Backloading Compensation
From Zanecorpwiki
Back loading compensation causes problems. It creates odd incentives and unintended consequences. It's impossible to judge future value and cost accurately. Employers tend to overcompensate while employees become entrenched. Equally as bad, it creates debt--explicit and implicit--that reduces flexibility and agility.
Two common examples include compensation packages that focus heavily on retirement benefits and equity based compensation. To take the first case, we see this a lot in government and heavily unionized industries. Employees may get paid less than their counterparts in other sectors.[notes 1], but always receive disproportionate back loaded compensation in the form of retirement pensions (or something similar) and Cadillac medical insurance.
Employers make these promises because they don't show up right away so it's easy. They underestimate the future cost, and when things are going well, it can seem sensible. However, when the true cost unfolds, especially if growth has leveled off or even declined, then there's big trouble. They are now locked into very expensive payments.
For their part, the employees become very defensive. "I worked for this!" is the claim, and it's not unreasonable, especially in cases where the employees earned less than they could other places. In general, because of underestimation of the value of the back loaded packages and the fact that people are living longer,[notes 2] it seems to me that back loaded compensation tends to overcompensate if it's actually carried through on.
Thus employers often feel justified in renegotiating such packages by using either the power of the state, bankruptcy, or the threat thereof to modify the contracts. Whether this is fair or not depends. On the one hand, if the employees are being overcompensated and dragging down the earning potential of follow on generations, then it's no less fair to reduce their compensation as it is to reduce the compensation of the follow on workers who subsidize retirement packages. On the other hand, there's a bait and switch going on as the employees bore the burden of risk and the cost of deferment for years. Now that the risk and deferment are no longer an issue, the fact that they were an issue doesn't change. The employees really did invest in these packages.
In the second example, equity style compensation made famous in tech industry with options and the like, employees tend to get undercompensated in most cases. The mean might actually work out, but that's only because some do very well--like the Microsoft and Google millionaires. In terms of median and mode, though, it's a losing proposition.
Notes
- ↑ In some cases, the employees get paid as much or more, so this isn't universal. "Deferred" compensation isn't critical, just back loading.
- ↑ The increasing longevity factors will level out in the next generation and should stop being a factor. Even in the last generation, it could have been predicted, but people are really bad at factoring in even very obvious demographics.
