chapter 13 variable pay and executive compensation

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

Copyright © 2005 Thomson Business & Professional Publishing. All rights reserved.

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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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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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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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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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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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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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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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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?


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Common Executive Compensation IssuesCommon Executive Compensation IssuesCommon Executive Compensation IssuesCommon Executive Compensation Issues

Figure 13–10

chapter 13 variable pay and executive compensation

Recruiting & HR