Unit I PowerPoint Presentation Compensation:  Direct and Indirect = Total Compensation (Research) Per the textbook, compensation can come in the form of financial returns, tangible services, and benefits. The two types of compensation are direct and indirect. Direct consists of pay for work performed. Indirect consists of the perks and benefits associated with the position/employment. Imagine that you are a human resources (HR) manager, and it is your responsibility to identify data to help strategize, benchmark, and develop proper pay compensation for all positions within the organization. There are tons of software, vendors, and/or other services available to help with developing the pay grades, levels, and/or categories; however, the following website provides data and insight into the total compensation package: www.salary.com. You decide to use this website to help you develop your pay model and total compensation strategy. For this assignment, you will create an eight- to ten-slide PowerPoint presentation. You will first choose a job title and a location to present the www.salary.com findings/results. Imagine that you are presenting to your company leaders, and ensure that you identify the following components: core compensation (direct compensation), benefits (indirect compensation), and benchmark benefits with the industry average. Below are the steps to access the material. 1. Go to www.salary.com. 2. Hover over Personal (located at the top of the screen). 3. Click Salaries (from the drop-down menu). 4. Enter job title and location. 5. Click Get My Salary Estimate. 6. Select one job title of your choice. 7. Click Skip This Advertisement. 8. Review the Salary and Benefits, which can be accessed using the navigation panel on the left. (Use this information to create your presentation.) 9. Once you select Benefits (located to the left of the screen), click the Benefits Calculator tab (located at the top of the page). 10. From the Industry drop-down list, select the appropriate industry. 11. Enter the Base Salary. 12. Enter any Bonuses. 13. Click Submit. 14. Once the results are provided, review the Define Employer Contributions tab. The Annual Value of Benefits portion lists the indirect benefits. Enter data for the following fields: 401k, disability, healthcare, pension, and time off (enter as days; on average, most organizations offer 21 days). 15. Click Submit. 16. Review the results within the Compare Benefits to Industry tab. As you create the content slides for your presentation, be sure to use the speaker notes function to explain the content in detail for each of the slides. Note: Keep the 6x6 PowerPoint rule in mind (i.e., slides should only include six to seven lines of content with no more than six to seven words per line). Any illustrations should relate to the content being discussed. Be creative! Include a title slide and a references slide in your presentation; however, please note that these slides do not count toward meeting the total slide count requirement.  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, for example, to the lyrics for the Beatles’ song “Money.”)1 They say something like: it’s true money doesn’t buy everything, but if money can’t buy it, I can’t use it. OK, maybe something of an exaggeration, but.… Yes? Well, 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, workers at Chrysler got total compensation (i.e., wages plus benefits) of about $76 per hour, whereas U.S. workers at Toyota received $48 per hour and the average total compensation per hour in U.S. manufacturing was $25 (and $16 in Korea, $3 in Mexico). 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, the “strategy” was not sustainable. It ended up going through bankruptcy, being bought out by Fiat, and then reducing worker compensation costs as part of its strategy for return to competitiveness. Specifically, Chrysler took steps (as part of its bankruptcy plan) to bring its hourly labor costs down to about $49 more recently.2 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 40 U.S. manufacturing plants and 51,000 U.S. hourly workers.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. Of course, building too many vehicles that consumers did not want was also a problem. But, having labor costs higher than the competition, 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 shareholder wealth was wiped out in bankruptcy. Think 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. 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 keep prices for its iPad and iPhone lower than otherwise 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 “innovative” new financial investment vehicles and for taking risks to earn themselves and their firms a lot of money.4 That is what happened—until several years ago. Then, the markets discovered that many such risks had gone bad. Blue Chip firms such as Lehman Brothers slid quickly into bankruptcy, whereas others 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. Recently, 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 aggressive” and that often results in those who thrive under this incentive rising to top leadership positions at the banks.5 Does greater expertise in the design and execution of compensation plans play a role in controlling excessive risk taking and other problematic behaviors and encouraging a more positive culture? Congress and the president seemed to think so, because in hopes of avoiding a similar financial crisis in the future they put into place legislation, the Troubled Asset Relief Program (TARP), which included restrictions on executive pay designed to discourage executives from taking “unnecessary and excessive risks.” Another commentator agreed. In an opinion piece in The Wall Street Journal, entitled “How Business Schools Have Failed Business,” the former director of corporate finance policy at the United States Treasury argued that misaligned incentives were a major cause of the global financial crisis (see above) and he wondered how many of the business schools that educated top executives and directors included a course on how to design compensation systems. His answer: not many. Our book, we hope, can play a role in helping to better educate you, the reader, about the design of compensation systems, both for managers and for workers. How people are paid affects their behaviors at work, which affect an organization’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. COMPENSATION: DEFINITION, PLEASE How people view compensation affects how they behave. It does not mean the same thing to everyone. Your view probably differs, 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. Society Some people see pay as a measure of justice. For example, a comparison of earnings between men and women highlights what many consider inequities in pay decisions. In 2013, among full-time workers in the United States, U.S. Bureau of Labor Statistics data indicate that women earned 82 percent of what men earned, up from 62 percent in 1979.8 If women had the same education, experience, and union coverage as men and also worked in the same industries and occupations, the ratio would increase, but most evidence suggests that no more than one-half of the gap would disappear. Thus, under even a best case scenario, such adjustments would increase the women/men earnings ratio to as high as about 90 percent, still leaving a sizable gap.9 Society has taken an interest in such earnings differentials. One indicator of this interest is the introduction of laws and regulation aimed at eliminating the role of discrimination in causing them.10 (See Chapter 17.) Benefits given as part of a total compensation package may also be seen as a reflection of equity or justice in society. Employers spend about 44 cents for benefits on top of every dollar paid for wages and salaries.11 Individuals and businesses in the United States spend $2.9 trillion per year, or 17.4 percent of its economic output (gross domestic product) on health care.12 Nevertheless, roughly 41 million people in the United States (14 percent of the population) have no health insurance.13 (The Affordable Care Act  EXHIBIT 1.1 Hourly Compensation Costs for Production Workers in Manufacturing and Economy-wide Productivity (Gross Domestic Product, GDP, per Employed Person), in U.S. Dollars Source: Hourly Compensation Cost: The Conference Board. International Comparisons of Hourly Compensation Costs in Manufacturing, 2013. December 2014. Productivity: The World Bank. http://data.worldbank.org/indicator/SL.GDP.PCAP.EM.KD. Extracted February 3, 2015. Notes: Compensation includes wages and benefits. The most recent Conference Board compensation cost was $3.07 (in 2012) for China. The estimate for China was obtained by inflating the Conference Board estimates based on data from the National Bureau of Statistics of China. Productivity is gross domestic product (GDP), in constant 1990 PPP $, divided by total employment in the economy. Purchasing power parity (PPP) GDP is GDP converted to 1990 constant international dollars using PPP rates. An international dollar has the same purchasing power over GDP that a U.S. dollar has in the United States. 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 plastic beads at New Orleans’ Mardi Gras, filmmakers were showing video clips of the Chinese factory that makes 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 complained, “It kinda takes the fun out of it.”18 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 will, in turn, 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 are betting that this $600 million will motivate employees to generate more than $600 million in extra revenue. Stockholders have a particular interest in executive pay.19 (Executive pay will be discussed further in Chapter 14.)20 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 executive pay and company performance are strongly linked in the typical U.S. company.21 In the absence of such a linkage, concerns arise that executives can somehow use their influence to obtain high pay without necessarily performing well. Exhibit 1.2 provides descriptive data on chief executive officer (CEO) compensation. Note the large numbers (total annual compensation of about $10 million to $11 million, depending on whether one uses the median or mean) and also that the bulk of compensation (stock-related) is connected to shareholder return or other performance measures (bonus). As such, one would expect changes in CEO wealth and shareholder wealth to be, generally speaking, aligned. To be sure, there are overpaid executives who earn a lot and produce little in return for shareholders (or other stakeholders such as employees). However, the assessment of whether an executive is being paid appropriately for performance is not as simple as it may seem: EXHIBIT 1.2 Annual Compensation of Chief Executive Officers, 200 Largest (by revenues) U.S. Public Companies Source: Original data from S&P Capital IQ; USA TODAY research, as reported in Barbara Hansen and Mark Hannan. Millions by millions, CEO pay goes up. USA TODAY, April 4, 2014 http://www.usatoday.com/story/money/business/2014/04/03/2013-ceo-pay/7200481/. Notes: Based on 200 Standard & Poor’s 500 companies that filed proxies with the Securities and Exchange Commission between January 1 and March 27, 2014. Mean (but not median) compensation components sum to equal total annual compensation. Consider the example of Richard Fairbank, the CEO of Capital One, as reported in the annual Wall Street Journal/Mercer CEO Compensation Survey (April 13, 2006). In 2005, Capital One shareholders earned a one-year return of 2.7 percent, and over five years, had earned a return of 5.8 percent. The survey reported that Fairbank received $249.3 million in total direct compensation from Capital One in 2005. This large lump sum, compared with a relatively small shareholder return number, implies a lack of alignment between shareholder return and CEO compensation that was widely reported in the popular press. However, most of the $249.3 million received by Fairbank arose from the exercise of stock options granted to him in 1995 (and that expired in 2005, forcing him to exercise them or lose them). Over that longer time period (1995–2005), shareholder wealth at Capital One increased by $23 billion, for a cumulative shareholder return of 802 percent.22 As the example indicates, the answer to how strongly CEO pay and shareholder return are related depends to some degree on how carefully the timing and measurement of performance are addressed. One study, which sought to address this issue found a strong relationship (?R2 = .35, ?R = .59) over time between total shareholder return and a new, corresponding concept, CEO return (i.e., change in CEO wealth). Exhibit 1.3 shows how CEO wealth changes in response to changes in shareholder wealth. Although CEO and shareholder interests appear to be significantly aligned on average, 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 2000 to 2008 period 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 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 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 EXHIBIT 1.3 Chief Executive Officer (CEO) Return and Shareholder Return Source: A. Nyberg, I. S. Fulmer, B. Gerhart, and M. A. Carpenter, “Agency Theory Revisited: CEO Returns and Shareholder Interest Alignment,” Academy of Management Journal, 53 (2010), pp. 1029–1049.  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 performance). 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 percent 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 percent to 12 percent). Supermarkets today are losing market share to the warehouse club stores such as Sam’s Club and Costco, who enjoy an even lower cost of labor (4 percent to 6 percent), even though Costco pays above-average wages for the industry. 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). Each store 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 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 segment, Costco appears to have chosen to pay higher wages, perhaps as a way to attract and retain a higher quality workforce.25 Indeed, in a recent annual report, Costco 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 recent annual report that they “experience significant turnover in associates [i.e., employees] each year.”26 Based on Exhibit 1.4, Costco is quite successful, 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 its labor costs are higher than those of Sam’s Club and Walmart, it appears that this model works for Costco because it helps 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 documented that it brings 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.27 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. This potential to influence employees’ behaviors, and subsequently the productivity and effectiveness of the organization, means that the study of compensation is well worth your time, don’t you think?28 EXHIBIT 1.4 Pay Rates at Retail Stores, Customer Satisfaction, Employee Turnover, and Sales/Square Ft. Sources: Starting Wage, Employee Annual Turnover, and Wage after 4 Years from Liza Featherstone, “Wage Against the Machine,” Slate, June 27, 2008; “The Costco Craze.” CNBC Television Report, April 26, 2012; Brad Stone. “Costco CEO Craig Jelinek Leads the Cheapest, Happiest Company in the World,” Business Week, June 06, 2013. www.businessweek.com. Customer Satisfaction Data from American Customer Satisfaction IndexTM. http://www.theacsi.org/. Extracted May 17, 2012. Store Size, Number of Employees from 2014 Costco and 2014 Walmart annual reports. Average Cashier Wage from www.glassdoor.com, extracted February 4, 2015. Notes: Separate turnover data unavailable for Sam’s Club. Overall Walmart turnover rate is thus used. aEstimated. 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.29 The importance of pay is apparent in many ways. 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 nondiscrimination 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. Incentive and Sorting Effects of Pay on Employee Behaviors Pay can influence employee motivation and behavior in two ways. First, and perhaps most obvious, 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), determines 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. However, pay can also have an indirect, but important, influence via a sorting effect on the composition of the workforce.30 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 to 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.) Less obvious perhaps, it is not only how much, but how an organization pays that can result in sorting effects.31 Ask yourself: Would people who are highly capable and have a strong work ethic and interest in earning a lot of money prefer to work in an organization that pays employees doing the same job more or less the same amount, 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  Incentive and Sorting Effects of Pay on Employee Behaviors Pay can influence employee motivation and behavior in two ways. First, and perhaps most obvious, 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), determines 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. However, pay can also have an indirect, but important, influence via a sorting effect on the composition of the workforce.30 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 to 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.) Less obvious perhaps, it is not only how much, but how an organization pays that can result in sorting effects.31 Ask yourself: Would people who are highly capable and have a strong work ethic and interest in earning a lot of money prefer to work in an organization that pays employees doing the same job more or less the same amount, 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 equal (e.g., if they are not paid more for their higher performance), translate into higher turnover, a likely significant problem to the degree it is the high performers leaving, especially to the degree that high performers in particular roles create a disproportionately high amount of value for organizations.32 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 policy and practice on dealing with outside offers (hopefully informed by research) is important.33 Let’s take a look at one especially informative study conducted by Edward Lazear regarding incentive and sorting effects.34 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 productivity 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 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 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. 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.35 In China, the traditional characters for the word “compensation” are based on the symbols for logs and water; compensation provides the necessities in life. In the recent past, the state owned all 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.36 “Compensation” in Japanese is kyuyo, which is made up of two separate characters (kyu and yo), both meaning “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.37 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):