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Incentive Compensation as Part of a Total Compensation Strategy Jacques Etame, Milap Thaker, and Vincent Zhang Strategic Human Capital Arthur McCombs, Professor The Johns Hopkins University March 6, 2013

Milap Thaker - Incentive compensation as part of a total compensation strategy

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Jacques Etame, Milap Thaker, and Vincent Zhang. Incentive compensation as part of a total compensation strategy presentation on compensation methods in high tech companies, hedge funds, and other leading edge marketplaces. Includes information on bonus types, negotiation strategies such as anchors and MESOs, and nontraditional incentive strategies.

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Page 1: Milap Thaker - Incentive compensation as part of a total compensation strategy

Incentive Compensation as Part of a Total Compensation

Strategy

Jacques Etame, Milap Thaker, and Vincent ZhangStrategic Human Capital

Arthur McCombs, ProfessorThe Johns Hopkins University

March 6, 2013

Page 2: Milap Thaker - Incentive compensation as part of a total compensation strategy

Topics to be Covered

Background Motivation: Practical Tools for MBA Students in

Financial Compensation Negotiations Incentive Compensation Methods

Individual Incentives Team Based Incentives Cash Awards Profit Sharing Vested Stock Options

Total Compensation Packages Variables in Compensation Packages Anchoring and Negotiation Strategy References

Page 3: Milap Thaker - Incentive compensation as part of a total compensation strategy

Background

Incentive compensation refers to financial methods used to compensate employees for their contributions. Some Examples:

▪ Individual Incentives▪ Team Based Incentives▪ Cash Awards▪ Profit Sharing▪ Vested Stock Options and Other Equity

Page 4: Milap Thaker - Incentive compensation as part of a total compensation strategy

Motivation and Goals

We all work for income and the ability to provide for ourselves and loved ones.

Our goal is to provide you with a blueprint on the various compensation methods available to empower your negotiations.

This powerpoint will demonstrate some of the major incentive compensation strategies as well as practical negotiation steps you can use in your own compensation negotiations.

Page 5: Milap Thaker - Incentive compensation as part of a total compensation strategy

Different Types of Bonuses

Sign-On Bonuses Given to new employees who

have just joined the company establish goodwill and to buy

out any compensation left on the table" from a

previous employer.

Retention Bonuses non-salary based, more

common in executives and management

maintain the workforce a solution provider wants

keep the competition from recruiting best employees

especially effective during M&As, corporate restructuring and relocations.

Project Completion Bonuses paid to team participants

assigned to specific projects typically 5 to 20 percent of

project total compensation short term (three to six

months). quantitative goals from a

project's start with fixed bonus amounts set based on the importance of individual's role

MBO Bonuses employees receive dollar value

for completing each assignment based on company priorities.

time bound offered quarterly or semi-annually.

built into employees' overall compensation plan with dollar value buckets from which quarterly project assignments are made.

Page 6: Milap Thaker - Incentive compensation as part of a total compensation strategy

Profit Sharing Bonuses require a person stay on

the job for a set amount of time before they receive payment

a percentage of the bonus is paid each year on a pre-designated date

Gain Sharing Bonuses most common in

manufacturing pay out quarterly or

monthly reward for statistical

improvements in production and quality

Different Types of Bonuses (cont’d)

Spot Bonuses reward employees on the spot for

achievements that deserve special recognition

typically $50 and up can be made by immediate

supervisor and any higher-level person or peer

allow employee to earn more than one instant bonus in a year

Noncash Bonuses special ceremony, certificate or

trophy sometimes coupled with a token

tangible award can instill pride and improve

employee morale if well designedhttp://www.salary.com/types-of-bonuses/http://www.klagroup.com/Resources/Articles/IncentiveBonusPlansforYourBestEmployees.php

Page 7: Milap Thaker - Incentive compensation as part of a total compensation strategy

Creative Incentives Canon Lifetime cumulative award system

Each suggestion is given a certain number of points, and every year President's Awards are given to the 20 people who have accumulated the most points since the system's inception. Each recipient receives a certain amount of money and a gold medal. Since this can get a bit repetitious, there are also Presidential Awards for the most points in a given year, the top 30 people receiving a smaller amount of money and silver medals.

http://www.1000ventures.com/business_guide/crosscuttings/motivating_incentive.html

Page 8: Milap Thaker - Incentive compensation as part of a total compensation strategy

Creative IncentivesCarbon Footprint Bonus

Set up in 2007 by engineering consultancy WSP

2,200 members in the last few years, available to employees at 15 organization.

Staff voluntarily agree to a personal carbon limit

They enter monthly output to a website The website calculates ongoing totals It then suggests ways to reduce emissions

If employees go over their limit -> No penalty If they go under -> an annual bonus in paycheck

Page 9: Milap Thaker - Incentive compensation as part of a total compensation strategy

Creative IncentivesCarbon Footprint Bonus (cont’d)

Page 10: Milap Thaker - Incentive compensation as part of a total compensation strategy

70% of members hit target every year getting about £100 in the U.K. ($100 in the U.S.). Annual target varies according to grid conditions and

car types, and falls every year. Some externalities

“Capping carbon can be effective--if not for actually cutting emissions directly, then at least for engaging employees on sustainability.”

“This a good way to increase understanding of environmental issues, and it does it in a subtle way, rather than being a formal training course.”

“People swap tips about sustainable living, “heroes” are recognized, and the peer group challenges itself.”

Creative IncentivesCarbon Footprint Bonus (cont’d)

http://www.fastcoexist.com/1679223/a-new-company-bonus-plan-reduce-your-footprint-earn-100

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Youtube video:The surprising truth about what motivates us

http://www.youtube.com/watch?v=u6XAPnuFjJc&feature=youtu.be

Page 12: Milap Thaker - Incentive compensation as part of a total compensation strategy

The Power of Loss Aversion: A Field Experiment

3.• $4,000 bonus at the

beginning• more the students‘ scores

increased, more the teacher could keep.

• receive up to $8,000 by the end of the year if student scores improve

• No bonus upfront

http://techcrunch.com/2012/08/10/harvard-researchers-find-a-creative-way-to-make-incentives-work/

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The Power of Loss Aversion: A Field Experiment (cont’d)

http://techcrunch.com/2012/08/10/harvard-researchers-find-a-creative-way-to-make-incentives-work/

Page 14: Milap Thaker - Incentive compensation as part of a total compensation strategy

Total Compensation Packages Total compensation can “far exceed base

salary.” Factors in a total compensation package:

Wages▪ Adjusted for cost of living?▪ Job performance adjusted?

Time off▪ Paid or unpaid▪ Maternity/Paternity leave?

Sick time Health insurance

▪ Medical▪ Dental▪ Vision

"Total Compensation." Total Compensation. 30 Oct. 2012. Web. 12 Mar. 2013. <http://blink.ucsd.edu/HR/comp-class/compensation/total.html>.

Page 15: Milap Thaker - Incentive compensation as part of a total compensation strategy

Total Compensation Packages (cont’d)

Non-traditional Benefits Company Car Cell Phone Service Office Equipment for Working at Home Housing Bereavement Pension ESOP

Page 16: Milap Thaker - Incentive compensation as part of a total compensation strategy

A Negotiation Matrix

Base Salary

70,000 80,000 90,000 100,000

Bonus 2% 3% 4% 5%

Location New York

Atlanta San Francisco

Seattle

Vacation 10 days 14 days 21 days 28 days

Health Plan

A B C D

Adapted from Course Notes: Negotiation, Carey Business School, Heather M. Williams, Professor. Coursepack from Harvard Business School Project on Negotiation.

Page 17: Milap Thaker - Incentive compensation as part of a total compensation strategy

Practical Negotiation Strategy

Anchoring Setting a first

offer initial price Creating the

bargaining range Zone of (realistic)

possible agreement

Finding a BATNA

Seek out MESOs Multiple

equivalent simultaneous outcome

Create a win-win outcome

Move from party positions to party interests

Page 18: Milap Thaker - Incentive compensation as part of a total compensation strategy

References

Ferenstein, Gregory. "Harvard Researchers Find A Creative Way To Make Incentives Work." TechCrunch. TechCrunch, 10 Aug. 2012. Web. 12 Mar. 2013. http://techcrunch.com/2012/08/10/harvard-researchers-find-a-creative-way-to-make-incentives-work/.

Kotelnikov, Vadim. "INCENTIVE MOTIVATION, INCENTIVES for EMPLOYEES - Understand the Power of an Incentive Program and Learn How To Organize and Promote It (Your First-ever Business E-Coach)." INCENTIVE MOTIVATION, INCENTIVES for EMPLOYEES - Understand the Power of an Incentive Program and Learn How To Organize and Promote It (Your First-ever Business E-Coach). Web. 12 Mar. 2013. <http://www.1000ventures.com/business_guide/crosscuttings/motivating_incentive.html>.

Lee, Kendra. "KLA Group Sales Article: Innovative Bonus Plans for Your Best Employees." KLA Group Sales Article: Innovative Bonus Plans for Your Best Employees. KLA Group Sales, Web. 12 Mar. 2013. <http://www.klagroup.com/Resources/Articles/IncentiveBonusPlansforYourBestEmployees.php>.

Miller, Stephen, CEBS. "Incentive Compensation Tips and Pitfalls Shared." Incentive Compensation Tips and Pitfalls Shared. Society for Human Resource Management, 1 June 2012. Web. 04 Mar. 2013.

Schiller, Ben. "A New Company Bonus Plan: Reduce Your Footprint, Earn $100." Co-Exist. Web. 12 Mar. 2013. <http://www.fastcoexist.com/1679223/a-new-company-bonus-plan-reduce-your-footprint-earn-100>.

"Total Compensation." Total Compensation. 30 Oct. 2012. Web. 12 Mar. 2013. <http://blink.ucsd.edu/HR/comp-class/compensation/total.html>.

Ueda, Dwight. "Types of Bonuses." Salary.com. Salary.com, Web. 12 Mar. 2013. <http://www.salary.com/types-of-bonuses/>.

Williams, Heather M. "Negotiation Strategy." Johns Hopkins Negotiation Course. 100 International Drive, Baltimore, MD. 4 Feb. 2013. Lecture.