Variable Pay and Executive Compensation Variable Pay and Executive Compensation

ROBERT L.
MATHIS
JOHN H. JACKSON
Chapter 13
Variable
Variable Pay
Pay and
and
Executive
Executive Compensation
Compensation
SECTION 4
Compensating
Human Resources
Copyright © 2005 Thomson Business & Professional Publishing. PowerPoint Presentation by Charlie Cook
All rights reserved. The University of West Alabama
Learning
Learning Objectives
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.
Copyright © 2005 Thomson Business & Professional Publishing. All rights reserved. 13–2
Variable
Variable Pay:
Pay: Incentives
Incentives for
for Performance
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.
Developing
Developing Successful
Successful Pay-for-Performance
Pay-for-Performance
Plans
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
Effective Incentive
Incentive Plans
Plans
Figure 13–1
Metrics
Metrics for
for Variable
Variable Pay
Pay Plans
Plans
Figure 13–2
Successes
Successes and
and Failures
Failures of
of
Variable
Variable Pay
Pay Plans
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
Types of
of Variable
Variable Pay
Pay Plans
Plans
Figure 13–3
Individual
Individual Incentives
Incentives
Identification
Identificationof
of Independent
Independent
Individual
Individual Work
Work
Performance
Performance
Individual
Individual
Incentive
Incentive
Systems
Systems
Individualism
Individualism Individual
Individual
Stressed
Stressedinin Competitiveness
Competitiveness
Organizational
Organizational Desired
Desired
Culture
Culture
Piece-Rate
Piece-Rate Systems
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.
Individual
Individual Incentives:
Incentives: Bonuses
Bonuses
• Bonus
 A one-time payment that does not become part
of the employee’s base pay.
• Spot Bonus
 A special type of bonus used is a “spot” bonus,
so called because it can be awarded at any
time.
Special
Special Incentive
Incentive Programs
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.
Purposes
Purposes of
of Special
Special Incentives
Incentives
Figure 13–4
Types
Types of
of Sales
Sales Compensation
Compensation Plans
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.
Determining
Determining Sales
Sales Effectiveness
Effectiveness
Figure 13–5
Why
Why Organizations
Organizations Establish
Establish Variable
Variable Pay
Pay Plans
Plans
for
for Groups/Teams
Groups/Teams
Figure 13–6
Group/Team
Group/Team Incentives
Incentives
Distribution
Distributionofof
Group/Team
Group/Team
Incentives
Incentives
Timing
Timingof
of Design
Designof
of
Group/Team
Group/Team Group/Team
Group/Team
Incentives
Incentives Incentive
IncentivePlans
Plans
Decision
DecisionMaking
Making
About
AboutGroup/Team
Group/Team
Amounts
Amounts
Group/Team
Incentives (cont’d)
(cont’d)
• 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
Conditionsfor
forSuccessful
SuccessfulGroup/Team
Group/TeamIncentives
Incentives
Figure 13–7
Types
Types of
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
Organizational
Organizational Incentives
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
Framework Choices
Choices for
for aa Profit-Sharing
Profit-Sharing Plan
Plan
Figure 13–8
Employee
Employee Stock
Stock Plans
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.
Employee
Employee Stock
Stock Plans
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.
Components
Components of
of Executive
Executive
Compensation
Compensation Packages
Packages
Figure 13–9
Executive
Compensation
• “Reasonableness” of Executive Compensation
 Would 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?
Common
Common Executive
Compensation Issues
Issues
Figure 13–10

Variable Pay and Executive Compensation Variable Pay and Executive Compensation

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