Variable Compensation

November 8, 2011

SEE READINGS!!!!!

• Bullets are examples!!• Chpt 18

–Variable Pay Plan Elements• Eligibility• Payout timing and frequency

–Types of Variable Pay Plans

SEE READINGS!!!!!

• Chpt 19–Types of Variable Pay Plans–Effectiveness of Plans

• Chpt 21–Team-based Incentives

SEE READINGS!!!!!

• Chpt 22–Profit-sharing and Gainsharing–The Farmer’s Tale–Line-of-sight Measurement

SEE READINGS!!!!!

• Chpt 37–Balanced scorecard

• Chpt 38–Metrics

• Chpt 39–Variable compensation and productivity

• Tables 39.1 and 39.2

SEE READINGS!!!!!

• Chpt 40–ROI

• Chpt 41–Challenges

Types of Plans

• SEE READINGS!!!!!• Individual incentive plans

–Piece rate plans–Standard hour plan–Business incentives–Stock options

Types of Plans

• Individual incentive plans–Standard hour plan–Piece rate plans–Business incentives

• Financial measures of org’l performance–Stock options

Balanced Scorecard

Types of plans

• Stock option plans– “strike price”– “underwater”–Back dating –Mess = longer

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2005 2011

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Strike Price

2005 2011

100,000 @ $30

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Strike Price (1)

Strike Price (2)

2005 2010

“Back Dating”

Types of Plans

• “special recognition” plans–Cheap– Immediacy–personalized

Types of Plans

• Group incentive plans–Any individual plan based on group

performance–Expectancy Theory?–Recall performance appraisal

Types of Plans

• Plantwide/unit wide group plans

–Typically gainsharing plans

–Profit sharing

Types of Plans

• Employee Stock Ownership Plans (ESOPs)–Tax saving–Smaller companies–10,000 companies/ 9 million

employees

And in closing……

Netflix

Type of incentive plans

 Executive Management

Professional(Sales and Non-sales)

Office/Clerical/

Technician

Trades/ Production/

Service

Highest-rated

64% 27% 20% 15% 13%

Middle-rated

44% 20% 14% 11% 11%

Lowest-rated

30% 10% 7% 6% 4%

Porter-Lawler Expectancy Theory

Porter and Lawler

Motivation Effort

Ability

Resources

Satisfaction?Performance

Intrinsic

Extrinsic

Objectives of merit pay

• Pay-for-performance culture– “at-risk” compensation–Tied to performance appraisal results

• Org’l success–High when good, low when bad

Merit Pay• But the REALLY BIG problem…..

Time

$

Darwin Awards

A Chronicle of Enterprising Demises Honoring those who improve the species by….....

accidentally removing themselves from it!

We have a winner!

• Corp goal: 2%• Company goal: 2% (on top of 2%)• Company - $0.67• Employees - $0.33• $1,200 / quarter