Variable Pay and Executive Compensation: R L M J H J

ROBERT L. MATHIS JOHN H.
JACKSON
Chapter 13
Variable Pay and Executive Compensation

SECTION 4
Compensating Human Resources
Copyright 2005 Thomson Business & Professional Publishing. All rights reserved.
PowerPoint Presentation by Charlie Cook The University of West Alabama
Learning Objectives
After you have read this chapter, you should be able to:
Define variable pay and identify three elements of successful pay-for-performance plans. Discuss three types of individual incentives. Explain three ways that sales employees are typically compensated. Identify key concerns that must be addressed when designing group/team variable pay plans. Discuss why profit sharing and employee stock ownership are common organizational incentive plans. Identify the components of executive compensation and discuss criticisms of executive compensation levels.
132
Variable Pay: Incentives for Performance

Variable Pay
Compensation linked to individual, group/team, and/or organizational performance.
Basic assumptions:
Some jobs contribute more to organizational success than others. Some people perform better and are more productive than others. Employees who perform better should receive more compensation. Some of employees total compensation should be tied directly to performance.
Copyright 2005 Thomson Business & Professional Publishing. All rights reserved. 133
Developing Successful Pay-for-Performance Plans

Reasons for Adopting Pay or Incentive Plans:
Link more directly strategic business goals and employee performance. Enhance organizational results and reward employees financially for their contributions. Reward employees to recognize different levels of employee performance.
Achieve HR objectives, such as increasing retention, reducing turnover, recognizing training, or rewarding safety and attendance.
Effective Incentive Plans
Figure 131 Copyright 2005 Thomson Business & Professional Publishing. All rights reserved. 135
Metrics for Variable Pay Plans
Successes and Failures of Variable Pay Plans

Successful incentive plans require:
The development of clear, understandable plans that are continually communicated. The use of realistic performance measures. Keeping plans current and linked to organizational objectives. Strong links among performance results and payouts that truly recognize performance differences. Clear identification of variable pay incentives separately from base pay.
Types of Variable Pay Plans
Individual Incentives
Identification of Individual Performance
Independent Work
Individual Incentive Systems

Individualism Stressed in Organizational Culture Individual Competitiveness Desired
139
Piece-Rate Systems
Straight Piece-Rate Systems
Wages are determined by multiplying the number of pieces produced by the piece rate for one unit.
Differential Piece-Rate Systems

Employees are paid one piece-rate for units produced up to a standard output and a higher piece-rate wage for units produced over the standard.
1310
Individual Incentives: Bonuses

Bonus
A one-time payment that does not become part of the employees base pay.
Spot Bonus
A special type of bonus used is a spot bonus, so called because it can be awarded at any time.
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Special Incentive Programs

Performance Awards
Cash or merchandise used as an incentive reward.
Recognition Awards
Recognition of individuals for their performance or service to customers in areas targeted by the firm.
Service Awards
Rewards to employees for lengthy service with an organization.
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Purposes of Special Incentives
Types of Sales Compensation Plans

Salary-Only
All compensation is paid as a base wage with no incentives.
Commission
Straight Commission
Compensation is computed as a percentage of sales in units or dollars. The draw system make advance payments against future commissions to salesperson.
Salary-Plus-Commission or Bonuses
Compensation is part salary for income stability and part commission for incentive.
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Determining Sales Effectiveness
Why Organizations Establish Variable Pay Plans for Groups/Teams
Group/Team Incentives
Distribution of Group/Team Incentives Timing of Group/Team Incentives Decision Making About Group/Team Amounts Design of Group/Team Incentive Plans
1317
Group/Team Incentives (contd)

Distributing Rewards
Same-size reward for each member Different-size reward for each member
Problems with Group/Team Incentives

Rewards in equal amounts may be perceived as unfair by employees who work harder, have more capabilities, or perform more difficult jobs. Group/team members may be unwilling to handle incentive decisions for co-workers. Many employees still expect to be paid according to individual performance.
Conditions for Successful Group/Team Incentives
Types of Group/Team Incentives

Group/Team Results
Self-funding pay plans for groups/teams that reward through improved organizational results on the basis of group output, cost savings, or quality improvement.
Gainsharing (Teamsharing or Goal Sharing)

The sharing with employees of greater-than-expected gains in productivity through increased discretionary efforts.

Improshare Scanlon Plan
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Organizational Incentives
Profit Sharing
A system to distribute a portion of the profits of the organization to employees. Primary objectives:
Increase productivity and organizational performance Attract or retain employees Improve product/service quality Enhance employee morale
Drawbacks
Disclosure of financial information Variability of profits from year to year Profit results not strongly tied to employee efforts
Framework Choices for a Profit-Sharing Plan
Employee Stock Plans

Stock Option Plan
A plan that gives employees the right to purchase a fixed number of shares of company stock at a specified price for a limited period of time.
If market price of the stock is above the specified option price, employees can purchase the stock and sell it for a profit. If the market price of the stock is below the specified option price, the stock option is underwater and is worthless to employees.
1323
Employee Stock Plans

Employee Stock Ownership Plan (ESOP)
A plan whereby employees gain significant stock ownership in the organization for which they work. Advantages
Favorable tax treatment for ESOP earnings
Employees motivated by their ownership stake in the firm
Disadvantages
Retirement benefit is tied to the firms future performance
Management tool to fend off hostile takeover attempts.
1324
Components of Executive Compensation Packages
Executive Compensation
Reasonableness of Executive Compensation
Would another company hire this person as an executive? How does the executives compensation compare with that for executives in similar companies in the industry Is the executives pay consistent with pay for other employees within the company? What would an investor pay for the level of performance of the executive?
1326
Common Executive Compensation Issues

Variable Pay and Executive Compensation: R L M J H J

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ROBERT L. MATHIS JOHN H.

Variable Pay and Executive Compensation

PowerPoint Presentation by Charlie Cook The University of West Alabama

Variable Pay: Incentives for Performance

Developing Successful Pay-for-Performance Plans

Effective Incentive Plans

Metrics for Variable Pay Plans

Successes and Failures of Variable Pay Plans

Types of Variable Pay Plans

Identification of Individual Performance

Individual Incentive Systems

Differential Piece-Rate Systems

Individual Incentives: Bonuses

Special Incentive Programs

Purposes of Special Incentives

Types of Sales Compensation Plans

Determining Sales Effectiveness

Why Organizations Establish Variable Pay Plans for Groups/Teams

Group/Team Incentives (contd)

Problems with Group/Team Incentives

Conditions for Successful Group/Team Incentives

Types of Group/Team Incentives

Gainsharing (Teamsharing or Goal Sharing)

Improshare Scanlon Plan

Framework Choices for a Profit-Sharing Plan

Employee Stock Plans

Employee Stock Plans

Favorable tax treatment for ESOP earnings

Employees motivated by their ownership stake in the firm

Retirement benefit is tied to the firms future performance

Management tool to fend off hostile takeover attempts.

Components of Executive Compensation Packages

Common Executive Compensation Issues

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