Introduction
The report presents discussion and analysis of compensation strategies of Nucor Corporation. The organizational structure significantly impacts the compensation system of an organization that affects its ability to attain strategic goals. If the compensation to executives is not aligned with the organizational culture then it may lead to adverse impact on the firm’s performance and lead to other consequences. Several studies indicate that the organizational culture has a significant impact on compensation as well as the firm’s performance. The firms offer different types of compensation to their executives that may affect the compensation structure. However, they are determined on the basis of organizational behavior. Moreover, the main objective of compensation is to keep executives motivated to optimize the company’s performance and profitability.
It is essential for an organization to achieve competitive advantage, which should be the outcome of organizational culture. In this report, information related to executive compensation is analyzed in order to determine how effectively Nucor is communicating, designing, developing, and managing executive compensation plan. Therefore, a critical review related to the issues of compensation, policies, and current practices is presented in this report to evaluate compensation practices of Nucor.
Company Background
Nucor Corporation is a US based metal recycling and steel manufacturing company currently headquartered in Charlotte, U.S. It is one of the largest steel manufacturing companies. It was ranked as the largest company for metal and other scrap material recycling in North America in 2015(Annual Report: Nucor Corporation 12). The company processes different metals including ferrous, pig iron, hot briquette, and other non-ferrous metals. The company operates internationally in different regions of the world and trades metal scrap and products (Annual Report: Nucor Corporation 12).
Nucor Corporation’s business has significantly expanded in the recent years. The company has made significant capital investment to improve its operational performance, cost structures, and product portfolio. The company is focused on lowering its cost and expanding its product mix, and improving market diversity to increase its operational performance. The company has acquired Skyline Steel LLC and Gallatin in 2012 and 2014 (Annual Report: Nucor Corporation 2).
Overview of previous year performance and compensation
Assessing compensation of Nucor Corporation variation in the incentives and basic salaries in the previous years is evident. It can be determined that there is a constant fluctuation in CEO’s compensation over the years because it is based on the performance and profitability of the company. The structure and policies show that the CEO compensation packages are designed to align interests of shareholders and executives with an increasing commitment to continue working in a challenging environment of the steel industry. Reviewing the CEO compensation plans in the past years, it is evident that the executive compensation packages are based on the revenue performance based on the return on equity. Moreover, the disclosures in the executives’ compensation report reveals that the policies for the compensation are subjected to change based on the prevailing conditions or managerial decisions. Since, Nucor Corporation’s core objective is to retain its employees and based on this objective the officers and executives are restricted to make any short term selling of the stock or hedging.
The executive compensation is based on a comparison between the groups that indicates the actual growth and performance of the comparator group. The unique compensation structure of Nucor is embedded with pay performance concept in which the executives are motivated to take decisions to support organizational performance. Nucor Corporation has simple organization structure, as the each of the department operates independently in flexible environment. The executive pay structure is based on typical management practices that are strategically aligned with the motivation of workers and productivity of the organization. The management supports the inclusion of fresh ideas to bring improvement in the operation without any barriers. The committee believes that executives hold significant interest in the company to align their interests with the organization. The guidelines of the company hold executives’ interests by offering ownership to executives over the period of five years that keeps them enacted with an opportunity to earn significant number of Nucor Shares. It can be noted from evaluating compensation plan of executives of Nucor Corporation that the larger proportion of incentives is equity based (Baker, Jensen and Murphy 121). The compliance is not promoted until there is sufficient progress achieved by the executives. There is an adjustment in the incentives and award payment annually which control payments mainly though Nucor’s common stock.
Also, it can be noted that the compensation plans for executives do not apply any particular benchmarking to determine incentives for executives. The comparator group is used as a benchmark but only for base salaries. However, the overall compensation is measured through achieving goals and exceeding performance levels defined by the committee upon comparing two performance comparator groups. The use of these measures is only done to determine annual and long term incentive plan (Besanko, Dranove and Shanley 74). It reflects that Nucor Corporation unlike the other companies is more inclined to improve its business performance. The higher the performance of the company is, the higher and better are incentives and compensation for executives.
Nucor current practices for its executives’ compensations are based on the objectives that the executives should be compensated on the basis of the overall performance of the organization. The company retains their services through effective compensation strategy and their commitment is also boosted ensuring that the shareholder value also increases.
The executive compensation is limited to certain employee benefits such as Nucor Profit Sharing, Service Award Program, Employee Stock Purchase Plan, and Extraordinary Benefits (Anuual Report: Nucor Corporation 12). It can be analyzed that the organizational culture has a great impact on the performance of its employees. It can be noted that the executives have been motivated to keep their performance through high-level financial rewards. The monetary reward has a great implication on the performance of executives that greatly affects the firm’s performance (Baker, Jensen and Murphy 15). Although the executives of the company have limited rewards, the working environment and culture of the organization positively impacts their motivation and commitment.
The executives are rewarded above the overall market median to ensure that their contributions to Nucor’s business and shareholders’ value are aligned for the long-term success of the company. Nucor specifically focuses on the return on equity, return on average invested capital, and revenue performance to design compensation packages for its employees. Russo, Tomei, and Santos highlight that compensation plays a vital role in dealing with the challenges of an organization to maintain commitment so that the organization is able to align its practices, management strategies, and policies which match and support the organizational culture (Russo, Tomei and Santos 13).
In other words, it can be explained that the compensation system of an organization depicts expectation from the people of the organization for business success. It is important that the incentives provided by the company should compensate employees in a manner that it develops a common vision within the organizational setup. Milgrom and Roberts state that compensation plan and policies specify the expectations of employers from their employees and how employees should be motivated by offering them both financial and non-financial rewards for their contribution and efforts to serve organizational interest (Milgrom and Roberts 51).
It can be identified that Nucor has a specific focus on the rewards for its employees by adopting incentive plans that are derived from the value it generates for its stockholders. It can be analyzed on the basis of the reinforcement and expectancy theory that highlights that the behavior of executives is based on the rewarding experience not only just the monetary rewards.. Nucor ensures that the commitment exhibited by its executives is compensated in the best possible manner. Hence, the monetary rewards and incentive plans for executives rely on the future performance of the firm. It keeps executives engaged and gives them freedom to work and opportunity to improve their practices to bring timely improvement in their decisions. Nucor does not neglect the performance and efforts of its executives as the culture of the organization strictly measures the competency of its executives and employees by assessing their behavior. It is ensured that the company’s executives are compensated by offering them high pay packages and ensuring that the interests of shareholders are well protected.
The compensation system of Nucor is formed on the basis of the variable pay system that is synchronized with the culture of the organization to create a competitive advantage for the company. Moreover, the compensation system developed for the company is well communicated and managed according to the firm’s performance.
Impact of Overall performance and Control on Incentive Plans and Salary Packages
According to Annual Report Nucor Corporation, the incentive plans for the executives of the company are designed by measuring the cyclical environment that is performance related between the two comparative groups that are Steel Comparator Group and General Industry Comparator Group (Annual Report: Nucor Corporation 23). The incentives are only paid when the performance of the company is high. Moreover, Nucor base salaries are lower than the median industrial salary average. It indicates that if Nucor’s performance is not better than the other competitors in the industry, the executives of the company would have earn less than the average industrial executive pay. The incentives paid to the executives are stock-based reward that can be held until the time of retirement. Zhang, Bartol, and Pfarrer, applying the agency theory, explain that stock-based incentives have a greater impact on the CEO’s earning manipulation behavior (Zhang, Bartol, and Pfarrer 45). It can benoted that Nucor gives incentives to its executives that are equity based to ensure that shareholders’ interests are closely associated with the rewards of executives. It leads to higher level of determination by executives to put their efforts in bringing changein the company. It wouldalso achieve a consistent performance of executives by making incentives highly leveraged through equity pay. The practice of incentives can be illustrated through the agency theory that explains that the promotion based reward system is applied within the organization. Overcoming interest conflicts between executives and shareholders reduces the risks of agency problem. Baker, Jensen, and Murphy illustrate, “The second group of merit-pay critics argues that, while financial incentive schemes improve productivity in principle, in practice they induce significant adverse side effects that are costly to employee morale and productivity” (Baker, Jensen, and Murphy 12).
Nucor’s approach to incentives for executives is mainly based on the financial performance of the company. The company is focused on keeping the morale of its executives high and reducing the agency gap betweenthe agents and the principle to ensure that the performance of the firm does not get affected. Upon analyzing the financial statement of Nucor Corporation, it can be identified that the firm has developed long-term incentive plans for executives that were initiated during 2003, 2008 and 2013. The incentive plans were composed of mixed components and opportunity level fluctuated throughout the time based on the assessment of the company’s analysts. It can be identified that the shareholders of the company have a great control over the compensation packages offered to its executives (Madhani 32). The involvement of the shareholders and committee is concentrated in the hands of the comparator group. The information provided in the financial report depicts that the stock-based compensation for the firm’s executives is mainly based on the performance that is evaluated over a period. The comparator group and committee decide the incentives paid to executives collectively. The incentives are adjusted to the base salaries after assessing the financial performance of the firm.
The control of the committee is based on the returns of shareholders that are annually reviewed. The planned payout for executives is mainly based on the approval of stockholders that is declared by the committee. The approvals for current and long-term incentive plans of Nucor have changed throughout time. It can be seen from the information revealed in the item 11 section of the annual report of Nucor that indicates that the compensation component of Nucor consists of four main components that are base salary, annual incentives, long-term incentives, and benefits. Baker, Jensen, and Murphy explain that firms make use of mixed components in the compensation packages by evaluating their existing current performance and market conditions (Baker, Jensen, and Murphy 12). Nucor adopts a similar approach. However, it can be noted that the proportion of equity options in the compensation package was higher than that of cash-based compensation options. It is because Nucor seeks to attain long-term performance by choosing effective compensation packages. Cooper, Gulen, and Ray highlight that the use of cash-based option would significantly impact the firm’s performance based on the market conditions (Cooper, Gulen, and Ray 16), and it could be noted that Nucor offer significant cash-based compensation to its executives.
Source:
For the year 2015, it can be noted that the committee member, as well as the independent compensation consultant, approved the executive compensation packages. It can be noted that the compensation of executives for the year was reviewed on the basis of the firm’s performance. It was also noted that the compensation of executive officers was not projected (Madhani 45). Perhaps, the compensation packages for executives were determined on the basis of their base salaries to maintain the relationship between compensation and firm’s performance (Annual Report: Nucor Corporation 12). According to the information provided in the annual report of Nucor Corporation (2015), it could be noted that the benchmarking to set base salaries and incentives for CEOs of Nucor were done on the basis of the likely 29 firms. There is a variation in the number of companies considered for benchmarking by Nucor. In 2012, there were 28 that became 29 in 2014 (Annual Report: Nucor Corporation 5). It clearly indicates that Nucor Corporation follows its assumptions based on the market data to set incentive packages for its executives. There is a critical review of comparable groups in the industry for setting compensation packages for the executives. The main formula used by Nucor Corporation to set its executive packages is based on the net sales achieved and the change in net sales of the company.
According to the annual report of Nucor Corporation, it is highlighted that the rewards for executives are given under the AIP, and 75 percent are based on the change in net sales of Nucor Corporation. The executives have the option to defer their one-third of their AIP award to Nucor’s common stock. 25 percent of the grants and AIP deferred by the executives are given as incentives. It could be noted that the incentive plans for executives are designed to optimize the firm’s performance (Anuual Report: Nucor Corporation 5). The policies of the firm indicate that the options for deferral of incentives and rewards by executives with greater incentives at a later stage show that the firm has policies to retain its executives and enhance transparency within the organization. In the report of “Federal Reserve Bank of New York Staff”, it is elaborated that deferment of compensation is a type of incentive by the organization that is realized as internal debt. The main reason that the firms’ focus on deferred incentives for CEOs is to increase transparency and also to retain them. However, the firms that hold a larger proportion of incentives are risky as the amount held under such scheme increases. It is because if the CEO holds a larger amount of debt relative to the equity invested then there is a probability that the prices of the firm would fall, and the debt value will increase (Wei and Yermack 46).
Nucor gives options to its executives to hold their compensation or incentives with a greater reward. However, the firm does not take any decision that would negatively impact the firm’s value (Wei and Yermack 65). Nucor has compensation policies that justify the offset of compensation gain with those of the company, and the valuation would persistently change with the passage of time. However, the disclosures of compensation in the financial statements show that the valuation changes because of the volatility of the company’s stock (Zhang, Bartol, and Pfarrer 11). It indicates that Nucor Corporation strictly follows pay-performance method to increase performance of its management.
Nucor also offers long-term incentive plans to its executives who are paid during the LTIP performance period. The payment is based on the value of the company’s common stock that is determined as 85 percent of the total base salary of executives. The rate of the performance period was different forevery executive of the company in 2014. 50 percent of the executive rewards are based on the performance and return of the company that is determined by the steel comparator group. The remaining 50 percent is based on the ROAIC of the company relative to the Comparator Group (Anuual Report: Nucor Corporation 11). Nucor has a policy that gives an opportunity to its executives to increase their rewards to 200 percent. It shows that Nucor takes in account market conditions and performance of competitors to develop its long-term incentive plan. It enables the firm to make adequate decisions to bring changes in the compensation of its executives. In the year 2014, it can be noted that Nucor paid case and restricted stock for its retired executives (Anuual Report: Nucor Corporation 12). However, Nucor has a policy that rewards to executives are paid when the executive retires or terminates affiliation with the company. There is no particular deferred payment for LTIP restricted stock. It is because the dividends of the firm are paid in cash within a period of 30 days when the company’s shareholders are paid.
The economic model supports that the firm that makes use of pay-performance model can achieve higher performance and greater efforts by their executives. It is because the incentive and reward system based on the structure compensation would increase the productivity of the organization. The management acknowledges and praises its executives as well as employees. There is greater acknowledgment for non-monetary reward and freedom in the organization enables individuals to make more efforts. Madhani explains that the organization that induces pay-performance compensation with flexible working environment would promote positive growth of the organization. The earnings of the organization are analyzed and set as a benchmark to develop compensation packages for executives (Madhani 2).
There are several risks associated with the compensation policies and practices of Nucor. One of the critiques related to the compensation system of Nucor is that it could force executives to avoid risks in decision making that could actually yield higher returns for the company. The executives would be less interested in taking decisions that have higher risks associated with them. On the other side, it could be argued that the company relies on the decisions made by executives and give them independence to make decisions that could generate profits for the company. In such situation, executives may take decisions that are profitable in the short term but in the long run they could generate negative returns. In addition to these, the executives of the company defer a portion of their AIP to the company’s stock. It implies that the value of compensation is at risk if the company’s stock value deteriorates. The executives will loose the value of incentives. Moreover, the executives generally receive lower salary as compared to the amount paid by other companies. Therefore, there is a risk of executives switching to other companies for better compensation. In this way, the company can loose the value of having executives with required expertise and knowledge.
Conclusion and Recommendation
On the basis of the discussion above, it can be concluded that Nucor Corporation’s organizational culture and structure has a great impact on the overall practices of the firm and its management. The executives of the company are given leverage to practice/make decisions freely, which would improve the performance of the business. There is less focus on directing control or strict monitoring as employees and executives enjoy a flexible environment to work. The executive compensation plan and packages are strictly based on the idea of sharing. The organization embeds innovation as the core competency to develop egalitarian culture (Baker, Jensen, and Murphy 10). The employees are empowered to enhance their motivation at work. The company encourages and supports its employees to persuade new ideas and make contribution to the business. The company assigns responsibilities for the improvement of the existing operations. The organizational culture is induced in the managerial practices of the company that shapes executives’ practices. The executives of the company are highly supported and acknowledged for their talent and productivity. The executives are leveraged to take decisions that would benefit the organization. The company follows the philosophy of “sharing benefits and losses”, giving respect, and keeping the morale of its executives high. The structure of compensation packages relies more on equity-based option more than cash based option, as the firm seeks to focus on long-term benefits. By stressing more on equity-based compensation, the firm is able to align the interest of shareholders and executives closely.
In other words, it can be explained that Nucor’s compensation plan is strictly based on pay- performance idea. Hence, executives have lower base salaries but are compensated highly based on their performances. The market conditions, shareholders’ interests, and returns are the main factors that form the basis of compensation. The policies of the company may change subject to the decisions of shareholders and committees. However, it can be noted that the decision of compensation or incentives for the CEO is decided by the shareholders, committee, and consultant to ensure that the decision regarding compensation is aligned with the market conditions. There are regular changes in the long-term incentives provided to the executives at Nucor. However, executives have limited access to benefits that are provided to the executives of other firms operating in the same industry. Shareholders’ interests dominantly influence the organization structure. Hence, the compensation packages of the firm are also aligned with the shareholders’ return. The flat organization structure itself could lead to problems, but the organizational culture of Nucor boosts morale and trust of its employees in the company’s policies and the company acknowledges efforts of its employees. Nucor follows a unique culture to compensate its employee by providing leverage to its executives. The interests of the management and firm are aligned on the basis of equity options to maintain long-term interests of employees. The idea of sharing keeps the interests of executives and shareholders aligned. If the firm undergoes any financial crisis or faces poor market conditions, then there the company would need to compensate its executives through cash options to enhance their performance. Hence, there is a need for the company to critically assess market conditions to make effective strategies and policies for executive compensation.
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