stakeholders) 4 1. Is the Research Useful? 26
Society 6 2. Does the Study Separate Correlation from
Stockholders 9 Causation? 26
Customers 10 3. Are There Alternative Explanations? 27
Managers 10 Your Turn: Compensation at the World’s Largest
Employees 11 Company 28
How Pay Influences Beahviors: Incentive and Sort- (Still) Your Turn: Who are Amazon’s Peer Com-
ing Effects 11 panies for Comparing Compensation? 28
Global Views—Vive la Différence 14 Chapter 2
Strategy: The Totality of Decisions 40
Forms of Pay 14
Similarities and Differences in Strategies 41
Cash Compensation: Base 15
Cash Compensation: Merit Increases/ Different Strategies within the Same
Short-Term Incentives (Merit Bonuses)/ Industry 43
COLAs 16 Different Strategies within the Same Company
Cash Compensation: Incentives 16 (between business units/markets) 44
Long-Term Incentives 17 Different Strategies within the Same Company
(Evolution over Time) 44
Benefits: Income Protection 17
Benefits: Work/Life Balance 18 Strategic Choices 45
Benefits: Allowances 18 Support Business Strategy 46
Total Earnings Opportunities: Present Value of
Support HR Strategy 47
a Stream of Earnings 18
Relational Returns from Work 19 The Pay Model Guides Strategic Pay
Decisions 48
Stated versus Unstated Strategies 49
iv Table of Contents
Developing a Total Compensation Strategy: Four
Steps 50
Step 1: Assess Total Compensation
Implications 50
HR Strategy: Pay as a Supporting Player or a
Catalyst for Change? 51
Step 2: Map a Total Compensation Strategy 54
Steps 3 and 4: Implement and Reassess 56
Source of Competitive Advantage: Three Tests 56
Align 56
Differentiate 56
Add Value 58
“Best Practices” versus “Best Fit”? 58
Guidance from the Evidence 58
Virtuous and Vicious Circles 59
Your Turn: Using Compensation to Improve Envi-
ronmental, Social and Governance (Including
Diversity & Inclusion) Performance: Apple and
Starbucks 60
Still Your Turn: Mapping Compensation
Strategies 61
PART II
Internal Alignment: Determining the Structure
Chapter 3
Defining Internal Alignment 72
Jobs and Compensation 73
Compensation Strategy: Internal Alignment 73
Supports Organization Strategy 75
Supports Work Flow 75
Motivates Behavior 76
Structures Vary among Organizations 76
Number of Levels 76
Differentials 77
Criteria: Content and Value 77
What Shapes Internal Structures? 79
Economic Pressures 79
Government Policies, Laws, and Regulations 80
External Stakeholders 80
Cultures and Customs 81
Organization Strategy 81
Organization Human Capital 81
Organization Work Design 82
Overall HR Policies 82
Internal Labor Markets: Combining External
and Organization Factors 83
Employee Acceptance and Perceived
Fairness 84
Pay Structures Change 84
Strategic Choices in Designing Internal
Structures 85
Tailored versus Loosely Coupled 85
Hierarchical versus Egalitarian and Layered
versus Delayered Structures 85
Guidance from the Evidence 87
Equity Theory: Fairness 87
Tournament Theory (and Pay Dispersion):
Motivation and Performance 88
Institutional Theory: Copy Others and
Conform 90
(More) Guidance from the Evidence 90
Consequences of Structures 91
Efficiency (including Retention) 92
Fairness 92
Compliance 92
Your Turn: So You Want to Lead an Orchestra! 93
Still Your Turn: (If You Don’t Want to Lead the
Orchestra...) 94
Still (yes, still) Your Turn: NCAA 97
Chapter 4
Job Analysis 106
Structures Based on Jobs, People, or Both 107
Job-Based Approach: Most Common 109
Why Perform Job Analysis? 109
Job Analysis Procedures 110

What Information Should Be Collected? 112
Job Data: Identification 112
Job Data: Content 113
Employee Data 114
“Essential Elements” and the Americans With
Disabilities Act 116
Level of Analysis 117
How Can the Information Be Collected? 118
Conventional Methods 118
Quantitative Methods 118
Who Collects the Information? 120
Who Provides the Information? 120
What about Discrepancies? 120
Job Descriptions Summarize the Data 121
Using Generic Job Descriptions 121
Describing Managerial/Professional Jobs 124
Verify the Description 124
Job Analysis: Bedrock or Bureaucracy? 125
Job Analysis and Change in Work: Globalization,
and Automation (Including AI) 126
Change in Work 126
Susceptibility to Offshoring 127
Susceptibility to Automation and AI 130
Job Analysis Information and Comparability
across Borders 134
Judging Job Analysis 134
Reliability 134
Validity 135
Acceptability 135
Currency 135
Usefulness 136
A Judgment Call 136
Your Turn: The Customer-Service Agent 137
Chapter 5
Job-Based Structures and Job Evaluation 143
Job-Based Structures: Job Evaluation 144
Defining Job Evaluation: Content, Value, and
External Market Links 145
Table of Contents v
Content and Value 145
Linking Content with the External Market 145
Technical and Process Dimensions 145
“How-To”: Major Decisions 146
Establish the Purpose 146
Single versus Multiple Plans 147
Choose among Job Evaluation Methods 149
Job Evaluation Methods 149
Ranking 150
Classification 151
Point Method 153
Who Should Be Involved? 162
The Design Process Matters 162
The Final Result: Structure 164
Balancing Chaos and Control 164
Your Turn: Job Evaluation at Whole Foods 165
Chapter 6
Person-Based Structures 175
Person-Based Structures: Skill Plans 176
Types of Skill Plans 176
Purpose of the Skill-Based Structure 179
“How-To”: Skill Analysis 180
What Information to Collect? 180
Whom to Involve? 182
Establish Certification Methods 182
Outcomes of Skill-Based Pay Plans: Guidance
from Research and Experience 182
Person-Based Structures: Competencies 183
Defining Competencies 185
Purpose of the Competency-Based
Structure 186
“How-To”: Competency Analysis 189
Objective 189
What Information to Collect? 189
Whom to Involve? 190
Establish Certification Methods 191
vi Table of Contents
Resulting Structure 191
Competencies and Employee Selection and
Training/Development 191
Guidance (and Caution) from the Research on
Competencies 193
One More Time: Internal Alignment Reflected in
Structures (Person-Based or Job-Based) 193
Administering and Evaluating the Plan 195
Reliability of Job Evaluation Techniques 195
Validity 197
Acceptability 198
Bias in Internal Structures 198
Wages Criteria Bias 198
The Perfect Structure 199
Your Turn: Climb the Legal Ladder 201
PART III
External Competitiveness: Determining the Pay
Level
Chapter 7
Defining Competitiveness 210
Compensation Strategy: External
Competitiveness 211
Control Costs and Increase Revenues 212
Attract and Retain the Right Employees 217
What Shapes External Competitiveness? 218
Labor Market Factors 220
How Labor Markets Work 220
Labor Demand 221
Marginal Product 222
Marginal Revenue 222
Labor Supply 223
Modifications to the Demand Side 223
Compensating Differentials 224
Efficiency Wage 225
Sorting and Signaling 226
Modifications to the Supply Side (Only Two More
Theories to Go) 227
Reservation Wage 227
Human Capital 227
Product Market Factors and Ability to Pay 228
Product Demand 228
Degree of Competition 228
A Different View: What Managers Say 229
Segmented Supplies of Labor and (Different)
Going Rates 229
Organization Factors 231
Industry and Technology 231
Employer Size 231
People’s Preferences 231
Organization Strategy 232
Relevant Markets 232
Defining the Relevant Market 233
Globalization of Relevant Labor Markets:
Offshoring and Outsourcing 234
Competitive Pay Policy Alternatives 235
What Difference Does the Pay-Level Policy
Make? 238
Pay with Competition (Match) 238
Lead Pay-Level Policy 240
Lag Pay-Level Policy 243
Different Policies for Different Employee
Groups 243
Not by Pay Level Alone: Pay-Mix Strategies 244
Consequences of Pay-Level and Pay-Mix
Decisions: Guidance from the Research 246
Efficiency 246
Fairness 248
Compliance 248
Your Turn: Two-Tier Wages 249
Your Turn: Combining Pay Survey and Job Evalu-
ation Data 250
Appendix 7-A: Utility Analysis 252

Chapter 8
Designing Pay Levels, Mix, and Pay
Structures 261
Major Decisions 262
Specify Competitive Pay Policy 262
The Purpose of a Survey 262
Adjust Pay Level—How Much to Pay? 263
Adjust Pay Mix—What Forms? 263
Adjust Pay Structure? 263
Study Special Situations 263
Estimate Competitors’ Labor Costs 264
Select Relevant Market Competitors 264
Fuzzy Markets 268
Design the Survey 268
Who Should Be Involved? 268
How Many Employers? 269
Which Jobs to Include? 272
What Information to Collect? 274
Interpret Survey Results and Construct a Market
Line 277
Verify Data 277
Statistical Analysis 280
Update the Survey Data 282
Construct a Market Pay Line 283
Setting Pay for Benchmark and
Non-Benchmark Jobs 285
Combine Internal Structure and External
Market Rates 286
From Policy to Practice: The Pay-Policy Line 286
Choice of Measure 287
Updating 287
Policy Line as Percent of Market Line 287
From Policy to Practice: Grades and Ranges 288
Why Bother with Grades and Ranges? 288
Develop Grades 289
Establish Range Midpoints, Minimums, and
Maximums 289
Overlap (and Midpoint Progression) 290
Table of Contents vii
From Policy to Practice: Broad Banding 291
Flexibility Control 293
Balancing Internal and External Pressures:
Adjusting the Pay Structure 294
Reconciling Differences 294
Market Pricing 295
Business Strategy (More than “Follow the
Leader”) 295
Review 296
Your Turn: Google’s (now Alphabet’s) Evolving
Pay Strategy 297
Still Your Turn: Word-of-Mouse: Dot-Com
Comparisons 298
PART IV
Employee Contributions: Determining Individual
Pay
Chapter 9
Pay-for-Performance: Theory and Evidence 306
What Behaviors Do Employers Care About? Link-
ing Organization Strategy to Compensation and
Performance Management 308
What Does It Take to Get These Behaviors? What
Theory Says 312
What Does It Take to Get These Behaviors? What
Practitioners Say 317
Does Compensation Motivate Behavior? 322
Do People Join a Firm Because of Pay? 322
Do People Stay in a Firm (or Leave) Because
of Pay? 323
Reminder: Not All Turnover is Bad (and at
least some is necessary) 324
Do Employees More Readily Agree to Develop
Job Skills Because of Pay? 324
Do Employees Perform Better on Their Jobs
Because of Pay for Performance? The Short
Answer is "Yes" (Especially Compared to the
Alternative) 325
Pay for Performance: Harmful Effects on
Intrinsic Motivation (Claims and
Evidence) 326
viii Table of Contents
Sorting and Incentive Effects 327
Risk (Unintended Consequence) 330
Designing a Pay-for-Performance Plan 330
Efficiency 330
Equity/Fairness 332
Compliance 333
Your Turn: Burger Boy 333
Chapter 10
Pay-for-Performance: Types of Plans 346
What Is a Pay-for-Performance Plan? 346
How Widely Used Is Pay for Performance
(PFP)? 347
The Important Role of Promotion (internal or
external) in Pay for Performance 350
Pay-for-Performance: Merit Pay Plans 351
Pay-for-Performance: Short-Term Incentive Plans
(Individual-Based) 354
Merit Bonuses aka Lump-Sum Bonuses 354
Individual Spot Awards 354
Individual Incentive Plans 355
Individual Incentive Plans: Returns (But Also
Risks) 358
Individual Incentive Plans: Examples 359
Pay-for-Performance: Short-Term Incentive Plans
("Group"-Based) 361
Comparing Group and Individual Incentive
Plans 364
Large Group Incentive Plans 367
Gain-Sharing Plans 367
Profit-Sharing Plans 372
Earnings-at-Risk Plans 373
Group Incentive Plans: Advantages and
Disadvantages 373
Group Incentive Plans: Examples 373
Pay-for-Performance: Long-Term Incentive
Plans 374
Employee Stock Ownership Plans (ESOPs) 376
Performance Plans (Performance Share and
Performance Unit) 377
Broad-Based Stock Plans (BBSPs) 377
Combination Plans: Mixing Individual and
Group 377
Does Variable Pay (Short-Term and Long-Term
Incentives) Improve Performance Results? The
General Evidence 378
Your Turn: Pay at Delta and American
Airlines 378
Chapter 11
Performance Appraisals 387
The Role of Performance Appraisals in Compen-
sation Decisions 389
Performance Metrics 389
Strategies for Better Understanding and Measur-
ing Job Performance 390
The Balanced Scorecard Approach 391
Strategy 1: Improve Appraisal Formats 392
Strategy 2: Select the Right Raters 401
Strategy 3: Understand How Raters Process
Information 404
Strategy 4: Training Raters to Rate More
Accurately 408
Strategy 5: Improving Rater Motivation and
Opportunity to Rate More Accurately 409
Putting It All Together: The Performance Evalua-
tion Process 409
“New” Performance Appraisal 410
A Checklist of Recommended Behaviors for
Managers and Employees 411
Equal Employment Opportunity and Performance
Evaluation 412
Tying Pay to Subjectively Appraised Performance
(Merit Pay) 413

Competency: Customer Care 414
Performance- and Position-Based
Guidelines 415
Designing Merit Guidelines 415
Your Turn: Performance Appraisal at American
Energy Development 419
Appendix 11-A: Balanced Scorecard Example:
Department of Energy (Federal Personal Property
Management Program) 422
Appendix 11-B: Sample Appraisal Form for Lead-
ership Dimension: Pfizer Pharmaceutical 425
PART V
Employee Benefits
Chapter 12
The Benefit Determination Process 443
Overview 444
Why the Growth in Employee Benefits? 445
Wage and Price Controls 447
Unions 447
Employer Impetus 448
Cost (Including Tax) Effectiveness of
Benefits 448
Government Impetus 449
The Value of Employee Benefits 449
Key Issues in Benefit Planning, Design, and
Administration 450
Benefits Planning and Design Issues 450
Benefit Administration Issues 451
Components of a Benefit Plan 454
Employer Factors 454
Employee Factors 457
Administering the Benefit Program 459
Employee Benefit Communication 459
Cost Containment 463
Claims Processing 463
Your Turn: World Measurement 464
Table of Contents ix
Chapter 13
Benefit Options 474
Legally Required Benefits 479
Workers’ Compensation 479
Social Security: Old Age, Survivors, Disability
& Health (OASDI) + Medicare 480
Unemployment Insurance 483
Family and Medical Leave Act (FMLA) 485
Consolidated Omnibus Budget Reconciliation
Act (COBRA) 485
Health Insurance Portability and
Accountability Act (HIPAA) 485
Retirement and Savings Plan Payments 486
Defined Benefit Plans 486
Defined Contribution Plans 487
Individual Retirement Accounts (IRAs) 490
Employee Retirement Income Security Act
(ERISA) 490
How Much Retirement Income to Provide? 491
Life Insurance 493
Medical and Medically Related Payments 493
General Health Care 493
Health Care: Cost Control Strategies 496
Short- and Long-Term Disability 497
Dental Insurance 497
Vision Care 497
More Benefits 498
Paid Time Off during Working Hours 498
Payment for Time Not Worked 498
Family-Friendly Policies (including Child Care,
Family Leave, and Flexible Work) 499
Elder Care 500
Domestic Partner Benefits 500
Legal Insurance 501
Addressing Financial Precarity (and Financial
Wellness) 501
Benefits (or Lack Thereof): Contingent and Alter-
native Work Arrangement Workers 501
x Table of Contents
Your Turn: Evolving Benefits: Paid Leave 502
(Still) Your Turn: Evolving Benefits:
Telehealth 502
PART VI
Extending the System
Chapter 14
Compensation of Special Groups: Executives and
Others 511
Special Groups: Overview 512
Supervisors 512
Corporate Directors 513
Executives 514
How Aligned are Executive Pay and
Performance? 515
Say on Pay (Shareholder Votes) 516
Why Is Everyone So Interested in Executive
Compensation? And . . . Some Different
Perspectives 528
Scientists and Engineers in High-Tech
Industries 532
Sales Forces 535
Contingent Workers and Workers under
Alternative Work Arrangements (Including
Independent Contractors, Gig Workers) 538
Your Turn: A Sports Sales Plan 539
Chapter 15
Union Role in Wage and Salary
Administration 547
The Impact of Unions in Wage
Determination 549
Union Impact on Compensation 549
The Structure of Wage Packages 551
Union Impact: The Spillover (or Threat)
Effect 552
Role of Unions in Wage and Salary Policies
and Practices 552
Role of Unions in Discipline, Job Security, and
Assignments 557
Unions and Alternative Reward Systems (and
Variable Pay) 558
Lump-Sum Awards/Bonuses 558
Employee Stock Ownership Plans (ESOPs) 558
Pay-for-Knowledge Plans 559
Gainsharing Plans 559
Profit-Sharing Plans 560
Your Turn: Collective Bargaining and Compensa-
tion in Health Care 561
Chapter 16
International Pay Systems 565
The Global Context 567
The Social Contract 569
Centralized or Decentralized Pay-Setting 569
Regulation 570
(National) Culture 573
Is National Culture a Major Constraint on
Compensation? 574
Trade Unions and Employee Involvement 577
Ownership and Financial Markets 578
Managerial Autonomy 578
Comparing Costs (and Productivity) 579
Labor Costs and Productivity 580
Cost of Living and Purchasing Power 582
Comparing Systems 583
Japanese Traditional National System 585
German Traditional National System 586
Comparison of Traditional Systems in Japan,
Germany, United States 587
Evolution and Change in the Traditional
Japanese and German Models 588
Strategic Market Mind-Set 591
Localizer: “Think Global, Act Local” 591
Exporter: “Headquarters Knows Best” 591
Globalizer: “Think and Act Globally and
Locally” 592
Expatriate Pay 592
 Table of Contents xi

Elements of Expatriate Compensation 594 Disparate Treatment 642

The Balance Sheet Approach 596 Disparate Impact 642
Expatriate Systems → Objectives? Quel
Executive Order 11246 643
dommage! 599
Pay Discrimination and Dissimilar Jobs 645
Borderless World → Borderless Pay?
Globalists 600 Evidence of Discrimination: Use of Market
Data 646
Your Turn: Globalization of the Labor Market: Evidence of Discrimination: Jobs of
The English Premier League 601 Comparable Worth 646
PART VII More Recent Developments 649
Managing the System
Earnings Gaps 649
Chapter 17
Government and Legal Issues in Sources of the Earnings Gaps 651
Compensation 615
Compliance: A Proactive Approach 656
Government as Part of the Employment
Your Turn: From Barista to Manager 656
Relationship 617
Overviews 617 Still Your Turn: The Case of Lady Gaga’s (For-
mer) Personal Assistant 657
Fair Labor Standards Act of 1938 619
Chapter 18
Minimum Wage 619 Management: Making It Work 669
Overtime and Hours of Work 626 Managing Labor Costs and Revenues 670
Child Labor 631
Managing Labor Costs 670
Living Wage 631 Number of Employees (a.k.a.: Staffing Levels or
Employee or Independent Contractor? 632 Headcount) 671
Hours 673
Prevailing Wage Laws 635
Benefits 675
Antitrust Issues 635 Average Cash Compensation (Fixed and
Pay Discrimination and Pay Equity: What Are Variable Components) 675
They? 636 Budget Controls: Top Down 676
Pay Discrimination 636 Budget Controls: Bottom Up 680
Embedded (Design) Controls 681
Pay Equity 638
The Equal Pay Act (and Related State Laws) 638 Managing Revenues 684
Definition of Equal 639 Using Compensation to Retain (and Recruit)
Top Employees 684
Definitions of Skill, Effort, Responsibility,
Working Conditions 639 Managing Pay to Support Strategy and
Factors Other than Sex 639 Change 686
“Reverse” Discrimination 640 Communication: Managing the Message 687
Title VII of the Civil Rights Act of 1964 and Pay Secrecy Versus Transparency/
Related Laws 640 Openness 687
xii Table of Contents

Pay Communication: General Principles 690 Your Turn: Communication by Copier 696
Say What? (Or, What to Say?) 691 Still Your Turn: Managing Compensation Costs,
Opening the Books 691 Headcount, and Participation/Communication
Issues 697
Structuring the Compensation Function and Its
Roles 692
Glossary 703
Centralization–Decentralization (and/or
Outsourcing) 692 Name Index 721
Ethics: Managing or Manipulating? 695 Subject Index 733
About the Author
BARRY GERHART
Barry Gerhart is the Bruce R. Ellig Distinguished Chair in Pay and Organizational Effectiveness, School of
Business, University of Wisconsin–Madison. Professor Gerhart received his B.S. in Psychology from Bowl-
ing Green State University and his Ph.D. in Industrial Relations from the University of Wisconsin–Madison.
Professor Gerhart is a recipient of the Scholarly Achievement Award, the International Human Resource
Management Scholarly Achievement Award (twice), the Herbert Heneman Jr. Career Achievement Award,
and the Mahoney Mentoring Award, all from the Human Resources Division, Academy of Management. He
has also received the Michael R. Losey Excellence in Human Resource Research Award, the career achieve-
ment award of the Society for Human Resource Management. Professor Gerhart is a Fellow of the Academy
of Management and of the American Psychological Association. He has served as a department chair and/
or area coordinator at Cornell, Vanderbilt, and Wisconsin, as well as senior associate dean and interim dean
at Wisconsin. He has held visiting appointments at Bayreuth University, King’s College London, and Copen-
hagen Business School.
Preface
Compensation is uniquely important in organizations because it typically represents the single largest oper-
ating cost, especially where employee skills or human capital are the source of competitive advantage (e.g.,
Google/Alphabet, Facebook; investment banking, law, accounting, and consulting firms; professional sports
teams; universities). Compensation is also important because employees regularly report it as the most impor-
tant factor that goes into their decision of whether to take a job or stay in a job. Compensation also plays a
major role in what employees choose to do on the job: their effort level, where they direct their effort/what
goals they pursue, how cooperative they are, how flexible they are, how ethical they are, and so forth. These
all add up to determine how efficient, innovative, customer-oriented and (in the case of for-profit) how prof-
itable an organization is over time. Profits, in turn, create jobs. In the absence of profits, jobs disappear. An
organization that pays too much, pays too little, ties too much compensation up as fixed costs, and/or pays
for the wrong things puts the company, its investors, and its employees at risk. On the other hand, designing
and executing an effective compensation strategy can play a key role in great shared success.
Compensation challenges ebb and flow with changes in the economy. The Financial Crisis of 2008 and the
related Great Recession brought job cuts (with the national unemployment rate rising to 10 percent, the high-
est since 1983), reduced hours, reduced employer contributions to 401(k) retirement plans, reduced bonus/
profit-sharing payments, and some wage cuts. With revenue and profits down and with labor costs often the
single largest operating cost, employers cut labor costs in these ways. Eventually, as company revenues picked
up again, we gradually saw employers put less emphasis on cutting labor costs and more emphasis on hiring.
However, job growth was initially quite modest. At the beginning of 2013, the unemployment rate was still at
8 percent. Why? Employers have become increasingly careful about adding new workers because they want
to keep costs under control and they don’t want to have to reduce the workforce if they guess wrong about
increasing revenue growth/product demand (and the need for more workers). As economic growth contin-
ued, however, competition for employees increased and employers began to hire. The U.S. unemployment rate
declined every year until it was below 4 percent in 2018 and 2019, the lowest it has been since 1969. However,
wage gains remain modest. That is because employers are careful not only about hiring, as we have noted.
They are also careful about giving wage/salary increases because once those are added to base pay, “they are
there forever.” Increasingly, employers seek to make labor costs variable, which means greater reliance on
bonuses and/or profit-sharing, where payments to employees go up during good times, but automatically go
down during bad times when profits and revenues go down. Nevertheless, the low unemployment rates and
the scarcity of workers it signaled resulted in a number of employers raising base wages.
Then, of course, the pandemic hit. The unemployment rate went from 3.5 percent in February 2020 to 14.8
percent by April 2020. Employers followed all of the same actions to cut labor costs in 2020 they had fol-
lowed in response to the Great Recession that began in 2008. Suddenly, many employers went from having to
raise wages to be able to hire and retain enough employees to run their businesses to instead having too many
employees costing too much to survive without dramatic action. Business strategy became “cut costs enough
to survive, while being ready to go when business picks back up.” A Conference Board survey reported that
one quarter of employers laid off or furloughed employees and 34 percent reduced working hours. Some com-
panies announced salary cuts (temporary) of 30 percent to 50 percent. Contributions to 401k plans were
stopped at about 1 in 10 employers. The millions of workers who lost their jobs or who took pay cuts still had
bills to pay. Government aid helped some business owners and employees, but not everyone and not always
enough.
 Preface xv

For some, there was opportunity. Amazon’s business strategy continued to be growth, and it added 427,300
employees (a more than 50 percent increase) between January and October of 2020. That this was necessary
can be seen from the fact it grew its revenue from $87.4 billion in the quarter ending December 31, 2019
to $125.6 billion in the quarter ended December 31, 2020. Amazon paid many workers bonuses to work
through the pandemic and remain with Amazon. There were some retailers who went beyond bonuses and
raised wages to make sure they would have the workforce to respond to growth in business. In June 2020,
Target announced it would increase its hourly minimum to $15, following increases to $11 in 2017 and $13
in 2019. The new hourly minimum allows Target to compete better for workers with Amazon and Costco,
which had a $15 minimum hourly wage (Costco subsequently raised it to $16/hour in February 2021) and
with Walmart, which also raised wages. By August 2020, many companies that had made temporary salary
or benefits (usually 401k) cuts began to rescind them. Economic forecasts suddenly began to turn positive
with the deployment of effective vaccines. In early 2021, The Congressional Budget Office (CBO) projected
a rapid economic recovery to pre-pandemic levels by 2022, including a strong drop in the unemployment rate
and thus a return to wide competition for employees. (Further, that projection did not consider the impact
on economic growth of the $1.9 trillion American Rescue Plan Act of 2021 enacted in March 2021.) Things
were about to go full circle, from economic boom until early 2020, to economic hard times (for most, not all)
starting March 2020, and looking in the crystal ball (or using forecasts like that of CBO just above), employ-
ers need to shift back to recruiting (and retention) mode (and quickly) to be able to take advantage of the
strong business recovery unfolding in 2021. (The unemployment rate was down to 6.0 % by April 2021.) Suc-
cess in recruiting and retention will depend on competitive compensation. Not acting quickly enough or not
setting compensation at a sufficiently competitive level means losing out on employees who choose to work
elsewhere and thus losing out on sales and profits.
We will also talk about the use of pay as an incentive to influence choices of effort and behavior. Let’s just
take a trip part-way around the globe here. To take a not so down to earth example, if you were a Russian
cosmonaut, you could earn a bonus of $1,000 for every space walk you took (technically known as “extrave-
hicular activity”), up to three per space trip. A contract listing specific tasks to be done on a space mission
permits you to earn up to $30,000 above the $20,000 you earn while you are on the ground. Conclusion: Pay
matters.
(As a small aside, in contrast to the Russian cosmonauts, private citizens have the opportunity to visit
the International Space Station, without having to meet the troublesome requirements and preparation to
become a cosmonaut or an astronaut. But, it will cost them. Axiom Space, based in Houston, using a SpaceX
rocket, will give a ride to three customers in 2022, each of whom will pay around $55 million for the trip and
an 8-day stay.)
After you have read this book, you will also better understand that what you pay for matters. Many years ago,
when Green Giant discovered too many insect parts in the pea packs from one of its plants, it designed a
bonus plan that paid people for finding insect parts. Green Giant got what it paid for: insect parts. Innovative
Green Giant employees brought insect parts from home to add to the peas just before they removed them
and collected the bonus.
The Houston public school district also got what it paid for when it promised teachers bonuses of up to
$6,000 if their students’ test scores exceeded targets. Unfortunately, several teachers were later fired when it
was discovered that they had leaked answers to their students and adjusted test scores. Teachers were moti-
vated to raise test scores, just not to raise them in the way desired (improved student learning). Wells Fargo
wanted customers to sign up for more of its products to increase its potential for revenue and profit growth.
To achieve this goal, Wells Fargo incentivized its employees so they would be rewarded for achieving this
goal (and/or penalized if they did not achieve it). This incentive certainly “worked,” if you think this includes
employees setting up fake accounts, which the customers did not sign up for, in order to achieve their targets
xvi Preface

for performance (new account sign-ups). Again, employees were motivated to achieve the outcome, but not
necessarily in the appropriate way.
Such problems are global. A British telephone company paid a cash bonus to operators based on how
quickly they completed requests for information. Some operators discovered that the fastest way to complete
a request was to give out a wrong number or—even faster—just hang up on the caller. “We’re actually looking
at a new bonus scheme,” says an insightful company spokesperson. Conclusion: What you pay for matters.
After you have read this book, you will also have learned that how you pay matters. Motorola ended its old-
fashioned pay system that employees said guaranteed a raise every six months if you were still breathing. The
new system paid for learning new skills and working in teams. Sound good? It wasn’t. Employees resented
those team members who went off for six weeks of training at full pay while remaining team members picked
up their work. Motorola was forced to get rid of its new-fashioned system, too.
Wells Fargo also, not surprisingly, had to change how it pays and what it pays for.2 Specific changes made
include:
• No product sales goals.
• Performance evaluation based on customer service, usage and growth, not simply on new accounts
opened.
• Incentives associated with direct customer feedback and product usage.
• A higher percentage of employee compensation comprised of base salary, rather than variable
incentives.
• More employee performance metrics focused on the goals of a given bank branch, instead of on an
individual worker.

To summarize, compensation is a powerful tool that has major consequences for the success or failure of an
organization. Our aim is to put you in a better position to design and/or execute compensation strategies to
make success more likely. That will be helpful whatever the scale and scope of your responsibility, from a unit
of a few employees to an entire organization. Our book will also help you better understand how your own
compensation is managed and how that can help you achieve your own career goals.

ABOUT THIS BOOK

This book focuses on the strategic choices in managing compensation. We introduce these choices, real-world
issues that managers confront from New York to New Zealand and all points between, in the total compen-
sation model in Chapter 1. This model provides an integrating framework that is used throughout the book.
Major compensation issues are discussed in the context of current theory, research, and practice. The prac-
tices illustrate new developments as well as established approaches to compensation decisions.
We live in interesting times. Anywhere you look on the globe today, economic and social pressures are forcing
managers to rethink how people get paid and what difference it makes. Traditional approaches to compensa-
tion are being questioned. But what is being achieved by all this experimentation and change? What is merely
fad and fashion, and what, instead, is supported by the evidence? In this book, we strive to separate beliefs
from facts, wishful thinking from demonstrable results, and opinions from research. Yet when all is said and
done, managing compensation is part science, but also part art.
Each chapter contains at least one e-Compensation box to point you to some of the vast compensation infor-
mation on the Internet. Real-life Your Turn cases ask you to apply the concepts and techniques discussed
in each chapter. For example, the Your Turn in Chapter 9 draws on Jerry Newman’s experience when he
 Preface xvii

worked undercover for 14 months in seven fast-food restaurants. The case takes you into the gritty details of
the employees’ behaviors (including Professor Newman’s) during rush hour, as they desperately worked to
fill customers’ orders and meet their own performance targets set by their manager. You get to recommend
which rewards will improve employees’ performance (including Professor Newman’s) and customers’ satis-
faction. We tackle major compensation issues from three sides: theory, research, and practice—no problem
can survive that onslaught!
The author, together with George Milkovich, also publishes Cases in Compensation, an integrated casebook
designed to provide additional practical skills that apply the material in this book. The casebook is available
directly from the authors (e-mail: cases.in.compensation@gmail.com). Completing the integrated cases will
help you develop skills readily transferable to future jobs and assignments. Instructors are invited to e-mail for
more information on how Cases in Compensation can help translate compensation research and theory into
practice and build competencies for on-the-job decisions.
But caveat emptor! “Congress raises the executive minimum wage to $565.15 an hour,” reads the headline in
the satirical newspaper The Onion (www.onion.com, “America’s Finest News Source”). The article says that
the increase will help executives meet the federal standard-of-easy-living. “Our lifestyles are expensive to main-
tain,” complains one manager. Although the story in The Onion may clearly be fiction, sometimes it is more
difficult to tell. One manager told us that when she searched for this textbook in her local bookstore, store
personnel found the listing in their information system—under fiction!

WHAT’S NEW
All chapters have been revised, in recognition of ongoing changes at organizations and in their competitive
environments around the world. Many examples are provided of the current pay strategies or practices used in
specific, named companies. Some of these are well established and successful (Apple, IBM, Lincoln Electric,
Microsoft, Merrill Lynch, Nucor, SAS Institute, Tesla, Toyota, Walmart), some face real problems (airlines,
domestic car companies), and others are using unique practices (Google, Whole Foods). Whenever possible,
we observe how the challenges faced by these companies have evolved over time. We have created six brand
new end- of-chapter Your Turn cases, which include an examination of the role of compensation at compa-
nies such as Amazon, Walmart, Apple, and Starbucks. This includes a focus on environmental, social, and
governance (ESG) issues. Other new Your Turns have to do with new benefits, including those important dur-
ing the pandemic. We have also introduced a dozen new exhibits, many of which document the causes and
consequences of compensation (e.g., how much does pay increase when someone voluntarily changes jobs?).
This edition continues to emphasize the importance of total compensation and its relevance for achieving
sustainable competitive advantage. It reinforces our conviction that beyond how much people are paid, how
they are paid really matters. Managing pay means ensuring that the right people get the right pay for achiev-
ing objectives in the right way. Greater emphasis is given to theoretical advances and evidence from research.
Throughout the book,+ we translate this evidence into guidance for improving the management of pay.

ACKNOWLEDGMENTS
A very special thanks goes to George T. Milkovich, who was the lead author on the first 11 editions of Com-
pensation. George has long been my mentor, colleague, and friend since our days together at Cornell. His
influence on me and on Compensation continues. Sincere thanks also goes to Jerry M. Newman, who co-
authored the first 13 editions of Compensation. With Jerry, like George, his influence on Compensation will
also be long-lasting. Jerry and I did not have as much of a chance to work together, but I enjoyed working
with him very much as well. An interesting note on Jerry is that he decided he wanted to learn more about
xviii Preface

work and compensation from a different perspective. To do this, he did something unusual: he stepped away
(temporarily!) from being a distinguished professor and actually went to work as a crew member (he knows
his way around a deep fryer) at several well-known quick service restaurants. (Think Undercover Boss.) You
might enjoy reading about it in his interesting and fun book, My Secret Life on the McJob.
All to say, I am grateful to have had the honor (and good fortune) to work with two people like George and
Jerry and to carry on their work in Compensation going forward. Indeed, you will often find the use of “we”
instead of “I” in the book, indicating that what you read reflects the influence of all three of us.
Many other people have contributed to our understanding of compensation and to the preparation of this
textbook over the years and editions. We owe a special, continuing debt of gratitude to our students. In the
classroom, they motivate and challenge us, and as returning seasoned managers they try mightily to keep our
work relevant:

Kenneth Abosch Takashi Fujiwara

Aon Mitsubishi
Stephanie Argentine Yuichi Funada
Rich Products Toshiba
Patrick Beall Ted Grasela
Lockheed Martin Cognigen
Joseph Bruno Thomas Gresch
Kodak General Motors
Karee Buerger Peter Hearl
Greater Chicago Area YUM Brands (emeritus)
Federico Castellanos Lada Hruba
IBM EMEA Bristol Meyers Squibb
Cindy Cohen Richard Ivey
Impac KFC
Andrew Doyle Tae-Jin Kim
Oppenheimer Fund SK Group
Brian Dunn Jed Kortens
Maclagan Cisco
Bruce Ellig Joe Kreuz
Author and Pfizer (emeritus) Advantage Professionals
Thomas Fentner Hiroshi Kurihara
Health Now Fuji Xerox
Rich Floersch Christian LeBreton
McDonald’s USA IBM EMEA
Beth Florin Mitch Linnick
Pearl Meyer & Partners IBM
Richard Frings Tony Marchak
Johnson & Johnson IBM EMEA
 Preface xix

Masaki Matsuhashi Jaime Richardson

Toshiba Align Technology
Randy McDonald Lindsay Scott
IBM Lindsay Scott & Associates
Nancy McGough Jason Sekanina
Room & Board Linear Technology
Matt Milkovich Rich Severa
Registry Nursing Accretive Partners & Strategies LLC
Michael Milkovich Diana Southall
brightpeak financial HR Foundations
Sarah Milkovich Cassandra Steffan
Jet Propulsion Laboratory Frito-Lay
Sonja Milkovich Masanori Suzuki
Sled Dog Software Google Japan
Pat Murtha Ichiro Takemura
Pizza Hut Toshiba
David Ness Richard Their
Medtronic Xerox
Erinn Newman Jan Tichy
American Express Merck
Kelly Newman Andrew Thompson
Presbyterian Residence Link Group Consultants
Terrie Newman Jose Tomas
HR Foundations Burger King
Stephen O’Byrne Karen Velkey
Shareholder Value Advisors Northrop Grumman
Tony Ragusa Ian Ziskin
Stereo Advantage Northrop Grumman

Our universities, past and present, Cornell, SUNY–Buffalo and the University of Wisconsin–Madison, and
Vanderbilt have provided forums for the interchange of ideas among students, experienced managers, and
academic colleagues. We value this interchange. Other academic colleagues have also played a role in our
research and thinking and/or provided helpful comments on this and previous editions of the book. We par-
ticularly thank:

Martha Andrews David Balkin

University of North Carolina, Wilmington University of Colorado
Tom Arnold Stuart Basefsky
Westmoreland Community College Cornell University
Lubica Bajzikova Glenda Barrett
Comenius University, Bratislava University of Maryland University College
xx Preface

Melissa Barringer Luis Gomez-Mejia

University of Massachusetts Arizona State University
Rebecca Bennett Nina Gupta
Louisiana Tech University University of Arkansas
Matt Bloom Thomas Hall
University of Notre Dame Penn State University
James T. Brakefield Kevin Hallock
Western Illinois University Cornell University
Timothy Brown Robert Heneman
San Jose State University Ohio State University
Lisa Burke Vandra Huber
University of Tennessee–Chattanooga University of Washington
Wayne Cascio Greg Hundley
University of Colorado–Denver Purdue
Michael Chase Debra D. Kuhl
Indiana Wesleyan University Pensacola State College
Dennis Cockrell Frank Krzystofiak
Washington State University–Pullman SUNY–Buffalo
H. Kristi Davison David I. Levine
University of Mississippi University of California–Berkeley
Rebecca Decardenas Frank B. Markham
Barry University The University of Mississippi
Lee Dyer Janet Marler
Cornell University SUNY–Albany
Allen D. Engle Sr. Patrenia McAbee
Eastern Kentucky University Delaware County Community College
Meiyu Fang Atul Mitra
National Central University Northern Iowa University
Jie (Jasmine) Feng Michael Moore
Rutgers University Michigan State University
Dwight D. Frink Bahaudin Mujtaba
University of Mississippi Nova Southeastern University
Ingrid Fulmer Brian Murray
Rutgers University University of Dallas
Marilyn Gagné Teresa S. Nelson
Curtin University Butler County Community College
Kubilay Gok Anthony J. Nyberg
Winona State University University of South Carolina
Mary Graham Rick Opland
Syracuse University California State University, Long Beach
 Preface xxi

Sanghee Park Warren Scott Stone

Rutgers University
Bryan J. Pesta
Cleveland State University
Richard Posthuma
University of Texas at El Paso
Janez Prasnikar
University of Ljubljana
Vlado Pucik
IMD
Hesan Ahmed Quazi
Nanyang Business School
Greg Reilly
University of Connecticut
Sara Rynes
University of Iowa
Donald P. Schwab
University of Wisconsin–Madison
Dow Scott
Loyola University Chicago
James Sesil
University of Wisconsin–Madison
Jason Shaw
Nanyang Technical University
Thomas Stone
Oklahoma State University
University of Arkansas at Little Rock
Michael Sturman
Rutgers University
Ningyu Tang
Shanghai Jiao Tong University
Thomas Li-Ping Tang
Middle Tennessee State University
Tom Timmerman
Tennessee Tech University
Charlie Trevor
University of Wisconsin–Madison
Lee Tyner
University of Central Oklahoma
Yingchun Wang
University of Houston Downtown
Zhong-Ming Wang
Zhejiang University
Yoshio Yanadori
University of South Australia
Tae Seok Yang
Western Illinois University
Nada Zupan
University of Ljubljana
Part I
Introducing The Pay Model And
Pay Strategy
Why do we work? If we are fortunate, our work brings meaning to our lives, challenges us in new and exciting
ways, brings us recognition, and gives us the opportunity to interact with interesting people and create
friendships. Oh yes—we also get a paycheck. Here in Part 1 of the book, we begin by talking about what we
mean by “pay” and how paying people in different ways can influence them and, in turn, influence organiza-
tion success. Wages and salaries, of course, are part of compensation, but so too, for some employees, are
bonuses, health care benefits, stock options, and/or work/life balance programs.
Compensation is one of the most powerful tools organizations have to influence their employees. Managed
well, it can play a major role in organizations successfully executing their strategies through their employees.
We will see how companies like Costco, Whole Foods, Nucor, the SAS Institute, Microsoft, Alphabet/Google,
and others use compensation to attract, motivate, and retain the right employees to execute their strategies.
We will also see how companies like Apple sell premium products at attractive price points, to an important
degree by using suppliers that have low labor costs. When they are managed less well—as bankruptcies
at General Motors, Chrysler (now part of Stellantis), Lehman Brothers, and American Airlines (which stated
at the time that it needed to reduce labor costs by $1.25 billion per year to be competitive), for example,
might indicate—compensation decisions can also come back to haunt you. In Part 1, we describe the com-
pensation policies and techniques that organizations use and the multiple objectives they hope to achieve
by effectively managing these compensation decisions.
Although compensation has its guiding principles, we will see that “the devil is in the details”—how a com-
pensation program is specifically designed and implemented will help determine its success. We want you
to bring a healthy skepticism when you encounter simplistic or sweeping claims about whether a particu-
lar way of managing compensation does or does not work. For example, organizations, in general, benefit
from pay for performance, but there are many types of pay-for-performance programs, and it is not always
easy to design and implement a program that has the intended consequences and avoids unintended con-
sequences. (As examples of what can go wrong, search the Web for Wells Fargo or Novartis and the term,
scandal.) So, general principles are helpful, but only to a point.
Thus, in Part 1, our aim is to also help you understand how compensation strategy decisions interact with
the specific context of an organization (e.g., its business and human resource strategies) to influence orga-
nization success. We emphasize that good theory and research are fundamental, not only to understanding
compensation’s likely effects, but also to developing that healthy skepticism we want you to have toward
simplistic claims about what works and what does not.
Chapter One
The Pay Model

Chapter Outline

Compensation: Does It Matter? (or, “So Benefits: Work/Life Balance

What?”)
Benefits: Allowances
Compensation: Definition, Please
(Stakeholders) Total Earnings Opportunities: Present Value
Society of a Stream of Earnings

Stockholders Relational Returns from Work

Customers A Pay Model

Managers Compensation Objectives
Employees Four Policy Choices

How Pay Influences Behaviors: Incentives Pay Techniques

and Sorting Effects
Global Views—Vive la Différence
Forms of Pay
Cash Compensation: Base
Cash Compensation: Merit Increases/
Short-Term Incentives (Merit
Bonuses)/COLAs
Cash Compensation: Incentives
Long-Term Incentives
Benefits: Income Protection
Book Plan
Caveat Emptor—Be an Informed Consumer
1. Is the Research Useful?
2. Does the Study Separate Correlation from
Causation?
3. Are There Alternative Explanations?
Your Turn: Compensation at the World’s
Largest Company
Still Your Turn: Who Are Amazon’s Peer
Companies for Comparing Compensation?
 CHAPTER ONE: The Pay Model 3

COMPENSATION: DOES IT MATTER? (OR, “SO

WHAT?”)
Why should you care about compensation? Do you find that life goes more smoothly when there is at least
as much money coming in as going out? (Refer, e.g., to the lyrics for the Beatles’ song “Money.”1 To exag-
gerate a bit, they say something like: Money doesn’t buy everything, but if money can’t buy it, I can’t use it.)
In the movie, It’s a Wonderful Life, George Bailey is in a difficult spot. An (inexperienced) guardian angel
by the name of Clarence has been sent to help George. When Clarence implores George to let him help,
George asks if he has $8,000 on him. Clarence replies “No, we don’t use money in Heaven” to which George
responds: “Well, it comes in real handy down here, bud!”
Of course, it is the same for companies. It really does help to have as much money coming in (actually, more
is better) as going out. Until recently, production workers at Chrysler received total compensation (i.e., wages
plus benefits) of about $76 per hour. U.S. workers doing the same jobs at Toyota received $48 per hour, and
the average total compensation per hour in U.S. manufacturing was $25 (and $3 in Mexico--not surprisingly,
many new automobile supply and assembly plants have gone to Mexico in recent years). It is one thing to pay
more than your competitors if you get something more (e.g., higher productivity and/or quality) in return.
But Chrysler was not. So its “strategy” was not sustainable. Chrysler ended up going through bankruptcy,
being bought out by Fiat, and then reducing worker compensation costs as part of its strategy for a return
to competitiveness. Specifically, Chrysler took steps (as part of its bankruptcy plan) to bring its hourly labor
costs down to about $49.2 (Fiat Chrysler is now part of Stellantis.)
General Motors (GM), like Chrysler, has for decades paid its workers well—too well, perhaps, for what it
received in return. So what? Well, in 1970, GM had 150 U.S. plants and 395,000 hourly workers. In sharp
contrast, GM now has 32 U.S. manufacturing plants (including 11 vehicle assembly plants) and 87,000 U.S.
workers (up from 57,000 U.S. hourly workers a few years ago).3 In June 2009, GM, like Chrysler, had to file
for bankruptcy (avoiding it for a while thanks to loans from the U.S. government—i.e., you, the taxpayer). Not
all of GM’s problems were compensation related. Building too many vehicles that consumers did not want
was also a problem. But having labor costs higher than the competition’s, without corresponding advantages
in efficiency, quality, and customer service, does not seem to have served GM or its stakeholders well. Its
stock price peaked at $93.62/share in April 2000. Its market value was about $60 billion in 2000. That share-
holder wealth was wiped out in bankruptcy. Think also of the billions of dollars the U.S. taxpayer had to put
into GM. Think of all the jobs that have been lost over the years and the effects on communities that have
lost those jobs. (The good news is that as of 2021, GM’s market value was over $80 billion. However, that is
a ways behind what is now the most valuable U.S. carmaker, Tesla, at $635 billion, depending on the day, or
about 8x greater than GM.)
On the other hand, Nucor Steel pays its workers very well, relative to what other companies inside and outside
of the steel industry pay. But Nucor also has much higher productivity than is typical in the steel industry.
The result: Both the company and its workers do well. Apple Computer is able to charge lower prices for
its iPads and iPhones by outsourcing manufacturing to China in facilities owned by the Hon Hai Precision
Industry Co., Ltd. (Foxconn), a Taiwanese company. (See Chapter 7.) As we will see later, doing so generates
billions (yes, billions with a “b”) of dollars in cost savings per year. Google and Facebook are companies that
are known for paying very well. So far that seems to have worked, in that their high pay allows them to be very
selective in who they hire and who they keep, and they would say that their talent-rich strategy has helped
them to foster growth and innovation.
Wall Street financial services firms and banks used incentive plans that rewarded people for developing “inno-
vative” new financial investment vehicles and for taking risks to earn a lot of money for themselves and their
firms.4 But several years ago, during the Great Financial Crisis of 2008, the markets discovered that many
4 PART I: Introducing the Pay Model and Pay Strategy

such risks had gone bad. Blue chip firms such as Lehman Brothers slid quickly into bankruptcy, whereas oth-
ers, like Bear Stearns and Merrill Lynch, survived to varying degrees by finding other firms (J.P. Morgan and
Bank of America, respectively) to buy them. The issue has not gone away. U.S. Federal Reserve officials have
“made it clear that they believe bad behavior at banks goes deeper than a few bad apples and are advising
firms to track warning signs of excessive risk taking and other cultural breakdowns.” In the words of one Fed
official, “Risk takers are drawn to finance like they are to Formula One racing.” An important driver of risk
taking among traders and others is the incentive system that encourages them to be “confident and aggres-
sive” and that often results in those who thrive under this incentive rising to top leadership positions at the
banks.5
Novartis is a health care solutions company based in Switzerland that includes medicines, pharmaceuticals,
and eye care. The U.S. Justice Department announced a $678 million settlement with Novartis over improper
inducements to persuade doctors to prescribe Novartis drugs, including Lotrel for hypertension. It is the
largest whistleblower settlement under federal law. The key whistleblower was Ozzie Bilotta. According to
NBC News, when he began working at Novartis, it was his dream job. But, “he never thought he’d be brib-
ing doctors and wearing a wire for the feds.” He ended up taking this sort of “drastic action” because he
felt it was necessary to change how the pharmaceutical industry operated. Novartis subsequently changed its
sales compensation such that pay no longer depends only on sales. It also now depends on an evaluation of
whether sales were achieved in a way that is consistent with the Novartis Code of Ethics. There is also an
Anti-Bribery Policy document that includes directing employees to “Always ask yourself before offering, giv-
ing, or promising anything of value to any person if what you are considering could be viewed as having an
illegitimate purpose. If the answer is yes, you must not proceed.”6 Novartis has also increased its investment
in data collection and analytics to monitor compliance with its Code of Ethics.
How people are paid affects their behaviors at work (as we have seen, for good or bad), which affect an orga-
nization’s success.7 For most employers, compensation is a major part of total cost, and often it is the single
largest part of operating cost. These two facts together mean that well-designed compensation systems can
help an organization achieve and sustain competitive advantage. On the other hand, as we have recently seen,
poorly designed compensation systems can likewise play a major role in undermining organization success.
Our book, we hope, can play a role in helping to better educate you, the reader, about the design of compensa-
tion systems, both for managers and for workers. That includes not only how compensation can make things
work better, but just as importantly, how compensation can make things go wrong, sometimes very wrong, as
in our above examples.

COMPENSATION: DEFINITION, PLEASE

(STAKEHOLDERS)
How people view compensation affects how they behave. It does not mean the same thing to everyone. Your
view will probably differ depending on whether you look at compensation from the perspective of a member
of society, a stockholder, a manager, or an employee. Thus, we begin by recognizing different perspectives.
 CHAPTER ONE: The Pay Model 5

EXHIBIT 1.1 Indicators of Economic Standard of Living, United States (all dollar amounts
in constant $), by Year
Panel A. Gross Domestic Product (GDP) per Employed Persona
1990 2000 2010 2020 Growth
1990-2020
84,062 100,468 118,578 127,378 52%

Panel B. Average Annual Earningsb

1990 2000 2010 2020 Growth
1990-2020
42,518 44,711 45,758 52,156 23%

Panel C. Household Income, by Income Levelc

1990 2000 2010 2017 Growth
1990-2017
Before Transfers and
Taxes
All 76,500 100,100 98,000 110,700 45%
Top 1 Percent 886,000 1,722,800 1,561,800 1,961,500 121%
Top 1 Percent Share 13% 21% 19% 22% 64%
(of Income)
Highest Quintile 182,500 264,500 260,600 309,400 70%
Middle Quintile 60,100 68,600 68,800 49,700 −17%
Lowest Quintile 15,700 19,600 20,100 21,300 36%
After Transfers and
Taxes
All 61,900 79,700 84,200 93,300 51%
Top 1 Percent 640,300 1,167,100 1,105,800 1,343,000 110%
Top 1 Percent Share 12% 17% 15% 17% 46%
(of Income)
Highest Quintile 137,200 191,400 198,800 229,700 67%
Middle Quintile 49,700 57,900 62,900 68,000 37%
Lowest Quintile 21,400 26,900 32,800 35,900 68%
6 PART I: Introducing the Pay Model and Pay Strategy

Panel D. Net Household Wealth and Population

1990 2000 2010 2020 Growth
1990-2020
Net Household 44,832,962 66,745,710 78,832,798 130,154,587 190%
Wealth (millions)d
Populatione 250,181,000 282,398,000 309,774,000 330,152,000 32%
Panel E. Net Individual Wealth Sharef
1990 2000 2010 2018 Growth
1990-2018
Top 1% Wealth Share 30% 33% 37% 38% 27%
Top 10% Wealth 68% 73% 77% 77% 13%
Share
aAdjusted for Purchasing Power, 2017 Dollars. Source: WorldBank.
https://data.worldbank.org/indicator/SL.GDP.PCAP.EM.KD
bU.S. Bureau of Labor Statistics. Usual Weekly Earnings. Multiplied by 52 and converted to 2020 dollars.
c2017 Dollars. Source: Congressional Budget Office (2020). The Distribution of Household Income, 2017. October 2020. Transfers are
means-tested (i.e., depend on income) and include, for example, Medicaid. Taxes are federal and include income tax, payroll tax, corpo-
rate, and excise tax.
https://www.cbo.gov/system/files/2020-10/56575-Household-Income.pdf
d2020 Dollars. Source: Board of Governors of the Federal Reserve (U.S.). Households and Nonprofit Organizations; New Worth,
Level.
https://fred.stlouisfed.org/series/HNONWRA027N
ehttps://fred.stlouisfed.org/series/POPTOTUSA647NWDB
fEmmanuel Saez and Gabriel Zucman. The Rise of Income and Wealth Inequality in America: Evidence from Distributional Macro-
economic Accounts. Journal of Economic Perspectives, 2020, 34, 3–26. Uses “tax units” (individuals) rather than households.

Society
Exhibit 1.1 summarizes information on indicators of economic standard of living. All dollar amounts are in
constant (also called real) dollars (i.e., adjusted for price changes/inflation). At the top, we start with Panel
A, economic output (GDP) per Employed Person, a measure of national productivity. We see that produc-
tivity has increased by 52 percent since 1990. As a general rule, increases in productivity are necessary to
generate increases in income and wealth for most of the population. We also note that the level of produc-
tivity in the United States in 2020, $127,378, is the highest among the 30 largest economies in the world.
Panel B shows that (real) average annual earnings have increased 23 percent since 1990. Panel C moves from
individual earnings from work to household income from all sources, including earnings, but other sources
also (e.g., employer contributions for health care premiums, unemployment compensation, business income,
capital income/gains, among others). We provide two sets of household income, before and after taxes (gen-
erally higher at higher income levels) and (means-test, meaning based on income) transfers (e.g., Medicaid;
Children‘s Health Insurance Program; these transfers are generally higher at lower income levels). We see
that income overall (All) has grown by 45 percent since 1990, before transfers and taxes and 51 percent after
adjusting for taxes and transfers. Growth in economic output is the basis for growth in overall income (and
wealth). However, the way income and wealth is distributed is also important. We show the income shares for
 CHAPTER ONE: The Pay Model 7

the top 1 percent of income group and for selected quintiles (each one-fifth of the distribution). We see that
income of the top 1 percent in 2020, after transfers and taxes, was $1,343,000 and it has grown by 110 percent
since 1990. In contrast, the other quintiles have income that is considerably lower in 2020 (e.g., 68,000 in the
middle quintile) and, although their growth rates are positive and significant, ranging from 37 percent to 68
percent, their growth has been considerably lower than for the top 1 percent group. Finally, Panels D and E
show household wealth and individual wealth, including shares at the top. Again, there is good news in that
household wealth has grown substantially over time, nearly tripling from 1990 to 2020. In this case, we need
to account for the fact that the population also grew. Clearly, however, population growth was much smaller,
indicating that the wealth of Americans really has increased substantially over time. However, wealth is very
concentrated. We see that the top 10 percent hold 77 percent of the country’s wealth and the top 1 percent
hold 38 percent of its wealth. We also see that the concentration of wealth has increased since 1990.
The focus on the distribution of income and its implications for justice or equity is also seen in the attention
paid to earnings differences by demographic groups.8 For example, a comparison of earnings between men
and women highlights what many consider inequities in pay decisions. Among full-time, year-round workers
in the United States, women earn 82 percent of what men earn (up from 60 percent in 1980).9 If women had
the same characteristics as men, especially years and continuity of work experience and worked in the same
occupations and industries, the gap narrows by one-half or more (see Chapter 17).10 However, even with that,
women would earn 93 percent of what comparable men earn, thus still leaving a sizable gap. Society has
taken an interest in such earnings differentials. One indicator of this interest is the introduction of laws and
regulations aimed at eliminating the discrimination that causes them.11 (See Chapter 17.)
Based on the discussion above, it seems clear that people care greatly about their income. However, one well-
known study on this issue by Kahneman and Deaton has sometimes been incorrectly (and/or incompletely
interpreted) to mean that money only matters up to a point.12 For example, based on the study, $75,000 (let’s
call it more like $95,000 adjusted for inflation) has been identified as the magic amount of annual income that
makes people happy and paying them more had severely diminishing returns such that annual income beyond
$75,000 did not increase their happiness any further. However, that result is based on asking people about
the emotional well-being (“happiness) they experienced yesterday. Perhaps not surprisingly, having had a
“headache” yesterday or reporting “zero social time with friends or family yesterday, including telephone and
email-contact” had much larger effects on the emotional well-being/affect they felt yesterday than did whether
their annual income was above $75,000. In contrast, when asked about life evaluation on a scale ranging from
0 (“worst possible life for you”) to 10 (“the best possible life for you”), there was almost no diminishing return
to higher income (measured on a log scale, equivalent to using percentage increases in income). As Kahne-
man and Deaton put it, there is “a fairly steady rise in life evaluation” in proportion to increases in income
“over the entire range.” Even returning to “happiness,” Deaton and Kahneman caution: “Our data speak only
to differences; they do not imply that people will not be happy with a raise from $100,000 to $150,000, or
that they will be indifferent to an equivalent drop in income.” In summary, the Deaton and Kahneman find-
ings can be interpreted to mean, first, that increases in income that help people avoid poverty or the threat of
poverty (or what is called financial precarity) have a major positive impact on both happiness and life eval-
uation. Second, these increases in income have diminishing returns for increasing happiness (as measured
by emotional well-being the day before) beyond $95,000 in today’s dollars. Third, it would be a mistake to
think that reducing anyone’s pay to $95,000 would do anything but make them unhappy. Fourth, higher pay
is associated with higher life satisfaction and that association continues beyond $95,000.
Benefits given as part of a total compensation package, like wages/salaries, may also be seen as a reflection of
equity or justice in society. As we will see, private sector employers spend about 42 cents for benefits on top
of every dollar paid for wages and salaries. (State and local government employers pay even more: 62 cents in
benefits on top of every wage dollar.)13 Individuals and businesses in the United States spend $3.6 trillion per
year, or about 17 percent of U.S. economic output (gross domestic product) on health care.14 Nevertheless,
8 PART I: Introducing the Pay Model and Pay Strategy

as we will see, many (over 30 million) of people in the United States (over 8 percent of the population) have
no health insurance.15 (Prior to implementation of The Affordable Care Act of 2010, over 48 million were
uninsured.)16 A major reason is that the great majority of people who are under the age of 65 and not below
the poverty line obtain health insurance through their employers, but small employers, which account for a
substantial share of employment, are much less likely than larger employers to offer health insurance to their
employees. As a result, the great majority of uninsured in the United States are from working families. (Of the
uninsured, 85 percent have a full-time worker in the family and another 11 percent have a part-time worker in
the family.)17 Given that those who do have insurance typically have it through an employer, it also follows
that whenever the unemployment rate increases, health care coverage declines further. (Some users of online
dating services provide information on their employer-provided health care insurance. Dating service “shop-
pers” say they view health insurance coverage as a sign of how well a prospect is doing in a career.)
Job losses (or gains) within a country over time are partly a function of relative labor costs (and productivity)
across countries. People in the United States worry about losing manufacturing jobs to Mexico, China, and
other nations. (Increasingly, white-collar work in areas like finance, computer programming, and legal ser-
vices is also being sent overseas.) Exhibit 1.2 reveals that annual salary cost per employee (these numbers do
not include benefits) in Mexico is $17,594, or about one-quarter of the $65,836 average salary in the United
States. China’s estimated annual salary of $12,430 is less than one-fifth of the U.S. rate. However, the value
of what is produced also needs to be considered. Productivity in China is also roughly one-fifth that of U.S.
workers, whereas Mexican worker productivity is about one-third of the U.S. level. Finally, if low wages are
the goal, there always seems to be somewhere that pays less. Some companies (e.g., Coach) are now mov-
ing work out of China because its hourly wage, especially after recent increases, is not nearly as low as in
countries like Vietnam, India, and the Philippines.18 However, for other companies—such as Foxconn, which
builds iPhones and iPads for Apple—even with increases in wages in China, labor costs remain very low in
China compared to those in the United States and other advanced economies. Foxconn appears to be poised
to continue having a large presence in China, a part of the world where most of its supply chain is. However,
recent events are leading it, like others, to work to diversify its production and supply chain to be less depen-
dent on any one country. We return to the topic of international comparisons in Chapter 7 and Chapter 16.)
Some consumers know that pay increases often lead to price increases. They do not believe that higher labor
costs benefit them. But other consumers lobby for higher wages. While partying revelers were collecting plas-
tic beads at New Orleans’ Mardi Gras, filmmakers were showing video clips of the Chinese factory that makes

EXHIBIT 1.2 Annual Salary and Economy-Wide Productivity (Gross Domestic Product [GDP] per Employed
Person), in U.S. Dollars
Annual Salary (excludes benefits) Productivity (GDP per employee)
United States 65,836 127,378
Mexico 17,594 45,172
Japan 38,617 78,297
China 12,430 30,074
Germany 53,638 105,234
Czechia 29,281 81,079

Source: Annual salary (not including benefits) is from the Organization for Economic Cooperation and Development (OECD.org).
https://data.oecd.org/earnwage/average-wages.htm, Salary data for China are from: Table 4-12, China Statistical Yearbook 2019.
National Bureau of Statistics of China. http://www.stats.gov.cn/tjsj/ndsj/2019/indexeh.htm. Converted from yuan to USD using aver-
age exchange rate for 2019. Productivity is gross domestic product (GDP), in constant 2017 PPP $, divided by total employment in the
economy. Purchasing power parity (PPP) adjustments are made to adjust for what can be purchased in different countries with the
equivalent of a U.S. dollar. Source: The World Bank. https://data.worldbank.org/indicator/SL.GDP.PCAP.EM.KD.
 CHAPTER ONE: The Pay Model 9

the beads. In the video, the plant manager describes the punishment (5 percent reduction in already low pay)
that he metes out to the young workers for workplace infractions. After viewing the video, one reveler com-
plained, “It kinda takes the fun out of it.”19

Stockholders
Stockholders are also interested in how employees are paid. Some believe that using stock to pay employees
creates a sense of ownership that will improve performance, which in turn will increase stockholder wealth.
But others argue that granting employees too much ownership dilutes stockholder wealth. Google’s stock
plan cost the company $600 million in its first year of operation. So people who buy Google stock (stock-
holders) are betting that this $600 million will motivate employees to generate more than $600 million in
extra stockholder wealth.
Stockholders (also called shareholders) have a particular interest in executive pay.20 (Executive pay will be
discussed further in Chapter 14.)21 To the degree that the interests of executives are aligned with those of
shareholders (e.g., by paying executives on the basis of company performance measures such as shareholder
return), the hope is that company performance will be higher. There is debate, however, about whether execu-
tive pay and company performance are strongly linked in the typical U.S. company.22 In the absence of such
a linkage, concerns arise that executives can somehow use their influence to obtain high pay without neces-
sarily performing well. Exhibit 1.3 provides descriptive data on chief executive officer (CEO) compensation.
Note the large numbers (total annual compensation of $12.3 million) and also that the bulk of compensa-
tion (stock-related) is connected to shareholder return or other (primarily short-term, or one year or less)
performance measures (bonus). As such, one would expect changes in CEO wealth and shareholder wealth
to generally be aligned. We will return to this topic in more depth in Chapter 14.
In Chapter 14 we will suggest that, on average, CEO interests and shareholder interests appear to be signif-
icantly aligned, but there are important exceptions and it is certainly an ongoing challenge to ensure that
executives act in the best interest of shareholders. For example, during the meltdown in the financial services
industry, top executives at Bear Stearns and Lehman Brothers regularly exercised stock options and sold stock
during the period 2000–2008 prior to the meltdown. One estimate is that these stock-related gains plus bonus
payments generated $1.4 billion for the top five executives at Bear Stearns and $1 billion for those at Lehman
Brothers during the 2000–2008 period. “Thus, while the long-term shareholders in their firms were largely
decimated, the executives’ performance-based compensation kept them in positive territory.” The problem
here is that shareholders paid a huge penalty for what appears to have been overly aggressive risk-taking by

EXHIBIT 1.3 Annual Compensation of Chief Executive Officers, U.S. (S&P 500) Public Companies
Median
Compensation Component
Salary $ 1,200,000
Bonus $ 2,000,000
Stock Grants $ 6,500,000
Stock Option Awards $ 0a
Total Annual Compensation $ 12,300,000
aThe mean was $2.0 million.

Source: Equilar, CEO Pay Trends. Equilar.com. Because medians are used, compensation components do not add up to equal total
annual compensation.
10 PART I: Introducing the Pay Model and Pay Strategy

executives, but the executives, in contrast, did quite well because of “their ability to claim large amounts of
compensation based on short-term results.”23
Shareholders can influence executive compensation decisions in a variety of ways (e.g., through shareholder
proposals and election of directors in proxy votes). In addition, the Dodd–Frank Wall Street Reform and
Consumer Protection Act (see Chapter 14) was signed into law in 2010. Among its provisions is “say on pay,”
which requires public companies to submit their executive compensation plan to a vote by shareholders. The
vote is not binding. However, companies seem to be intent on designing compensation plans that do not result
in negative votes. In addition, clawback provisions (designed to allow companies to reclaim compensation
from executives in some situations) are available under Dodd–Frank and have also been adopted in stronger
form by some companies.24

Customers
Employment costs in the form of compensation are often the largest single operating cost for an organization.
Thus, for companies whose business strategy depends on low product/service cost to compete for customers,
they also may focus on keeping compensation costs low. As we will see shortly, that is certainly true of Wal-
mart. It certainly seems to have worked in the eyes of customers as it is year after year the largest company
in the world in terms of revenues. As a different example, we will see that Costco’s business strategy is less
exclusively cost-based. They are concerned about employment costs, but their business strategy depends on
paying higher wages to attract and retain employees more successfully than Walmart does, as well as employ-
ees who can provide a higher level customer experience. Compensation also increasingly comes into play for
customers who want to purchase from a company that acts with responsibility with respect to environmental,
social, and governance (ESG) issues. This can take a variety of forms in the employment and compensation
area. For example, customers may base their buying decisions on how they believe the company’s employees
are treated and/or how workers employed by other companies, but part of the company’s supply chain, are
treated. For example, Apple has supplier responsibility standards and an extensive system to monitor supplier
adherence to these standards, including in the area of employment.25

Managers
For managers, compensation influences their success in two ways. First, it is a major expense that must be
managed. Second, it is a major determinant of employee attitudes and behaviors (and thus, organization per-
formance). We begin with the cost issue. Competitive pressures, both global and local, force managers to
consider the affordability of their compensation decisions. Labor costs can account for more than 50 percent
of total costs. In some industries, such as financial or professional services and in education and government,
this figure is even higher. However, even within an industry, labor costs as a percentage of total costs vary
among individual firms. For example, small neighborhood grocery stores, with labor costs between 15 percent
and 18 percent, have been driven out of business by supermarkets that delivered the same products at a lower
cost of labor (9 to 12 percent). Supermarkets today are losing market share to the warehouse club stores such
as Sam’s Club and Costco, which enjoy an even lower cost of labor (4 to 6 percent), even though Costco
pays wages that are above average for the industry. And, now Amazon has entered the grocery business by
purchasing Whole Foods, which is expected to cause further cost reductions and disruption.
Exhibit 1.4 compares the hourly pay rate for retail workers at Costco to that at Walmart and Sam’s Club
(which is owned by Walmart). Wages for the three jobs in Exhibit 1.4 are higher at Costco. The Costco wages
are increasing further because as of 2021, its minimum wage will go to $16/hour. Walmart’s minimum wage
remains at $11/hour. Each retailer tries to provide a unique shopping experience. Walmart and Sam’s Club
compete on low prices, with Sam’s Club being a “warehouse store” with especially low prices on a narrower
 CHAPTER ONE: The Pay Model 11

range of products, often times sold in bulk. Costco also competes on the basis of low prices, but with a mix
that includes more high-end products aimed at a higher customer income segment. To compete in this seg-
ment, Costco appears to have chosen to pay higher wages, perhaps as a way to attract and retain a higher
quality workforce.26 A Costco’s annual report states, “With respect to expenses relating to the compensation
of our employees, our philosophy is not to seek to minimize the wages and benefits that they earn. Rather,
we believe that achieving our longer-term objectives of reducing employee turnover and enhancing employee
satisfaction requires maintaining compensation levels that are better than the industry average for much of
our workforce.” By comparison, Walmart simply states in a previous annual report that they “experience sig-
nificant turnover in associates [i.e., employees] each year.”27 Based on Exhibit 1.4, Costco is quite success-
ful, relative to its competitors, in terms of employee retention, customer satisfaction, and the efficiency with
which it generates sales (see revenue per square foot and revenue per employee). So, although Costco’s labor
costs are higher than those of Sam’s Club and Walmart, it appears that this model works for Costco because
it helps it gain an advantage over its competitors.
Thus, rather than treating pay only as an expense to be minimized, a manager can also use it to influence
employee behaviors and to improve the organization’s performance. High pay, as long as it can be docu-
mented to bring high returns through its influences on employees, can be a successful strategy. As our Costco
(versus Sam’s Club and Walmart) example seems to suggest, the way people are paid affects the quality of
their work and their attitude toward customers.28 It may also affect their willingness to be flexible, learn new
skills, or suggest innovations. On the other hand, people may become interested in unions or legal action
against their employer based on how they are paid (e.g., if they perceive their pay to be unfairly low). This
potential to influence employees’ behaviors, and subsequently the productivity and effectiveness of the orga-
nization, means that the study of compensation is well worth your time, don’t you think?29

Employees
The pay individuals receive in return for the work they perform and the value they create is usually the major
source of their financial security. Hence, pay plays a vital role in a person’s economic and social well-being.
Employees may see compensation as a return in an exchange between their employer and themselves, as an
entitlement for being an employee of the company, as an incentive to decide to take/stay in a job and invest in
performing well in that job, or as a reward for having done so. Compensation can be all of these things.30
The importance of pay is apparent in many ways. Employees are less likely to quit current jobs that pay more
and are likely to increase their pay when they quit voluntarily to take another job. (See Chapter 7.) Wages and
benefits are a major focus of labor unions’ efforts to serve their members’ interests. (See Chapter 14.) The
extensive legal framework governing pay—including minimum wage, living wage, overtime, and nondiscrimi-
nation regulations—also points to the central importance of pay to employees in the employment relationship.
(See Chapter 17.) Next, we turn to how pay influences employee behaviors.

HOW PAY INFLUENCES BEHAVIORS: INCENTIVE AND

SORTING EFFECTS
Pay can influence employee motivation and behavior in two ways. First, and perhaps most obviously, pay can
affect the motivational intensity, direction, and persistence of current employees. Motivation, together with
employee ability and work/organizational design (which can help or hinder employee performance), deter-
mines employee behaviors such as performance. We will refer to this effect of pay as an incentive effect, the
degree to which pay influences individual and aggregate motivation among the employees we have at any
point in time.
12
EXHIBIT 1.4 Pay Rates at Retail Stores, Customer Satisfaction, Employee Turnover, and Sales/Square Ft.
Average Average Average Customer Store
Pharmacy Stocker Cashier Satisfaction Employee On Best Size Revenue Revenue
Tech Hourly Hourly (100 = Annual Employer Average Number of per Sq. per
Annual Wage Wage Wage highest) Turnover List? Stores Revenues (Sq. ft.) Employees ft. Employee

Costco $17 to $24 $14 to $15 $15 to $16 81 lower Yesa 795 $163 billion 146,038 273,000 $1,406 $597,875
Sam’s Club $14 to $16 $11 to $12 $11 to $12 79 599 $64 billion 133,995 — $ 796
—
Walmart $13 to $17 $11 to $12 $11 to $12 71 higher No 4,473 $370 billion 148,225 — $ 526
—
Walmart + 5,342 $434 billion 146,624 1,600,000 $ 554 $271,171
Sam’s Club

Sources: Customer Satisfaction data from American Customer Satisfaction Index TM, http://www.theacsi.org/, retrieved April 4, 2021; Number of Stores, Revenues, Store Size, Number
of Employees from Wal-Mart 10-K (Annual Report) and Costco 10-K (Annual Report). For Walmart, used only U.S. data; Average Wage from www.glassdoor.com, retrieved April 4,
2021. Note: There are wage and compensation data in Costco’s Annual Report (Form 10-K) and in Walmart’s Annual Report (Form 10-K) and more in Walmart’s Environmental, Social,
and Governance Report. However, the data reported by Costco is total compensation, primarily for full-time U.S. employees, whereas Walmart includes many non-U.S. employees and
reports wage or salary (rather than total compensation). Note: Revenue per sq. ft. equals Revenues/(Stores × Store Size Average)
a#4 on Forbes 2021 list. Top 50 in Glassdoor 2021 list.
 CHAPTER ONE: The Pay Model 13

However, pay can also have an indirect, but important, influence via a sorting effect on the composition of the
workforce.31 That is, different types of pay strategies may cause different types of people to apply to and stay
with (i.e., self-select into) an organization. In the case of pay structure/level, it may be that higher pay levels
help organizations attract more high-quality applicants, allowing them to be more selective in their hiring.
Similarly, higher pay levels may improve employee retention. (In Chapter 7, we will talk about when paying
more is most likely to be worth the higher costs.)
In other words, although perhaps less obvious, it is not only how much but how an organization pays that
can result in sorting effects.32 Ask yourself: Would people who are highly capable and have a strong work
ethic and an interest in earning a lot of money prefer to work in an organization that pays about the same
amount to all employees doing the same job, regardless of their performance? Or would they prefer to work
in an organization where their pay can be much higher (or lower) depending on how they perform? If you
chose the latter answer, then you believe that sorting effects matter. People differ regarding which type of pay
arrangement they prefer. The question for organizations is simply this: Are you using the pay policy that will
attract and retain the types of employees you want? Keep in mind that high performers have more alternative
job opportunities and that more opportunities, all else being equal (e.g., if they are not paid more for their
higher performance), translate into higher turnover—which is likely to be a significant problem if it is the high
performers who are leaving, especially if high performers in particular roles create a disproportionately high
amount of value for organizations. This would be the case, for example, if performance, instead of following
a normal distribution, follows a power law distribution, which allows more extreme values (e.g., in the form
of very high and valuable performance).33
This also raises the issue of dealing with outside offers that employees receive. We know that a substantial
share of employee turnover results from receiving unsolicited outside offers. In other words, turnover is not
always in response to dissatisfaction. Sometimes it is driven by opportunity. These are likely to be some of the
most valuable employees, and thus policies and practices for dealing with outside offers (hopefully informed
by research) are important.34
Let’s take a look at one especially informative study conducted by Edward Lazear regarding incentive and
sorting effects.35 Individual worker productivity was measured before and after a glass installation company
switched one of its plants from a salary-only (no pay for performance) system to an individual incentive plan
under which each employee’s pay depended on his/her own performance. An overall increase in plant pro-
ductivity of 44 percent was observed comparing before and after. Roughly one-half of this increase was due
to individual employees becoming more productive. However, the remaining one-half of the productivity gain
was not explained by this fact. So, where did the other one-half of the gain come from? The answer: Less-
productive workers were less likely to stay in their jobs under the new individual incentive system because it
was less favorable to them. When they left, they tended to be replaced by more-productive workers (who were
happy to have the chance to make more money under a system that rewards performance than they might
make elsewhere). Thus, focusing only on the incentive effects of pay (on current workers) can miss the other
major mechanism (sorting) by which pay decisions influence employee behaviors.
Some research looks at “stars.” For example, one study used data on individual security analysts in investment
banks and found that newly hired “stars” from other firms generally did less well in their new firms, but their
performance decline was less when moving with other members of their team, rather than alone.36 Thus,
there are implications. First, star performance may be somewhat firm-specific. Second, a firm cannot neces-
sarily “buy talent” and be sure that talent will perform at the same level as at its previous firm. Third, to the
degree that is the case, the firm-specificity may stem at least partly from the additional value created by being
part of a well-functioning team. Other research on stars, this time in the hedge fund industry, finds that,
14 PART I: Introducing the Pay Model and Pay Strategy

compared to other members of their team, stars get more credit when things go well and more blame when
things go poorly. Thus, working “in someone’s shadow” can be a plus when things don’t go well, but can lead
to less credit when things go well.37
The pay model that comes later in this chapter includes compensation policies and the objectives (efficiency,
fairness, compliance) these are meant to influence. Our point here is that compensation policies work
through employee incentive and sorting effects to either achieve or not achieve those objectives.

Global Views—Vive la Différence

In English, compensation means something that counterbalances, offsets, or makes up for something else.
However, if we look at the origin of the word in different languages, we get a sense of the richness of the
meaning, which combines entitlement, return, and reward.38
In China, the traditional characters for the word “compensation” are based on the symbols for logs and water,
suggesting that compensation provides the necessities in life. In the recent past the state owned all Chinese
enterprises, and compensation was treated as an entitlement. In today’s China, compensation takes on a
more subtle meaning. A new word, dai yu, is used. It refers to how you are being treated—your wages, benefits,
training opportunities, and so on. When people talk about compensation, they ask each other about the dai
yu in their companies. Rather than assuming that everyone is entitled to the same treatment, the meaning of
compensation now includes a broader sense of returns as well as entitlement.39
“Compensation” in Japanese is kyuyo, which is made up of two separate characters (kyu and yo), both mean-
ing “giving something.” Kyu is an honorific used to indicate that the person doing the giving is someone of
high rank, such as a feudal lord, an emperor, or a samurai leader. Traditionally, compensation is thought of
as something given by one’s superior. Today, business consultants in Japan try to substitute the word hou-
syu, which means “reward” and has no associations with notions of superiors. The many allowances that are
part of Japanese compensation systems translate as teate, which means “taking care of something.” Teate is
regarded as compensation that takes care of employees’ financial needs. This concept is consistent with the
family, housing, and commuting allowances that are still used in many Japanese companies.40
These contrasting ideas about compensation—multiple views (societal, stockholder, managerial, employee,
and even global) and multiple meanings (returns, rewards, entitlement)—add richness to the topic. But they
can also cause confusion unless everyone is talking about the same thing. So let’s define what we mean by
“compensation” or “pay” (the words are used interchangeably in this book):

Compensation refers to all forms of financial returns and tangible services and benefits employees
receive as part of an employment relationship.

FORMS OF PAY
Exhibit 1.5 shows the variety of returns people receive from work. Total returns are categorized as total com-
pensation and relational returns. The relational returns (learning opportunities, status, challenging work, and
so on) are psychological.41 Total compensation returns are more transactional. They include pay received
directly as cash (e.g., base, merit, incentives, cost-of-living adjustments) and indirectly as benefits (e.g., pen-
sions, medical insurance, programs to help balance work and life demands, brightly colored uniforms).42 So
 CHAPTER ONE: The Pay Model 15

pay comes in different forms, and programs to pay people can be designed in a wide variety of ways. Worldat-
Work has a Total Rewards Model that is similar and includes compensation, benefits, work-life, performance/
recognition, and development/career opportunities.43 The importance of monetary rewards as a motivator
relative to other rewards (e.g., intrinsic rewards such as how interesting the work is) has long been a topic of
interest, as have the conditions under which money is more or less important to people (and even whether
money is sometimes too important to people).44 Although scholars and pundits have sometimes debated
which is more important (and have sometimes argued that money does not motivate or even that it demoti-
vates), our reading of the research indicates that both types of rewards are important and that it is usually
not terribly productive to debate which is more important.45 It will no doubt come as little surprise that we
will focus on monetary rewards (total compensation) in a book called Compensation. Whatever other rewards
employees value, it is our experience that they expect to be paid for their work, that how and how much they
are paid affects their attitudes, performance, and job choice, as well as their standard of living. These effects
of compensation on employees (as well as the cost of employee compensation) have major implications for
how successfully organizations can execute their strategies and achieve their goals, as we will see.

Cash Compensation: Base

Base wage is the cash compensation that an employer pays for the work performed. Base wage tends to reflect
the value of the work or skills and generally ignores differences attributable to individual employees. For
example, the base wage for machine operators may be $20 an hour. However, some individual operators may
receive more because of their experience and/or performance. Some pay systems set base wage as a function
of the skill or education an employee possesses; this is common for engineers and schoolteachers.46
A distinction is often made in the United States between wage and salary, with salary referring to pay
for employees who are exempt from regulations of the Fair Labor Standards Act (FLSA) and hence do
not receive overtime pay.47 Managers and professionals usually fit this category. Their pay is calculated
at an annual or monthly rate rather than hourly, because hours worked do not need to be recorded.
In contrast, workers who are covered by overtime and reporting provisions of the Fair Labor Standards
Act—nonexempts—have their pay calculated as an hourly wage. Some organizations, such as IBM, Eaton, and
Walmart, label all base pay as “salary.” Rather than dividing employees into separate categories of salaried
and wage earners, they believe that an “all-salaried” workforce reinforces an organizational culture in which
all employees are part of the same team. However, merely changing the terminology does not negate the need
to comply with the FLSA.

EXHIBIT 1.5 Total Returns for Work

16 PART I: Introducing the Pay Model and Pay Strategy

Cash Compensation: Merit Increases/Short-Term Incentives

(Merit Bonuses)/COLAs
A cost of living adjustment (COLA) to base wages may be made on the basis of changes in what other
employers are paying for the same work, changes in living costs, or changes in experience or skill. Such pro-
visions are less common than in the past as employers continually try to control fixed costs and link pay
increases to individual and/or company performance.
Merit increases are given as increments to base pay and are based on performance.48 According to a Worl-
datWork survey, 94 percent of U.S. firms use merit pay increases.49 Given that 22 percent of respondents to
the survey were in the nonprofit, not-for-profit, or public sectors where we know that the use of merit pay is
less,50 it may be that nearly 100 percent of U.S. private sector organizations use merit pay. Merit payments
are based on an assessment (or rating) of recent past performance made (with or without a formal perfor-
mance evaluation). In recent years, merit increase budgets (or average merit increases) have been around 3
percent.51 Survey data indicate that, on average, an outstanding performer receives a 4.8 percent increase, an
average performer a 2.9 percent increase, and a poor performer a 0.2 percent increase.52 Finally, companies
increasingly use merit bonuses.53 As with merit increases, merit bonuses are based on a performance rating
but, unlike merit increases, are paid in the form of a lump sum rather than becoming (a permanent) part of
the base salary.54 Merit bonuses (also referred to as short-term incentives) may now be more important than
traditional merit increases. “Indeed, merit bonuses now appear to account for more of the pay-performance
relationship than do the traditional and most often discussed form of pay for individual performance, merit
pay.”55 In companies that use merit bonuses and among those workers who receive them, the average annual
merit bonus in recent years has been about 6 percent for hourly employees, 7 percent for lower level salaried
employees, and 11 percent for higher level (but below officers/executives) salaried employees, all much larger
than the more often discussed recent merit increase pools of around 3 percent.56 We return to this issue in
Chapter 18.

Cash Compensation: Incentives

Incentives also tie pay increases to performance.57 However, incentives differ from merit adjustments. First,
incentives are tied to objective performance measures (e.g., sales) usually in a formula-based way, whereas a
merit increase program typically relies on a subjective performance rating. There is also some subjectivity in
the size of the pay increase awarded for a particular rating. Second, incentives do not increase the base wage
and so must be re-earned each pay period. Third, the potential size of the incentive payment will generally be
known (given the use of a formula) beforehand. Whereas merit pay programs evaluate past performance of
an individual and then decide on the size of the increase, what must happen in order to receive the incentive
payment is called out very specifically ahead of time. For example, a Toyota salesperson knows the commis-
sion on a Land Cruiser versus a Prius prior to making the sale. The larger commission he or she will earn by
selling the Land Cruiser is the incentive to sell a customer that car rather than the Prius. Fourth, while both
merit pay and incentives try to influence performance, incentives explicitly try to influence future behavior
whereas merit recognizes (rewards) past behavior, which is hoped to influence future behavior. The incentive-
reward distinction is a matter of timing.
Incentives can be tied to the performance of an individual employee, a team of employees, a total business
unit, or some combination of individual, team, and unit.58 The performance objective may be expense
reduction, volume increases, customer satisfaction, revenue growth, return on investments, increase in stock
value—the possibilities are endless. Prax Air, for example, used return on capital (ROC). For every quarter in
 CHAPTER ONE: The Pay Model 17

which a 6 percent ROC target is met or exceeded, Prax Air awarded bonus days of pay. An 8.6 percent ROC
means two extra days of pay for that quarter for every employee covered by the program. An ROC of 15 per-
cent means 8.5 extra days of pay.
Because incentives are one-time payments, they do not permanently increase labor costs. When performance
declines, incentive pay automatically declines, too. Consequently, incentives (and sometimes merit bonuses
also) are frequently referred to as variable pay.
Incentives can have powerful effects, both good and bad, on performance. On average, these effects are pos-
itive and substantial.59 However, incentives are risky, and they can go wrong in spectacular fashion.60 One
example is the Great Financial Crisis, which apparently stemmed in large part from improper and aggressive
incentives paid to encourage loan officers to give home loans (mortgages) to people who were unlikely to be
able to pay them back. (Recent events at Wells Fargo provide further examples.) We will talk about more
examples in later chapters.

Long-Term Incentives
Incentives may be short- or long-term. Long-term incentives are intended to focus employee efforts on mul-
tiyear results. Typically they are in the form of stock ownership or else options to buy stock at a fixed price
(thus leading to a monetary gain to the degree the stock price later goes up). The belief underlying stock
ownership is that employees with a financial stake in the organization will focus on long-term financial objec-
tives: return on investment, market share, return on net assets, and the like. Bristol-Myers Squibb grants stock
to selected “Key Contributors” who make outstanding contributions to the firm’s success. Stock options are
often the largest component in an executive pay package. Some companies extend stock ownership beyond
the ranks of executives and/or other high salary employees. Examples of companies that provide both broad-
based equity awards and employee stock purchase plans include Cisco, Intuit, Adobe Systems, and Goldman
Sachs.61

Benefits: Income Protection

Exhibit 1.5 showed that benefits, including income protection, work/life services, and allowances, are also
part of total compensation. Indeed,benefits add an average of $0.46 in cost for every $1.00 in wages and
salaries. (See Chapter 12.) Some income protection programs are legally required in the United States;
employers must pay into a fund that provides income replacement for workers who become disabled or unem-
ployed. Employers are also required to pay one-half the payroll tax for each employee to fund Social Security
coverage. (Employees pay the other half.) Different countries have different lists of mandatory benefits.
Medical insurance, retirement programs, life insurance, and savings plans are common benefits. They help
protect employees from the financial risks inherent in daily life. Often companies can provide these pro-
tections to employees more cheaply than employees can obtain them for themselves. In the United States,
employers spend roughly $725 billion per year just on health care costs, or 19 percent of all U.S. health
care expenditures.62 Among employers that provide health insurance, the cost to provide family coverage
is $21,342 per year per employee. The average employer pays $15,574 (74 percent) of that and the average
employee pays the remaining $5,588 (26 percent).63 Given the magnitude of such costs, it is no surprise that
employers have sought to rein in or reduce benefits costs. One approach has been to shift costs to employees
(e.g., having employees pay a larger share of health insurance premiums).64 Some companies have allowed
their benefits costs to get so far out of control that more drastic action has been taken. For example, as noted,
18 PART I: Introducing the Pay Model and Pay Strategy

companies like Chrysler, GM, and American Airlines have recently gone through bankruptcy, which has been
used to reduce benefits costs and labor costs more generally. GM benefits costs had gotten so high that GM
was sometimes described as a pension and health care provider that also makes cars.

Benefits: Work/Life Balance

Programs that help employees better integrate their work and life responsibilities include time away from
work (vacations, jury duty), access to services to meet specific needs (drug counseling, financial planning,
referrals for child and elder care), and flexible work arrangements (e.g., remote work, nontraditional sched-
ules, nonpaid time off). Responding to the changing demographics of the workforce (two-income families or
single parents who need work-schedule flexibility to meet their family obligations), many U.S. employers are
giving a higher priority to these benefit forms. (This trend was reinforced by the pandemic.) Medtronic, for
example, touts its Total Well-Being Program that seeks to provide “resources for growth—mind, body, heart,
and spirit” for each employee. Health and wellness, financial rewards and security, individual and family well-
being, and a fulfilling work environment are part of this “total well-being.”65 Medtronic believes that this pro-
gram permits employees to be “fully present” at work and less distracted by conflicts between their work and
nonwork responsibilities.

Benefits: Allowances
Allowances often grow out of whatever is in short supply. In Vietnam and China, housing (dormitories
and apartments) and transportation allowances are frequently part of the pay package. Many decades after
the end of World War II–induced food shortages, some Japanese companies still continue to offer a “rice
allowance” based on the number of an employee’s dependents. Almost all foreign companies in China
discover that housing, transportation, and other allowances are expected.66 Companies that resist these
allowances must come up with other ways to attract and retain employees. In many European countries, man-
agers assume that a car will be provided—only the make and model are negotiable.67

Total Earnings Opportunities: Present Value of a Stream of

Earnings
Up to this point we have treated compensation as something received at a moment in time. But a firm’s com-
pensation decisions have a temporal effect. Say you have a job offer at $50,000 a year. If you stay with the
firm for five years and receive an annual increase of 4 percent, in five years you will be earning $60,833 a
year. For your employer, the five-year cost commitment of the decision to hire you turns out to be $331,649
in cash. If you add in an additional 30 percent for benefits, the decision to hire you implies a commitment of
over $430,000 from your employer. Will you be worth it? You will be, after this course.
A present-value perspective shifts the comparison of today’s initial offers to consideration of future bonuses,
merit increases, and promotions. Sometimes a company will tell applicants that its relatively low starting
offers will be overcome by larger future pay increases. In effect, the company is selling the present value of
the future stream of earnings. But few candidates apply that same analysis to calculate the future increases
required to offset the lower initial offers. Hopefully, everyone who reads Chapter 1 will now do so.
 CHAPTER ONE: The Pay Model 19

Relational Returns from Work

Why do Google millionaires continue to show up for work every morning? Why does Andy Borowitz write
the funniest satirical news site on the web (www.borowitzreport.com) for free? There is no doubt that nonfinan-
cial returns from work have a substantial effect on employees’ behavior.68 Exhibit 1.5 includes such relational
returns from work as recognition and status, employment security, challenging work, and opportunities to
learn. Other forms of relational return might include personal satisfaction from successfully facing new chal-
lenges, teaming with great co-workers, receiving new uniforms, and the like.69 Such factors are part of the
total return, which is a broader umbrella than total compensation. Interestingly, as you may have noticed, the
types of rewards just listed, other than money, are sometimes viewed as being, for lack of a better word, more
noble (or higher order as Maslow and Herzberg might say) than money. In fact, at least one study reports
that candidates for a job who come across as more motivated by money are sometimes inferred to have lower
levels of higher order motivations, resulting in them being evaluated lower. The researchers refer to this as
“motivation purity bias.”70 So, as always, think about how you want to present yourself (including in terms of
your motivation purity) and come across when you interview!

The Organization as a Network of Returns

Sometimes it is useful to think of an organization as a network of returns created by all these different forms
of pay, including total compensation and relational returns. The challenge is to design this network so that it
helps the organization to succeed.71 As in the case of crew rowers pulling on their oars, success is more likely
if all are pulling in unison rather than working against one another. In the same way, the network of returns
is more likely to be useful if bonuses, development opportunities, and promotions all work together.
So the next time you walk through an employer’s door, look beyond the cash and health care offered to search
for all the returns that create the network. Even though this book focuses on compensation, let’s not forget
that compensation is only one of many factors affecting people’s decisions about work. (You might enjoy lis-
tening to Roger Miller’s song “Kansas City Star,” or Chely Wright’s “It’s the Song” for some other reasons
people choose their work.)

A PAY MODEL
The pay model shown in Exhibit 1.6 serves as both a framework for examining current pay systems and a
guide for most of this book. It contains three basic building blocks: (1) the compensation objectives, (2) the
policies that form the foundation of the compensation system, and (3) the techniques that make up the com-
pensation system. Because objectives drive the system, we will discuss them first.

Compensation Objectives
Pay systems are designed to achieve certain objectives. The basic objectives, shown at the right side of the
model, include efficiency, fairness, ethics, and compliance with laws and regulations. Efficiency can be stated
more specifically: (1) improving performance, increasing quality, delighting customers and stockholders, and
(2) controlling labor costs.
Compensation objectives at Medtronic and Whole Foods are contrasted in Exhibit 1.7. Medtronic is a med-
ical technology company that pioneered cardiac pacemakers. Its compensation objectives emphasize perfor-
mance, business success, minimizing fixed costs, and attracting and energizing top talent.
20 PART I: Introducing the Pay Model and Pay Strategy
EXHIBIT 1.6 The Pay Model
EXHIBIT 1.7 Pay Objectives at Medtronic and Whole Foods
Medtronic
Support Medtronic mission and increased
complexity of business
Minimize increases in fixed costs
Attract and engage top talent
Emphasize personal, team, and Medtronic
performance
Recognize personal and family total well
being
Ensure Fair Treatment: and Acknowledge that
team outcomes are collective should be on
their own line.
Whole Foods
Increase long-term shareholder value
Earn profits daily through voluntary
exchange with our customers
Through profits, create capital for growth,
prosperity, opportunity, job satisfaction, and
job security
Support team member happiness and
excellence
Acknowledge that team outcomes are
collective
 CHAPTER ONE: The Pay Model 21

Whole Foods is the nation’s largest organic- and natural-foods grocer. Its markets are a “celebration of food”:
bright, well stocked, and well staffed.72 The company describes its commitment to offering the highest quality
and least processed foods as a shared responsibility. Its first compensation objective is “Increase long-term
shareholder value.”
Fairness (sometimes called equity) is a fundamental objective of pay systems.73 In Medtronic’s objectives,
fairness means to “ensure fair treatment” and “recognize personal and family well-being.” Whole Foods’s pay
objectives discuss a “shared fate.” In their egalitarian work culture, pay beyond base wages is linked to team
performance, and employees have some say about who is on their team.
The fairness objective calls for fair treatment for all employees by recognizing both employee contributions
(e.g., higher pay for greater performance, experience, or training) and employee needs (e.g., a fair wage as
well as fair procedures). Procedural fairness refers to the process used to make pay decisions.74 It suggests
that the way a pay decision is made may be equally as important to employees as the results of the decision
(distributive fairness).
Compliance as a pay objective means conforming to federal and state compensation laws and regulations. If
laws change, pay systems may need to change, too, to ensure continued compliance. As companies go global,
they must comply with the laws of all the countries in which they operate.

Ethics
Asian philosophy gives us the concept of yin and yang—complementary opposites rather than substitutes or
trade-offs. It is not yin or yang; part of yin is in yang, and part of yang is in yin. So it is with objectives in the
pay model. It is not efficiency versus fairness versus compliance. Rather, the aim is to achieve all three simul-
taneously. The tension of working toward all objectives at once creates fertile grounds for ethical dilemmas.
Ethics means the organization cares about how its results are achieved.75 Scan the websites or lobby walls of
corporate headquarters and you will inevitably find statements of “Key Behaviors,” “Our Values,” and “Codes
of Conduct.” One company’s code of conduct is shown in Exhibit 1.8. The challenge is to put these state-
ments into daily practice. The company in the exhibit is the formerly admired, now reviled, Enron, whose
employees lost not only their Enron jobs, but also the money they invested in Enron stock (in some cases,
their entire retirement nest egg).
Because it is so important, it is inevitable that managing pay sometimes creates ethical dilemmas. Manipulat-
ing results to ensure executive bonus payouts, misusing (or failing to understand) statistics used to measure
competitors’ pay rates, repricing or backdating stock options to manipulate (increase) their value, encourag-
ing employees to invest a portion of their wages in company stock while executives are bailing out, offering
just enough pay to get a new hire in the door while ignoring the relationship to co-workers’ pay, and shaving
the hours recorded in employees’ time card—these are all-too-common examples of ethical lapses.
Some, but not all, compensation professionals and consultants remain silent during ethical misconduct and
outright malfeasance. Absent a professional code, compensation managers must look to their own ethics—and
the pay model, which calls for combining the objectives of efficiency and fair treatment of employees as well
as compliance.76
There are probably as many statements of pay objectives as there are employers. In fact, highly diversified
firms such as General Electric and Eaton, which operate in multiple lines of businesses, may have different
pay objectives for different business units. At General Electric, each unit’s objectives must meet GE overall
objectives.
22 PART I: Introducing the Pay Model and Pay Strategy

Objectives serve several purposes. First, they guide the design of the pay system. If an objective is to increase
customer satisfaction, then incentive programs and merit pay might be used to pay for performance. Another
employer’s objective may be to develop innovative new products. Job design, training, and team building may
be used to reach this objective. The pay system aligned with this objective may include salaries that are at least
equal to those of competitors (external competitiveness) and that go up with increased skills or knowledge
(internal alignment). This pay system could be very different from our first example, where the focus is on
increasing customer satisfaction. Notice that policies and techniques are the means to reach the objectives.
In summary, objectives guide the design of pay systems. They also serve as the standards for judging the suc-
cess of the pay system. If the objective is to attract and retain the best and the brightest skilled employees,
but they are leaving for higher-paying jobs elsewhere, the system may not be performing effectively. Although
there may be many nonpay reasons for such turnover, objectives provide standards for evaluating the effec-
tiveness of a pay system.77

Four Policy Choices

Every employer must address the policy decisions shown on the left side of the pay model: (1) internal
alignment, (2) external competitiveness, (3) employee contributions, and (4) management of the pay system.
These policies are the foundation on which pay systems are built. They also serve as guidelines for managing
pay in ways that accomplish the system’s objectives.

EXHIBIT 1.8 Enron’s Ethics Statement

Foreword
“As officers and employees of Enron Corp., its subsidiaries, and its affiliated companies, we are
responsible for conducting the business affairs of the companies in accordance with all
applicable laws and in a moral and honest manner. . . . We want to be proud of Enron and to
know that it enjoys a reputation for fairness and honesty and that it is respected. . . . Enron’s
reputation finally depends on its people, on you and me. Let’s keep that reputation high.”
July 1, 2000
Kenneth L. Lay
Chairman and Chief Executive Officer
Values
Respect We treat others as we would like to be treated ourselves. We do not tolerate
abusive or disrespectful treatment. Ruthlessness, callousness, and arrogance
don’t belong here.
Integrity We work with customers and prospects openly, honestly, and sincerely. When
we say we will do something, we will do it; when we say we cannot or will not
do something, then we won’t do it.
Communication We have an obligation to communicate. Here, we take the time to talk with
one another . . . and to listen.
Excellence We are satisfied with nothing less than the very best in everything we do. . . .
The great fun here will be for all of us to discover just how good we can really
be.

Source: Enron’s Code of Ethics, The Smoking Gun, July 2000.

Another random document with
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thermometer, which was set up beneath a little wooden shelter daily,
reached extraordinary maxima. For one whole month the maximum
fluctuated between forty and fifty degrees Centigrade, the
atmosphere becoming heavier and more exhausting as the day wore
on until sunset. During the night the maximum was generally a little
over thirty degrees, and you must remember that I am speaking of
the winter, when the air was pretty well saturated with moisture.
I have read in books of travel of countries where, to avoid
succumbing from the heat, Europeans live in holes dug in the earth,
and make negroes pour more or less fresh water on their heads from
calabashes to keep them cool. We never got as far as that, but I do
think that Say, at least in June and July, can compete in intensity of
heat with any other place in the world.
In such an oven we quite lost our appetites!
Now ensued a time of terrible ennui. All our energy, all our gaiety,
all our philosophy melted away before the awful prospect of living in
this remote and hostile corner of the earth for five whole months; five
months during which we knew we could not stir from the island; five
months in which we must endure all the storms of heaven in our frail
huts, and be exposed to the ceaseless plots against us of Amadu.
The dreary, monotonous days in which nothing happened, did not
even supply us with topics of conversation, so we talked more and
more of France, which of course only intensified our home-sickness.
Taburet, who had a wonderful memory for dates, seemed to find
every day of the month an anniversary of some event.
It became a more serious matter when our ennui resulted in
constant attacks of fever, but fortunately these attacks, thanks to the
daily dose of quinine, were never very serious, only their recurrence
was weakening, the more so that they were accompanied by what
we called the Sudanite fever, a kind of moral affection peculiar to
African soil.
This Sudanite affection betrayed itself by different eccentricities in
different people. It really is the effect of the great heat of the sun
upon anæmic subjects, or upon those whose brains are not very
strong. Sometimes, at about four o’clock in the morning, we used all
of a sudden to hear a series of detonations inside the enceinte.
“Holloa!” we would exclaim, “some one has got an attack of Sudanite
fever, and is working it off by firing at bottles floating on the river.” Or
another of the party would seal himself up hermetically in his hut,
blocking every hole or crack through which a ray of sunlight could
penetrate. The whole of the interior would be hung with blue stuff,
under the pretence that red or white light would give fever. Another
case of Sudanite!
We could cite many more examples of the disease during our stay
at Fort Archinard.
However different may be most of its symptoms, one is always the
same—a patient afflicted with it contradicts everybody and shows an
absolutely intolerant spirit.
Truth to tell, I must add, in common fairness, that we were all
more or less affected by it. We might have managed to pull along
peaceably in an ordinary station with occupations which separated
us from each other sometimes, but in this island, this cage, for it was
little more, we were always rubbing shoulders, so to speak, and
constant friction was inevitable. In fact, we ran our angles into our
neighbours instead of rubbing those angles down. We were regularly
prostrated with our inactive, almost idle life, and the true characters
of each one came out without disguise.
 THE MEMBERS OF THE EXPEDITION AT FORT ARCHINARD.

At table every discussion led to a kind of squabble. Each of us

stuck to his own opinion, even when the most astounding paradoxes
had been enunciated. Sometimes, after a regular row, we all sat
perfectly mute glaring at each other, and wondering what was to
happen next.
At night, or in the hour of the siesta, I used to get out my flute—
another form of the Sudanite fever—and play melodies from the Or
du Rhin or Tristan et Yseult, but even music failed to calm the
disputants. The tension was too great, and I was afraid that, even at
this late period of our expedition, things would go wrong in
consequence.
All of a sudden a happy idea occurred to me, a regular inspiration
from Heaven, which every one fell in with at once.
This idea was simply that we should all work, and the result was
the immediate restoration of order.
 It was a simple task enough that we now set ourselves to do, just
to make vocabularies of the various more or less barbarous idioms in
use in the Niger districts. There were plenty to choose from, for there
is more confusion of tongues, such as is described in the Bible, in
these parts than anywhere else. There is a perfectly inexhaustible
supply of peculiar phrases.
For instance, between Abo, in the highest part of the delta of the
Niger, and the sea, as an officer of the Royal Niger Company told
me, there are no less than seven dialects spoken, none of which
have the very slightest affinity with each other. It would appear that
one wave of migration has succeeded another, as the breakers do
on the beach, the natives composing the different parties of
emigrants dying out, or leaving only a few survivors stranded like
islets in a flood in the tropical forests, retaining their original customs
and dialects, and continuing to offer sacrifices in the old way,
uninfluenced by the other native populations.
It has been different further inland, for the last emigrants have
been absorbed by the earlier settlers, rather than driven back, but at
the same time their characteristics have not been merged in those of
other tribes, so that we still find side by side totally different customs,
and people speaking different dialects quite unlike each other, such
as the Tuareg, Fulah, Songhay, Bambara, Bozo, Mossi, etc., almost
equally distributed over extensive districts.
So we all set to work. Father Hacquart and I buckled to at the
Tuareg language. Pullo Khalifa turned out to be an indifferent
teacher, though he was full of good-will. He was never at a loss for
the signification of a word, but his renderings were mostly merely
approximate. I have already dwelt upon the peculiarities of the
Tuareg language in a previous chapter, so I will only add here that
we had two other instructors in it, another Fulah, a Mahommedan,
who shilly-shallied a good deal in his interpretations, and a female
blacksmith of Bokar Wandieïdiu, now attached to the service of
Ibrahim Galadio, who lent her to us. The last-named was certainly
the most interesting of our linguistic professors. She had a
tremendous voice, and was as ugly as sin, but she gave herself
many airs and graces. With the aid of these three and a few others
we drew up quite an imposing comparative vocabulary of the Tuareg
language.
Father Hacquart also devoted some time to the study of Songhay,
which is spoken between Say and Timbuktu, and also in other
districts beyond those towns in the east and west, for we meet with it
again at Jenné and at Aghades. Near Say, they call the Songhay
language djermanké. Pretty well every one undertook to teach us
Songhay; it was a simple dialect enough, spoken through the nose,
and it was likely to be very useful to us. The Pères blancs of
Timbuktu give especial attention to its study.
Tierno Abdulaye Dem, a few coolies, old Suleyman, who had
deserted Amadu, tired of wandering about after him, and had
rejoined us to go back to his beloved Foota, used to assemble every
day in Baudry’s hut, which was transformed into a Fulah academy.
Most unexpected results ensued from these meetings. The Fulah
language is a very charming one, and has been carefully studied by
General Faidherbe and M. de Giraudon, but there is still a good deal
to be learnt about it. It is very difficult to connect it with any other. It is
the one language necessary for travelling or for trading between
Saint Louis and Lake Tchad. There have been many theories on the
subject of the Fulah migration, and a great deal of nonsense has
been talked about it. Baudry, who studied the language with the
greatest zeal, discovered some extraordinary grammatical rules in it
and strange idioms, enough to frighten M. Brid’oison himself. No one
could now utter two or three words at table without Baudry declaring
how they could be translated into one Fulah expression. The
following example will give an idea of how much could be expressed
in a Fulah word. I must add, however, that Baudry and Tierno
Abdulaye agree in saying it is very seldom used.
The word I allude to is Nannantundiritde, which signifies to
pretend to go and ask mutually and reciprocally for news of each
other.
Tierno Abdulaye, who was a Toucouleur from the Senegal
districts, gave out that he could speak his maternal language or
Fulah pretty perfectly. When, however, Baudry set to work to explain
to him the formation of Fulah words which he claimed to have
discovered, Tierno realized that after all he did not know much about
it, so he tried to acquire grammatical Fulah, with the result that many
of his fellow-countrymen could not understand what he said. They
were completely confused by all these new rules, but Baudry was
delighted at having won a disciple.
The people of Massina, or the districts near the great bend of the
Niger, speak very quietly and in a low voice, as if they realized the
beauty of their language, and do not trouble themselves very much
about strict grammatical accuracy. The Fulah tongue, in fact, admits
of an immense number of shades of expression, and though there is
not perhaps exactly anything that can be called Fulah literature,
except for a few songs which can only be obtained from the griots
with the greatest difficulty, the language simply teems with proverbs.
Here are a few examples, but of course, like all such sayings, they
lose terribly in translation:—
“When you cannot suck the breasts of your mother, you must suck
those of your grandmother.”
“When a man has eaten his hatchet and his axe, he is not likely to
sputter much over broiled pea-nuts.”
“A stick may rot in the water, but that does not make it a
crocodile.”
“There is the skin of a sheep and the skin of a cow, but there is
always a skin.”
Thanks to Osman, Bluzet had unearthed a cobbler or garanké, a
native of Mossi. He was a very worthy fellow, but, it seems to me,
most of his fellow-countrymen are equally estimable. The Mossi, at
least those we knew, were all very easily intimidated, but honest and
trustworthy. At first Bluzet had a good deal of trouble to get any
information out of this Mossi, but when he gained a little confidence
he got on apace, and used to indulge on occasion in long
monologues, as when he treated us to the following little tale, which
he related to us all in Mossi in Bluzet’s hut.
 “One day, a woman going along the road to Say, taking some milk
to market, sat down at the foot of a tree and fell asleep.
“Presently three young men came up, and when they saw the
woman one of them said to the others—
“‘Follow me, and imitate everything I do.’
“They approached her cautiously, making a détour round the
brushwood. ‘Hu! hu!’ cried the leader, when he got close to the
sleeper, and the others shouted after him, ‘Hu! hu!’
“The woman started up terrified, and ran away, leaving the
calabash of milk on the ground.
“Then the eldest of the three young men said, ‘This milk is mine
because I am the eldest.’ ‘No,’ said the second, ‘it is mine because I
thought of crying, Hu! hu!’ ‘No, no,’ cried the third, ‘I mean to drink it,
for I am armed with a spear, and you have only sticks.’
“Just then a marabout passed by. ‘Let him be the judge!’ said the
disputants, and they put their case before him.
“‘I know of nothing in the Koran which applies to your difficulty,’
said the holy man; ‘but show me the milk.’ He took the milk, he
looked at it, he drank it. ‘This is really good milk,’ he added, ‘but
there is nothing about your case in the Koran that I know of.’”
With two other vocabularies of Gurma and Bozo expressions, less
complete than those of the Songhay and Fulah languages, we made
up a total of more than ten thousand new words, to which we added
many very interesting grammatical remarks.
This absorbing occupation, which fortunately became a positive
monomania with some of us, contributed more than anything to our
being able to survive the last month of our stay at Fort Archinard.
OUR QUICK-FIRING GUN.
NATIVES OF SAY.
 CHAPTER VIII

MISTAKES AND FALSE NEWS

We must now return to our arrival at Say. Although the days there
were most of them monotonous enough, they brought their little ups
and downs, and we received news now and then, of which, under
the circumstances, we naturally sometimes exaggerated the
importance. It would be wearisome for me as well as for the reader
to give an account of what happened every day during our long
winter at Fort Archinard. My notes were written under various
difficulties and in very varying moods, reflecting alike my
exaggerated low spirits when things went wrong, and my excess of
delight when anything occurred to cheer me. Consecutive pages of
my journal often contradicted each other, and any one reading them
would imagine they were written by two different persons; but this is
always the way with travellers, and even Barth himself was not
exempt from such fluctuations of mood.
My journal in extenso might serve as an illustration of the
psychology of the lie as illustrated amongst the negroes and
Mussulmans, but no other useful purpose, so I shall greatly
condense it. The reader will still, I hope, get a very good idea of all
we went through. If what I quote is rather incoherent, excuses must
be made for me, for the news we got was often incoherent enough,
and our life at the Fort was rather a puzzle too sometimes, with our
alternations of hope and anxiety.
Friday, April 10.—We are getting on with our fort; our abattis are
finished and ready for any attack. (This was written the day after our
arrival, whilst our work was still in full swing.)
We put the Aube in dry dock to-day, and it took the united efforts
of us all to haul her into position: non-commissioned officers,
interpreters, servants, all had to work, and even we white men lent a
hand. During the operation of turning her on to her side, the poor
Aube might have tumbled to pieces, for all her planks were loose.
But she held together yet once more, and, as you will see, we did not
have to abandon her until the very end of our voyage.
A new recruit joined us to-day, my journal goes on, so with
Suleyman Futanké we have two extra hands now. This was how he
came to join us. During the siesta hour we heard a man shouting
from the other side of the river, “Agony! agony!” and looking out we
saw some one waving a white cloth. We sent the Dantec to fetch
him, and when he arrived he kept shouting “Agony! agony!” in a
joyful voice. He showed us his cap of European make, evidently
expecting us to understand what he meant, but that did not explain
the use of the word “agony” so often.
It was Tedian Diarra, a big Bambarra, who had acted as guide to
General Dodds in the Dahomey campaign, who solved the mystery
at last, and told us that the man had been a porter at Say to the
Decœur expedition. He had been taken ill with an attack of some
discharge from the joints, and had been left under the care of the
chief of the village to be handed over to the first Frenchman who
should happen to pass. The poor fellow, whose name was Atchino,
—at least that is what we always called him,—was trying to explain
to us that he came from the village of Agony on the Wemé. He had
feared he should never see his native village again, with its bananas
and oil palms; but as soon as he heard of our arrival at Say, he came
to take refuge with us. Later I indemnified the man who had taken
care of him for the expense he had been put to. We made this
Atchino our gardener, and he turned out a very useful fellow, a
decided acquisition to our small staff.
Monday, April 13.—We finished the repairs of the Aube. She still
let the water in like a strainer, but, as we always said, we were used
to that. This expression, “used to it,” was perpetually employed by us
all, and it enabled us to bear with philosophy all our troubles. It is, in
fact, the expression which gilds the bitterest pills to be swallowed on
an exploring expedition, and no one need dream of starting on such
a trip as ours if they cannot adopt what we may call the philosophy of
use and wont on every occasion. Have twenty-five of us got to pack
into a boat about the size of my hand? What does it matter? go on
board, you’ll get used to it. Have we got to find place for provisions
and things to exchange with the natives when there is no more
room? Never mind, ship them all, we shall get used to them when we
settle down. Are you in a hostile district? Do rumours of war, of
approaching columns of thousands and thousands of natives uniting
to attack, trouble you? Never mind, they will turn out not to be so
many after all; you are used to these rumours now. You have some
dreadful rapids in front of you; you have got to pass them somehow.
There are so many, you can’t count them. Shall we draw back? Shall
we allow them to check our onward march? No, no, we shall get
used to them. If you take them one by one, you will find that each
fresh one is not worse than the last, and that the hundredth is just
like the first. You get quite used to them, at least if you do not lose
your boats and your life too. Which would be the final getting used to
things, the last settling down!
A diavandu and his sister one day presented themselves at the
camp. These diavandus, who are the guides and confidants of the
people, are everywhere met with amongst the Fulahs. I don’t know
what trade the sister followed, but this diavandu came to offer us his
services. He offered to perform all the usual duties of his office on
our behalf, and was ready either to sell us milk, or to act as a spy for
us. He was a little fellow, of puny, sickly appearance. We made him
drink some quinine dissolved in water, and our people told him that
the bitter beverage contained all the talismans of the infernal
regions. Certainly the witches in Macbeth never made a philtre
nastier than our mixture.
Our diavandu swore by the Koran, without any mental
reservations, that he would be faithful to us, and our spells and the
grisgris we had given him would, he knew, kill him if he were false to
us, or betrayed us in any way. Then we sent him to see what was
going on in Amadu’s camp. I do not know what eventually became of
him, but perhaps if he was false to us the quinine killed him by auto-
suggestion; perhaps he was simply suppressed by our enemies, or
he may have died a natural death; anyhow we never saw either him
or his sister again.
About the same time Pullo Khalifa appeared at Fort Archinard,
sent, he said, by Ibrahim Galadio, the friend of Monteil. He began by
asking us what we wanted, but it really was he who wanted to get
something out of us. We gave him a fine red chechia to replace his
own, which was very dirty and greasy. Later we gave him various
other presents, but, strange to say, he always came to visit us in his
shabbiest garments.

TALIBIA.

Thursday, April 23.—In the evening a sudden noise and confusion

arose on shore at Talibia, and in our camp we heard dogs barking
and women shrieking, whilst the glare of torches lit up the
surrounding darkness. Gradually the tumult died away in the
distance. Had the Toucouleurs been on the way to surprise us, but
finding us prepared given up the idea for the time being? We
shouted to Mahmadu Charogne, but no answer came. Mamé then
fired a fowling-piece into the air, but nothing came of it. All was silent
again, but we passed the night in watching, for we knew that that
very morning a man wearing a white bubu had tried to tamper with
our coolies, and to frighten away the native traders. He had shouted
from the left bank that Amadu had let loose the Silibés upon us,
giving them permission to make war on us, and promising them the
blessing of Allah if they beat us. No wonder such a coincidence as
this put us on our guard.
The next morning Mahmadu explained the uproar of the
preceding evening. It had been a question not of an attack on us, but
of a wedding amongst the Koyraberos. He told us a marriage is
never consummated until the bridegroom has literally torn away his
bride from her people, and the rite of abduction, for a regular rite it is,
is a very exciting ceremony. When the suitor comes to pay the dowry
it is customary for him to give his fiancée, it is considered good form
for the parents to shrug their shoulders, and pretend that the sum
offered is not enough; millet is very dear just now, they say, and they
cannot afford wedding festivities worthy of their daughter. They must
keep her at home until after the harvest, and so on.
The young man goes home then with bowed head and a general
air of depression. When he gets back to his own village he calls his
relations and friends together, chooses out the best runners and
those who can shout the loudest, and with them returns to seize the
object of his choice. He finally succeeds in taking her away in the
midst of screams, yells, and the sham curses of her relations, who
are really full of joy at the marriage. The so-called ravishers of the
dusky bride are pursued to the last tents of the village, and the
ceremony concludes, as do all weddings amongst the negroes, with
a feast such as that of Gamache immortalized in Don Quixote.
Soon after this exciting night our relations with Galadio began,
and throughout the winter all our hopes were centred on this man.
We counted on him to the very last moment as our best friend, and
he really was more reasonable than most of those with whom we
had to do during that dreary time. It must not, however, be forgotten
that amongst Mussulmans, especially those of the Fulah race,
wisdom means profound duplicity. The Fulahs actually have no word
to express giving advice, only one which means “give bad advice,” or
“betray by counsel given.” The idea is simple enough, and is the first
which comes into their heads. So that if by any chance they want for
once to translate our expression, “advise you for your own good,”
they have to go quite out of the way to make the meaning intelligible,
and to use a borrowed word. This is really a reflection of the Fulah
character.

TALIBIA.

Galadio was in this respect a thorough Fulah, although he had

Bambarra blood in his veins. His mother was a Fulah, of the Culibaly
tribe, and he deceived us perpetually with good words which meant
nothing. Still I must do him the justice to add, that he was careful to
save us from being involved in open war. Perhaps he saw how fatal
that would be to his own influence, or he may have dreaded it as a
calamity for the country he was now living in, or for the people over
whom he had been set. Anyhow he managed to run with the hare
and hunt with the hounds: in other words, to keep in with Amadu and
us. He always gave us to understand, that if the worst came to the
worst he would at least preserve a strict neutrality, and as a reward
for this he got many very fine presents. He was treated almost as the
equal of Madidu himself, and he too received from us a velvet saddle
embroidered with gold. His messengers were provided with a pass
by us, and were received with all due honour, for it was not until quite
the end of our stay that the mystery was solved, and Galadio
appeared in his true colours. Of his own free will he had concluded a
regular treaty with me, a treaty drawn up quite formally in Arabic and
French, and which he signed with his own name. He showed,
moreover, a very eager wish to enter into relations with Bandiagara.
April 30.—Khalifa is certainly an extraordinary man. To-night he is
to bring to us in a canoe, when the moon is set and all is silence,
darkness, and mystery, no less a person than the brother of the chief
of Say. We watch all night for the signal agreed upon of the
approach of our guests: the lighting of a candle on the bank of the
river, but nothing is to be seen. Was the whole thing simply a
manœuvre on the part of Pullo to get possession of a box of
matches and a candle? Perhaps so, for one of his chief delights
when he is in any of our tents,—and he is very often there,—is to
strike matches one after the other. He is not the only one with this
wasteful habit, Baudry is also afflicted with it, but fortunately we have
a sufficient supply even for such vagaries as this, which really are
very pardonable in the Sudan.
The next day Khalifa and the brother of the chief of Say actually
arrived, after a good deal more fuss and mystery. Even poor little
Arabu, who wanted to sleep in the camp, was sent away, weeping
bitter tears at the thought that his white brothers did not want him.
Very useless were all these precautions, for the brother of the chief
of Say, though perhaps rather more polite, was not a bit more
sincere than he. Our visitor explained that he had come to see us
quite independently, and that his great wish was to make friends with
us. What he really wanted, however, was a bubu and a copy of the
Koran. As his friendship was of a very doubtful quality, we put off
giving the present to another time, when he should have proved his
sincerity by getting us a courier to go to Bandiagara. He went off
promising to see about it.
 We had “big brothers” and “little brothers” ad infinitum, but as
there is no masculine or feminine in the Fulah language, the
Sudanese when they try to speak French muddle up relationships in
a most original manner, without any distinction of sex. Abdulaye said
to us, with no idea that he was talking nonsense, “My grandfather,
who was the wife of the king of Cayor;” and it is no rare thing for one
of our men to bring a young girl to us in the hope of getting a
present, who is really no relation to him at all, telling us, “Captain,
here is my little brother; he has come to say good-morning to you.”
In my journal I find the following note à propos of this confusion of
relationships. The grandson of Galadio, who came to see us, told us
he had come to pay his respects to his grandfather, and I was that
grandfather, because I was the big brother of his other grandfather.
The muddle is simply hopeless, but with it all the natives never lose
their heads, but keep in view the possible present all the time.

GALADIO’S GRANDSON.
 Sunday, May 3.—The day before yesterday some strange news
was brought us by a boy of about fifteen. He had been sent secretly
to us by the Kurteye marabout we had seen when we were on our
way to Say. A horrible plot was being concocted, he said, for Amadu,
remembering the spells of his father, who had been a great magician
at Hamda-Allâhi, had made an infallible charm against us. On some
copy-book paper, which had evidently been taken off our presents,
he had written the most awful curses, imploring Allah seven times
over to exterminate the Kaffirs, as he called us, and having washed
the paper in water he made a goat drink the decoction thus
produced. He then sent that goat to us, thinking we would buy it! But
we were warned in time.
The awful grisgris did, in fact, arrive in camp yesterday in the form
of a black goat. The poor creature did not look as if she were
charged with venom. She was plump not too old, and would make a
first-rate stew.
All our men were, however, afraid to have anything to do with her,
for in their eyes she was indeed a grisgris endowed with unholy
powers by Amadu. The negroes are all superstitious, and their
imagination often quite runs away with them. On the other hand, faith
is sometimes wanting amongst the Mussulmans. Putting on an air of
very great wisdom, therefore, we generously offered two cubits of
stuff, worth about threepence-halfpenny, for the goat filled with spells
against us, and when the trader who had brought her looked
confused, yet almost willing to let us have her at that ridiculous price,
we explained to him emphatically that our own grisgris, the tubabu
grisgris, had revealed to us the black designs of Amadu, and we
intended to have him and his goat taken back to the other side of the
river, manu militari, I very nearly said kicked back.
The Kurteye marabout who had warned us, was evidently a
friend, unless the whole story was made up to get a present from us.
Every evening now regular tornados broke near Say. Up-stream and
down-stream, at Djerma and at Gurma, torrents of rain fell
constantly, and the lightning flashed from every point of the
compass; but, strange to relate, there was no rain at Say itself, and
when there is no rain there is no harvest. The report was now spread
that we had called down on the village the curse of Allah. The other
day Amadu Saturu had publicly recited the Fatiha in the Mosque in
the hope of getting rain to fall, and we were told that in the meeting
of the notables of the place, the Kurteye marabout had got up and
asserted that Say was punished for having given a bad reception to
a man sent from God, in other words, to the chief of our expedition,
and because Amadu had broken his promise and all his solemn
oaths.
Like my uncle Dr. Barth in Sarayamo, I now found myself looked
upon as the bringer of storms. He had also been looked upon as a
marabout saint, and the Fatiha had been recited to him in the hope
that he would open the floodgates of heaven. We, Kaffirs though we
were, would soon in our turn be entreated to remove our interdict on
the rain so much needed.
May 7.—Tierno, after many a discussion, has at last succeeded in
getting us a courier in the person of an ivory merchant from Hombori.
He will take our letters for Bandiagara, an advanced French post of
Massina. Aguibu, king of Massina, and under our protection, had
sent an agent to Hombori, which is on the road there. Our man
would go for 200 francs, 100 payable at Bandiagara and 100 on his
return to us. All, therefore, was for some days excitement and bustle
in our camp. Maps, reports, letters were being rapidly got ready, and
nobody had a moment to spare. Our courier, who did not seem to
feel quite sure of his safety, sent to ask whether during his absence
his family could go to our friend Galadio, who would protect them.
We said yes, of course.
He returned a month later, and said he had not been able to get to
Bandiagara. The Habés, who had risen in revolt, had robbed him
near the village of Dé. He had only escaped with the greatest
difficulty under cover of a tornado, leaving his packet of letters in the
hands of our enemies. We think he romanced a good deal on the
subject, and I fancy that a good search in Amadu Saturu’s camp
would probably result in the discovery of our packet intact, except for
being perhaps gnawed by termites.
 I had some little doubt on the subject, however, and it is thanks to
that doubt that the courier still has his head on his shoulders. I never
saw him again.
May 13.—Great news! We are told by Osman that there are some
white men on the Dori side of the river, but no one knows exactly
how many. Barges full of white men are floating down-stream; they
are now off Ansongo. There is talk of three iron boats like ours; those
in them are all for peace, nothing but peace.
May 16.—Who is our friend Pullo bringing us this morning? Who
is that man with him who looks like a Tuareg, dressed in blue Guinea
cloth, with a grisgris on his head and a spear and javelin in his hand?
He is a Fulah, the foster-brother of Madidu, with his pockets full of
news. Twenty days ago he said he had left his “big brother” to come
to Say and sell four oxen for some of the cloth of the district. One of
these oxen had died, another had been stolen. What a good
opportunity to ask us to give him a bubu to make up for his losses.
Madidu had not known that we were still at Say. Had he done so
he would certainly have sent messengers, perhaps even have come
himself. He or Djamarata would have visited us, for they had gone
down the river as far as Ayoru to chastise Yoba for some want of
respect to us, but I am sure I don’t know what.
Our Fulah had heard a rumour of four white men having come to
trade on the Niger. Madidu had sent two of his blacksmiths to
prepare the way before them, and he had also by this time sent
envoys to Timbuktu to confirm the treaty we had made with him. He
did not know what had become of that treaty, but anyhow he had
returned with his pocket (Heaven only knows the capacity of that
pocket) full of knick-knacks and more than one present for Madidu.
The news of the approach of the barges was confirmed during the
following days, and in my notes I find the following reference to
them:—
May 17.—A man from Auru who had come to Say told us that at
Ansongo there were three hundred armed men and seven or eight
whites who had come in peace, nothing but peace, and were coming