Hi. Welcome back. In the previous module we talked about the importance of culture. But what about compensation and benefits? It's pretty straightforward, right? You pay more, you get better people and better results. And if you want to get better performance, you tie pay directly to performance. Or is it so straightforward? This Bloomberg graphic showing the relationship of compensation stock performance pairs of top-paid CEOs is a pretty telling example of asking a data question which gives you no useful answers. We all know that CEOs are not paid for performance, right? Well actually, there is plenty of research showing there is correlation between firm performance and CEO compensation. Whether there is causation is a totally different story. Of course, there is no one size fits all compensation model. As we mentioned before, what you choose to be your HR policies would greatly depend on your company's unique situation, culture, performance objectives, planning horizon, the employees you seek to attract, and so on. Compensation consists of the so-called fixed portion, also known as wage or salary, and variable portion, also known as performance-based pay. Salary and wages represent the market value of one skill set and are usually tied to the time worked, year, month, week, day or hour. Employees may be paid at this rate and in some locations they would still be subject to minimum wage laws, which means HR people have to record time worked and calculate overtime pay. Piece rate is often criticized as one dimensional because it motivates for speed rather than quality. Base pay is critical to the organization's ability to recruit and retain talent. Fixed pay market value is corrected by additional variables such as mobility of talent, employees' monopoly power, skills transferability, labor union's presence and power. In the absence of data driven decision making and processes, conscious and subconscious biases, discrimination, and asymmetric information can affect fixed and base pay significantly. And through sense of equity, performance, turnover, and engagement are affected as well. In some countries, like the United States, benefits, such as health insurance, can play an important role in compensation because they also affect turnover and recruiting competitiveness. Performance-based pay includes short-term bonuses, which are paid at the completion of a specific project, or periodically, like monthly, quarterly or yearly. And as the term implies, they are supposed to incentivize certain behaviors and performance. The rule of thumb is that such bonuses are most effective when the employee can see the direct relationship between his behavior or action, and the reward. The key problem with short-term bonuses is incentivizing immediate personal gain at the expense of long-term value. Finally, there are long-term incentives which can include deferred compensation and various profit sharing schemes, including stock options and stock appreciation rights. These tools are used to inspire sense of ownership, retain employees, and promote long-term thinking, including preventing decisions that lead to short-term personal gains at the expense of the organization's interest. And it does so by aligning those interests with those of the employer. Pay-for-performance incentives can apply to individuals, teams, and the organization as a whole. Individual-based incentives may lead to less cooperation and collaboration. Team-based incentives may promote free ridership. Incentives based on organizational success are too dissociated from one's own actions, especially if the employee is not a senior executive, and if the company is not very small, with multiple layers of hierarchy.