chapter 13 variable pay and executive compensation
TRANSCRIPT
Copyright © 2005 Thomson Business & Professional Publishing.All rights reserved.
ROBERT L. MATHIS
JOHN H. JACKSON
PowerPoint Presentation by Charlie CookThe University of West Alabama
Variable Pay and Variable Pay and Executive CompensationExecutive Compensation
Chapter 13Chapter 13
SECTION 4SECTION 4Compensating Compensating
Human ResourcesHuman Resources
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13–2
Learning ObjectivesLearning ObjectivesLearning ObjectivesLearning 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.
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13–3
Variable Pay: Incentives for PerformanceVariable Pay: Incentives for PerformanceVariable Pay: Incentives for PerformanceVariable 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.
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13–4
Developing Successful Pay-for-Performance Plans
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.
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Effective Incentive PlansEffective Incentive PlansEffective Incentive PlansEffective Incentive Plans
Figure 13–1
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Metrics for Variable Pay PlansMetrics for Variable Pay PlansMetrics for Variable Pay PlansMetrics for Variable Pay Plans
Figure 13–2
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Successes and Failures of 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.
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Types of Variable Pay PlansTypes of Variable Pay PlansTypes of Variable Pay PlansTypes of Variable Pay Plans
Figure 13–3
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Individual IncentivesIndividual IncentivesIndividual IncentivesIndividual Incentives
IndividualismStressed in
OrganizationalCulture
IndividualismStressed in
OrganizationalCulture
Identification ofIndividual
Performance
Identification ofIndividual
Performance
IndependentWork
IndependentWork
IndividualCompetitiveness
Desired
IndividualCompetitiveness
Desired
Individual Individual Incentive Incentive SystemsSystems
Individual Individual Incentive Incentive SystemsSystems
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13–10
Piece-Rate SystemsPiece-Rate SystemsPiece-Rate SystemsPiece-Rate Systems
• Straight Piece-Rate SystemsWages are determined by
multiplying the number of pieces produced by the piece rate for one unit.
• Differential Piece-Rate SystemsEmployees 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.
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13–11
Individual Incentives: BonusesIndividual Incentives: BonusesIndividual Incentives: BonusesIndividual Incentives: Bonuses
• BonusA one-time payment that does not become part
of the employee’s base pay.
• Spot BonusA 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 ProgramsSpecial Incentive ProgramsSpecial Incentive ProgramsSpecial Incentive Programs
• Performance AwardsCash or merchandise used as an incentive reward.
• Recognition AwardsRecognition of individuals for their performance or service to
customers in areas targeted by the firm.
• Service AwardsRewards to employees for
lengthy service with an organization.
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Purposes of Special IncentivesPurposes of Special IncentivesPurposes of Special IncentivesPurposes of Special Incentives
Figure 13–4
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Types of Sales Compensation PlansTypes of Sales Compensation PlansTypes of Sales Compensation PlansTypes of Sales Compensation Plans
• Salary-OnlyAll compensation is paid as a base wage with no
incentives.
• CommissionStraight 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 EffectivenessDetermining Sales EffectivenessDetermining Sales EffectivenessDetermining Sales Effectiveness
Figure 13–5
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Why Organizations Establish Variable Pay PlansWhy Organizations Establish Variable Pay Plansfor Groups/Teamsfor Groups/Teams
Why Organizations Establish Variable Pay PlansWhy Organizations Establish Variable Pay Plansfor Groups/Teamsfor Groups/Teams
Figure 13–6
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13–17
Group/Team IncentivesGroup/Team IncentivesGroup/Team IncentivesGroup/Team Incentives
Distribution of Distribution of Group/Team Group/Team IncentivesIncentives
Distribution of Distribution of Group/Team Group/Team IncentivesIncentives
Timing ofTiming ofGroup/Team Group/Team Incentives Incentives
Timing ofTiming ofGroup/Team Group/Team Incentives Incentives
Decision Making Decision Making About Group/Team About Group/Team
AmountsAmounts
Decision Making Decision Making About Group/Team About Group/Team
AmountsAmounts
Design of Design of Group/Team Group/Team
Incentive PlansIncentive Plans
Design of Design of Group/Team Group/Team
Incentive PlansIncentive Plans
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13–18
Group/Team Incentives (cont’d)Group/Team Incentives (cont’d)Group/Team Incentives (cont’d)Group/Team Incentives (cont’d)
• Distributing RewardsSame-size reward for each member
Different-size reward for each member
• Problems with Group/Team IncentivesRewards 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.
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Conditions for Successful Group/Team IncentivesConditions for Successful Group/Team IncentivesConditions for Successful Group/Team IncentivesConditions for Successful Group/Team Incentives
Figure 13–7
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Types of Group/Team IncentivesTypes of Group/Team IncentivesTypes of Group/Team IncentivesTypes 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 IncentivesOrganizational IncentivesOrganizational IncentivesOrganizational Incentives
• Profit SharingA 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
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Framework Choices for a Profit-Sharing PlanFramework Choices for a Profit-Sharing PlanFramework Choices for a Profit-Sharing PlanFramework Choices for a Profit-Sharing Plan
Figure 13–8
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Employee Stock PlansEmployee Stock PlansEmployee Stock PlansEmployee Stock Plans
• Stock Option PlanA 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.
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13–24
Employee Stock PlansEmployee Stock PlansEmployee Stock PlansEmployee 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 firm’s future performance
Management tool to fend off hostile takeover attempts.
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Components of Executive Components of Executive Compensation PackagesCompensation Packages
Components of Executive Components of Executive Compensation PackagesCompensation Packages
Figure 13–9
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Executive CompensationExecutive CompensationExecutive CompensationExecutive Compensation
• “Reasonableness” of Executive CompensationWould another company hire this person as an
executive?
How does the executive’s compensation compare with that for executives in similar companies in the industry
Is the executive’s pay consistent with pay for other employees within the company?
What would an investor pay for the level of performance of the executive?