Human Resource Management 11e.

Attract Acquire Retain Develop - Deploy

Variable Pay and Executive Compensation

Module 4

CEO PayMade in AmericaMy StorySam Walton and John Huey (1993)A lot of what goes on these days with high-flying companies and these overpaid CEOs whore really looting from the top and arent watching out for anyone but themselves, really upsets me.

CEO Pay

Variable Pay: Incentives for PerformanceVariable 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.

Effective Incentive Plans

Boeing, Nordstrom, Wal-Mart, Safeway

Successes and Failures of Variable Pay PlansSuccessful incentive plans require:The development of clear, understandable plans that are continually communicated.The use of realistic performance measures.Strong links among performance results and payouts that truly recognize performance differences.Clear identification of variable pay incentives separately from base pay.

Types of Variable Pay Plans

Piece-Rate SystemsStraight 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.

Individual Incentives: BonusesBonusA one-time payment that does not become part of the employees base pay.Spot BonusA special type of bonus used is a spot bonus, so called because it can be awarded at any time.

Special Incentive ProgramsPerformance 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.

Types of Sales Compensation PlansSalary-OnlyAll compensation is paid as a base wage with no incentives.CommissionStraight CommissionCompensation 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 BonusesCompensation is part salary for income stability and part commission for incentive.

Determining Sales Effectiveness

Group/Team Incentives (contd)Distributing RewardsSame-size reward for each memberDifferent-size reward for each memberProblems 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.Social LoafingThe folly of rewarding A and hoping for B

Conditions for Successful Group/Team Incentives

Organizational IncentivesProfit SharingA system to distribute a portion of the profits of the organization to employees.Primary objectives:Increase productivity and organizational performanceAttract or retain employeesImprove product/service qualityEnhance employee moraleDrawbacksDisclosure of financial informationVariability of profits from year to yearProfit results not strongly tied to employee efforts

Framework Choices for a Profit-Sharing Plan

Employee Stock PlansStock 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.

Employee Stock PlansEmployee Stock Ownership Plan (ESOP)A plan whereby employees gain significant stock ownership in the organization for which they work.AdvantagesFavorable tax treatment for ESOP earningsEmployees motivated by their ownership stake in the firmDisadvantagesRetirement benefit is tied to the firms future performanceManagement tool to fend off hostile takeover attempts.

Components of Executive Compensation Packages

Executive CompensationReasonableness of Executive CompensationWould another company hire this person as an executive?How does the executives compensation compare with that for executives in similar companies in the industryIs the executives pay consistent with pay for other employees within the company?What would an investor pay for the level of performance of the executive? Investors are ownersWe as managers are stewards (agency theory)

Common Executive Compensation Issues