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Copyright © 2005 Thomson Business & Professional Publishing.
All rights reserved.
ROBERT L. MATHIS
JOHN H. JACKSON
PowerPo...
Copyright © 2005 Thomson Business & Professional 13–2
Learning ObjectivesLearning ObjectivesLearning ObjectivesLearning Ob...
Copyright © 2005 Thomson Business & Professional 13–3
Variable Pay: Incentives for PerformanceVariable Pay: Incentives for...
Copyright © 2005 Thomson Business & Professional 13–4
Developing Successful Pay-for-Performance
Plans
Developing Successfu...
Copyright © 2005 Thomson Business & Professional 13–5
Effective Incentive PlansEffective Incentive PlansEffective Incentiv...
Copyright © 2005 Thomson Business & Professional 13–6
Metrics for Variable Pay PlansMetrics for Variable Pay PlansMetrics ...
Copyright © 2005 Thomson Business & Professional 13–7
Successes and Failures of
Variable Pay Plans
Successes and Failures ...
Copyright © 2005 Thomson Business & Professional 13–8
Types of Variable Pay PlansTypes of Variable Pay PlansTypes of Varia...
Copyright © 2005 Thomson Business & Professional 13–9
Individual IncentivesIndividual IncentivesIndividual IncentivesIndiv...
Copyright © 2005 Thomson Business & Professional 13–10
Piece-Rate SystemsPiece-Rate SystemsPiece-Rate SystemsPiece-Rate Sy...
Copyright © 2005 Thomson Business & Professional 13–11
Individual Incentives: BonusesIndividual Incentives: BonusesIndivid...
Copyright © 2005 Thomson Business & Professional 13–12
Special Incentive ProgramsSpecial Incentive ProgramsSpecial Incenti...
Copyright © 2005 Thomson Business & Professional 13–13
Purposes of Special IncentivesPurposes of Special IncentivesPurpose...
Copyright © 2005 Thomson Business & Professional 13–14
Types of Sales Compensation PlansTypes of Sales Compensation PlansT...
Copyright © 2005 Thomson Business & Professional 13–15
Determining Sales EffectivenessDetermining Sales EffectivenessDeter...
Copyright © 2005 Thomson Business & Professional 13–16
Why Organizations Establish Variable Pay PlansWhy Organizations Est...
Copyright © 2005 Thomson Business & Professional 13–17
Group/Team IncentivesGroup/Team IncentivesGroup/Team IncentivesGrou...
Copyright © 2005 Thomson Business & Professional 13–18
Group/Team Incentives (cont’d)Group/Team Incentives (cont’d)Group/T...
Copyright © 2005 Thomson Business & Professional 13–19
Conditions for Successful Group/Team IncentivesConditions for Succe...
Copyright © 2005 Thomson Business & Professional 13–20
Types of Group/Team IncentivesTypes of Group/Team IncentivesTypes o...
Copyright © 2005 Thomson Business & Professional 13–21
Organizational IncentivesOrganizational IncentivesOrganizational In...
Copyright © 2005 Thomson Business & Professional 13–22
Framework Choices for a Profit-Sharing PlanFramework Choices for a ...
Copyright © 2005 Thomson Business & Professional 13–23
Employee Stock PlansEmployee Stock PlansEmployee Stock PlansEmploye...
Copyright © 2005 Thomson Business & Professional 13–24
Employee Stock PlansEmployee Stock PlansEmployee Stock PlansEmploye...
Copyright © 2005 Thomson Business & Professional 13–25
Components of ExecutiveComponents of Executive
Compensation Package...
Copyright © 2005 Thomson Business & Professional 13–26
Executive CompensationExecutive CompensationExecutive CompensationE...
Copyright © 2005 Thomson Business & Professional 13–27
Common Executive Compensation IssuesCommon Executive Compensation I...
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Chapter 13 Variable Pay and Executive Compensation

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Chapter 13 Variable Pay and Executive Compensation

  1. 1. Copyright © 2005 Thomson Business & Professional Publishing. All rights reserved. ROBERT L. MATHIS JOHN H. JACKSON PowerPoint Presentation by Charlie Cook The University of West Alabama Variable Pay andVariable Pay and Executive CompensationExecutive Compensation Chapter 13Chapter 13 SECTION 4SECTION 4 CompensatingCompensating Human ResourcesHuman Resources
  2. 2. Copyright © 2005 Thomson Business & Professional 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.
  3. 3. Copyright © 2005 Thomson Business & Professional 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.
  4. 4. Copyright © 2005 Thomson Business & Professional 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.
  5. 5. Copyright © 2005 Thomson Business & Professional 13–5 Effective Incentive PlansEffective Incentive PlansEffective Incentive PlansEffective Incentive Plans Figure 13–1
  6. 6. Copyright © 2005 Thomson Business & Professional 13–6 Metrics for Variable Pay PlansMetrics for Variable Pay PlansMetrics for Variable Pay PlansMetrics for Variable Pay Plans Figure 13–2
  7. 7. Copyright © 2005 Thomson Business & Professional 13–7 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.
  8. 8. Copyright © 2005 Thomson Business & Professional 13–8 Types of Variable Pay PlansTypes of Variable Pay PlansTypes of Variable Pay PlansTypes of Variable Pay Plans Figure 13–3
  9. 9. Copyright © 2005 Thomson Business & Professional 13–9 Individual IncentivesIndividual IncentivesIndividual IncentivesIndividual Incentives Individualism Stressed in Organizational Culture Individualism Stressed in Organizational Culture Identification of Individual Performance Identification of Individual Performance Independent Work Independent Work Individual Competitiveness Desired Individual Competitiveness Desired IndividualIndividual IncentiveIncentive SystemsSystems IndividualIndividual IncentiveIncentive SystemsSystems
  10. 10. Copyright © 2005 Thomson Business & Professional 13–10 Piece-Rate SystemsPiece-Rate SystemsPiece-Rate SystemsPiece-Rate 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.
  11. 11. Copyright © 2005 Thomson Business & Professional 13–11 Individual Incentives: BonusesIndividual Incentives: BonusesIndividual Incentives: BonusesIndividual Incentives: 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.
  12. 12. Copyright © 2005 Thomson Business & Professional 13–12 Special Incentive ProgramsSpecial Incentive ProgramsSpecial Incentive ProgramsSpecial Incentive 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.
  13. 13. Copyright © 2005 Thomson Business & Professional 13–13 Purposes of Special IncentivesPurposes of Special IncentivesPurposes of Special IncentivesPurposes of Special Incentives Figure 13–4
  14. 14. Copyright © 2005 Thomson Business & Professional 13–14 Types of Sales Compensation PlansTypes of Sales Compensation PlansTypes of Sales Compensation PlansTypes of Sales Compensation 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.
  15. 15. Copyright © 2005 Thomson Business & Professional 13–15 Determining Sales EffectivenessDetermining Sales EffectivenessDetermining Sales EffectivenessDetermining Sales Effectiveness Figure 13–5
  16. 16. Copyright © 2005 Thomson Business & Professional 13–16 Why Organizations Establish Variable Pay PlansWhy Organizations Establish Variable Pay Plans for Groups/Teamsfor Groups/Teams Why Organizations Establish Variable Pay PlansWhy Organizations Establish Variable Pay Plans for Groups/Teamsfor Groups/Teams Figure 13–6
  17. 17. Copyright © 2005 Thomson Business & Professional 13–17 Group/Team IncentivesGroup/Team IncentivesGroup/Team IncentivesGroup/Team Incentives Distribution ofDistribution of Group/TeamGroup/Team IncentivesIncentives Distribution ofDistribution of Group/TeamGroup/Team IncentivesIncentives Timing ofTiming of Group/TeamGroup/Team IncentivesIncentives Timing ofTiming of Group/TeamGroup/Team IncentivesIncentives Decision MakingDecision Making About Group/TeamAbout Group/Team AmountsAmounts Decision MakingDecision Making About Group/TeamAbout Group/Team AmountsAmounts Design ofDesign of Group/TeamGroup/Team Incentive PlansIncentive Plans Design ofDesign of Group/TeamGroup/Team Incentive PlansIncentive Plans
  18. 18. Copyright © 2005 Thomson Business & Professional 13–18 Group/Team Incentives (cont’d)Group/Team Incentives (cont’d)Group/Team Incentives (cont’d)Group/Team Incentives (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.
  19. 19. Copyright © 2005 Thomson Business & Professional 13–19 Conditions for Successful Group/Team IncentivesConditions for Successful Group/Team IncentivesConditions for Successful Group/Team IncentivesConditions for Successful Group/Team Incentives Figure 13–7
  20. 20. Copyright © 2005 Thomson Business & Professional 13–20 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
  21. 21. Copyright © 2005 Thomson Business & Professional 13–21 Organizational IncentivesOrganizational IncentivesOrganizational IncentivesOrganizational 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
  22. 22. Copyright © 2005 Thomson Business & Professional 13–22 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
  23. 23. Copyright © 2005 Thomson Business & Professional 13–23 Employee Stock PlansEmployee Stock PlansEmployee Stock PlansEmployee Stock 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.
  24. 24. Copyright © 2005 Thomson Business & Professional 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.
  25. 25. Copyright © 2005 Thomson Business & Professional 13–25 Components of ExecutiveComponents of Executive Compensation PackagesCompensation Packages Components of ExecutiveComponents of Executive Compensation PackagesCompensation Packages Figure 13–9
  26. 26. Copyright © 2005 Thomson Business & Professional 13–26 Executive CompensationExecutive CompensationExecutive CompensationExecutive 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?
  27. 27. Copyright © 2005 Thomson Business & Professional 13–27 Common Executive Compensation IssuesCommon Executive Compensation IssuesCommon Executive Compensation IssuesCommon Executive Compensation Issues Figure 13–10

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