Compensation as a Strategic Asset

CHAPTER 6COMPENSATION TERMINOLOGY AND CRITERIA

“The beginning of wisdom is the definition of terms.”

—Plato

Based on Plato’s quote, it seems appropriate to begin our discussion of compensation systems by explaining general terms common to compensation systems. This chapter discusses not only compensation terms, but also the criteria many firms currently use for evaluating performance.

COMPENSATION TERMINOLOGY

In this section, we define and discuss four key components of owner compensation: base pay, return on capital, bonus, and return on equity. We also explore the concepts of total compensation.

Base Pay

Base pay can best be defined as the pay for a job or position excluding additional payments or allowances. The difficult questions include:

▮ What is the base value of any given position?

▮ How much should you pay?

▮ How do you determine what the pay should be?

These are merely some of the questions owners of public accounting firms and human resources professionals ask themselves consistently when hiring new employees or admitting new owners.

For most workers (with the exception of C-level executives such as CEOs, CFOs, and CIOs), base pay is the essence of their compensation. This is historically true for owners of public accounting firms. As we look at a typical accounting firm, base pay is often determined by position. For each position in the firm (for example, staff accountant, senior, supervisor, manager, and director), firms generally create a base-pay range that is often ...