Human Resource Management

TENTH EDITON

SECTION 4
Compensating Human Resources

Robert L. Mathis John H. Jackson

Chapter 13

Variable Pay and Executive Compensation

2003 Southwestern College Publishing. All rights reserved.

PowerPoint Presentation by Charlie Cook

Learning Objectives
After you have read this chapter, you should be able to:
Define variable pay and give examples of three types of variable pay. Identify four guidelines for successful incentive programs. Discuss three types of individual incentives. Explain three different way that sales employees typically are compensated. Identify key factors that must be addressed when using team variable pay plans.
2002 Southwestern College Publishing. All rights reserved. 132

Learning Objectives (contd)

Discuss why gainsharing, profitsharing, and employee stock options have grown as organizational incentive plans. Identify the components of executive compensation and discuss criticisms of executive compensation levels.

2002 Southwestern College Publishing. All rights reserved.

133

Variable Pay: Incentives for Performance

Variable Pay Systems
Some jobs contribute more to the organization than others. Some people perform better than others. Employees who perform better should receive more compensation. A portion of some employees total compensation should be contingent on performance.

Service Pay Systems

Time spent is the primary measure of employee contribution Length of service is the primary differentiating factor among people. Contributions are recognized through different amounts of base pay. Apportioning rewards based on individual performance is considered to be divisive.

2002 Southwestern College Publishing. All rights reserved.

134

Types of Variable Pay Plans

Figure 131
2002 Southwestern College Publishing. All rights reserved. 135

Factors Affecting Variable Pay Plans

Does the plan fit the organization?

Variable Pay Plan Success

Are the right behaviors encouraged by the plan?

Is the plan being administered properly?

2002 Southwestern College Publishing. All rights reserved.

136

Factors for Successful Variable Pay Plans

Figure 132
2002 Southwestern College Publishing. All rights reserved. 137

Individual Incentives

Identification of Individual Performance

Independent Work

Individual Incentive Pay Plans

Individualism Stressed in Organizational Culture Individual Competitiveness Desired

2002 Southwestern College Publishing. All rights reserved.

138

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.

2002 Southwestern College Publishing. All rights reserved.

139

Bonuses and Special Incentive Programs

Bonus
A one-time payment that does not become part of the employees base pay.

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.

2002 Southwestern College Publishing. All rights reserved.

1310

Sources of Bonuses

Source: Kathryn F. Clark, Incentives Increase But Competitive Base Salary Key in Talent Race, Human Resource Executive, June 2, 2000, 30. Used with permission. 2002 Southwestern College Publishing. All rights reserved.

Figure 133
1311

Different Bases for Sales Incentives, In Order of Use

Figure 134
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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. Draw system make advance payments against future commissions to salesperson.

Salary Plus Commission or Bonus

Compensation is part salary for income stability and part commission for incentive.

2002 Southwestern College Publishing. All rights reserved.

1313

Why Organizations Establish Team Pay Plans

Figure 135
2002 Southwestern College Publishing. All rights reserved. 1314

Group/Team-Based Variable Pay

Determining Individual Rewards Distributing Team Incentives

Timing of Team Incentives

Deciding the Allocation of Rewards

2002 Southwestern College Publishing. All rights reserved.

1315

Conditions for Successful Team Incentives

Figure 136
2002 Southwestern College Publishing. All rights reserved. 1316

Gainsharing

Gainsharing
The sharing with employees of greater-thanexpected gains in productivity. Alternatives for rewards distribution:
A flat amount for all employees Same percentage of base salary for all employees Percentage of the gains by category of employees A percentage based on individual performance against measures

2002 Southwestern College Publishing. All rights reserved.

1317

Profit Sharing

Profit Sharing
A system to distribute a portion of the profits of the organization to employees. Primary objectives:
Improve productivity Recruit or retain employees Improve product/service quality Improve employee morale

Drawbacks
Disclosure of financial information Variability of profits from year to year Profit results not strongly tied to employee efforts
2002 Southwestern College Publishing. All rights reserved. 1318

Profit-Sharing Plan Framework Choices

Figure 137
2002 Southwestern College Publishing. All rights reserved. 1319

Employee Stock Ownership Plans (ESOPs)

Employee Stock Ownership Plans

A plan whereby employees gain stock ownership in the organization for which they work.

ESOP Advantages
Favorable tax treatment for ESOP earnings Employees motivated by ownership in the firm

ESOP Disadvantages
Retirement benefit is tied to the firms performance Management tool to fend off hostile takeover attempts.

2002 Southwestern College Publishing. All rights reserved.

1320

U.S. CEO Remuneration

Source: The Economist, May 8, 2000, 16. 2002 Southwestern College Publishing. All rights reserved.

Figure 138
1321

Executive Compensation Components

Figure 139
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Common Executive Perks

Figure 1310
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Arguments in the Executive Pay Debate

Figure 1311
2002 Southwestern College Publishing. All rights reserved. 1324