hrd 24-mathis-12e-ch13-sh-variable pay and executive compensation

© 2008 Thomson/South-Western All rights reserved.© 2008 Thomson/South-Western All rights reserved. PowerPoint Presentation by Charlie CookThe University of West Alabama

PowerPoint Presentation by Charlie CookThe University of West Alabama

CHAPTER 13CHAPTER 13

Variable Pay and Executive Variable Pay and Executive

CompensationCompensation

CHAPTER 13CHAPTER 13

Variable Pay and Executive Variable Pay and Executive

CompensationCompensation

S E C T I O N 4 Compensating Human Resources

© 2008 Thomson/South-Western. All rights reserved. 13–2

Variable Pay: Incentives for Variable Pay: Incentives for PerformancePerformance

Variable Pay

Assumptions

Some people perform better and are more

productive than others

Better performing employees should

receive more compensation

Some jobs contribute more to organizational

success than others

Part of compensation should be tied

directly to performance and

results


FIGURE 13-1

Examples of Incentives


Developing Successful Developing Successful Pay-for-Performance PlansPay-for-Performance Plans

Pay-for-Performance Plans

Link strategic goals and employee

performance

Enhance results and reward employees financially

Reward and recognize employee

performance

Promote achievement

of HR objectives


Successful Variable Pay PlansSuccessful Variable Pay Plans

Effective Incentive Plans

Does the Plan Fit the

Organization?

Does the Plan Reward the Appropriate

Actions?

Is the Plan Administered

Properly?


Why Variable Pay Plans FailWhy Variable Pay Plans Fail

Plan incentives are

not seen as desirable

Plan doesn’t reward doing

a good job

Plan doesn’t motivate

Plan rewards teams/groups rather than individuals

Plan doesn’t increase base

pay

Employees’ View of

Variable Pay Plan


Developing Successful Incentive Plans Developing Successful Incentive Plans

Develop clear, understandable plans that are continually

communicated.

Use realistic performance measures.

Keep plans current and linked to organizational objectives.

Link results to payouts that recognize differences.

Identify variable pay incentives separately from base pay.

Successful Incentive

Plans


Individual IncentivesIndividual Incentives

Necessary Conditions For Individual Incentive Plans

Individual performance

must be identified

Individual competitiveness must be desired

Individualism must be

stressed in the organizational

culture


FIGURE 13-3 Categories of Variable Pay Plans


Individual IncentivesIndividual Incentives• Piece-Rate Systems Piece-Rate Systems

Straight piece-rate systemStraight piece-rate systemDifferential piece-rate systemDifferential piece-rate system

• BonusBonus• ““Spot” BonusesSpot” Bonuses• Special Incentive ProgramsSpecial Incentive Programs

Performance awardsPerformance awardsRecognition awardsRecognition awardsService awardsService awards


FIGURE 13-4 Purposes of Special Incentives


Why Organizations Establish Variable Why Organizations Establish Variable Pay Plans for Groups/TeamsPay Plans for Groups/Teams

Group/Team-Based

Variable Pay Plans

Improve productivity

Tie pay to team performance

Improve customer service or production

quality

Increase employee retention


Design of Group/Team Incentive PlansDesign of Group/Team Incentive Plans

Group/Team Incentive Plan Issues

Distribution of Group/Team Incentives

Timing of Group/Team Incentives

Decisions About

Group/Team Incentive Amounts


Group/Team Incentives (cont’d)Group/Team Incentives (cont’d)• Distributing RewardsDistributing Rewards

Same-size reward for each memberSame-size reward for each member

Different-size reward for each memberDifferent-size reward for each member

• Problems with Group/Team IncentivesProblems with Group/Team Incentives Rewards in equal amounts may be perceived as Rewards in equal amounts may be perceived as

“unfair” by employees who work harder, have more “unfair” by employees who work harder, have more capabilities, or perform more difficult jobs.capabilities, or perform more difficult jobs.

Group/team members may be unwilling to handle Group/team members may be unwilling to handle incentive decisions for co-workers.incentive decisions for co-workers.

Many employees still expect to be paid according to Many employees still expect to be paid according to individual performance.individual performance.


FIGURE 13-5 Conditions for Successful Group/Team Incentives


Types of Group/Team IncentivesTypes of Group/Team Incentives• Group/Team ResultsGroup/Team Results

““Self-funding” pay plans for groups/teams that reward Self-funding” pay plans for groups/teams that reward through improved organizational results on the basis through improved organizational results on the basis of group output, cost savings, or quality improvement.of group output, cost savings, or quality improvement.

• Gainsharing (Gainsharing (Teamsharing or Goal SharingTeamsharing or Goal Sharing)) The sharing with employees of greater-than-expected The sharing with employees of greater-than-expected

gains in productivity through increased discretionary gains in productivity through increased discretionary efforts.efforts.

ImproshareImproshare

Scanlon PlanScanlon Plan


Organizational IncentivesOrganizational Incentives

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

Profit Sharing


FIGURE 13-6 Framework Choices for a Profit-Sharing Plan


Employee Stock PlansEmployee Stock Plans• Stock Option PlanStock Option Plan

A plan that gives employees the right to purchase a A plan that gives employees the right to purchase a fixed number of shares of company stock at a fixed number of shares of company stock at a specified price for a limited period of time.specified price for a limited period of time. If market price of the stock is above the specified If market price of the stock is above the specified

option price, employees can purchase the stock option price, employees can purchase the stock and sell it for a profit.and sell it for a profit.

If the market price of the stock is below the If the market price of the stock is below the specified option price, the stock option is specified option price, the stock option is “underwater” and is worthless to employees.“underwater” and is worthless to employees.


Employee Stock PlansEmployee Stock Plans• Employee Stock Ownership Plan (ESOP)Employee Stock Ownership Plan (ESOP)

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

AdvantagesAdvantagesFavorable tax treatment for ESOP earningsFavorable tax treatment for ESOP earningsEmployees motivated by their ownership stake in Employees motivated by their ownership stake in

the firmthe firm DisadvantagesDisadvantages

Retirement benefit is tied to the firm’s future Retirement benefit is tied to the firm’s future performanceperformance

Management tool to fend off hostile takeover Management tool to fend off hostile takeover attempts.attempts.


Types of Sales Compensation PlansTypes of Sales Compensation Plans• Salary-OnlySalary-Only

All compensation is paid as a base wage with no All compensation is paid as a base wage with no incentives.incentives.

• CommissionCommission Straight CommissionStraight Commission

Compensation is computed as a percentage of Compensation is computed as a percentage of sales in units or dollars.sales in units or dollars.

The draw system make advance payments against The draw system make advance payments against future commissions to salesperson.future commissions to salesperson.

Salary-Plus-Commission or BonusesSalary-Plus-Commission or BonusesCompensation is part salary for income stability Compensation is part salary for income stability

and part commission for incentive.and part commission for incentive.


Executive CompensationExecutive Compensation

Executive Salaries

Executive Benefits

Executive Perquisites(Perks)

Annual Executive Incentives and Bonuses

Performance Incentives: Long Term vs. Short Term

Elements of Executive

Compensation


““Reasonableness” of Executive Reasonableness” of Executive CompensationCompensation

Executive Compensatio

n Consideration

sand

Concerns

Would another company hire this

person as an executive?

How does the executive’s

compensation compare with that for executives in similar

companies?

What would an investor pay for the level of performance

of the executive?

Is the executive’s pay consistent with

pay for other employees within the

company?


FIGURE 13-8 Common Executive Compensation Criticisms