Incentive Pay

Chapter # 8

Resource person: Furqan-ul-haq Siddiqui

Reference Books:

Strategic Compensation: A Human Resource Management Approach (6th Edition), Joseph J., Martocchio Joe, Pearson Education.Strategic Compensation in Canada (4th Edition), Richard J. Long, Nelson Education Ltd.Internet

Incentive Pay or Variable Pay

Compensation fluctuates according to A pre-established formula Individual or group goals Company earnings

other than fixed pay Controls costs Motivates employees

Incentive Pay Categories

Individual

Group

Company-wide

Performance Measures

Individual incentive plans

Quantity of work output

Quality of work output

Monthly sales

Work safety record

Work attendance

Types of Individual Incentive Plans

Piecework plans

Management incentive plans

Behavior encouragement plans

Referral plans

Piecework Plans

Awards based on individual production or objective standards

Awards based on individual performance standards using objective & Subjective criteria

Quantity and / or quality goals

Individual Incentive Plan Advantages

Helps relate pay to performance

Promotes equitable distribution of compensation

Helps retain best performers Compatible with America’s individualistic culture

Disadvantages

May promote inflexibility Unrealistic standards may hamper employee motivation

Factors beyond employee’s control may affect outcomes Factors not rewarded may be overlooked

Group Incentive Plans

Rewards employees for their collective performance Use has increased in industry

2 types Team - based or small group Gain sharing

Allocation Methods Equal incentive payments

Differential payments based on

contribution to goals

Differential payments according

to base pay

Gain Sharing

Gainsharing is a system of management used by a business to increase profitability by motivating employees to improve their performance through involvement and participation. As their performance improves, employees share financially in the gain (improvement).

In gain sharing, gain means savings. An employee or team shares in the amount saved by a business as a result of a suggestion he made or task performed. 

Company - Wide Incentive Plans

Rewards employees when company meets performance standards

2 Types Profit sharing plans Employee stock option plans

Designing Sales Incentive Compensation Plans

Sales volume, which indicates the amount of sales that should be achieved for a specified period.

New business, which refers to making sales from customers who have not made previous purchases.

Retaining sales, which simply targets a level of sales from existing customers.

Product mix, which rewards sales professionals for selling a pre-established mix of a company’s product goods or services.

Win-back sales, which is designed to motivate sales professionals to regain business from former.

Designing Sales Incentive Compensation Plans Alternative Sales Compensation Choosing the appropriate plan depends on the

company’s competitive strategy Five main alternativesa. Salary-only b. Salary-plus-bonusc. Salary-plus-commissiond. Commission-plus-drawe. Commission-only

Designing Sales Incentive Compensation Plans Multiple-tiered commissions Award sales professionals with higher

percentages of the sales made in a given period,

If the sales level exceeds a pre-determined level

Example: Multiple-Tiered Commissions* 8% commissions per unit for sales up to 1000

units* 12% commissions per unit for sales exceeding

1000 units

Executive Compensation

Executive Compensation is a broad term for the financial compensation awarded to a firm's executives. Executive Compensation packages are designed by a company's Board of Directors, typically by the Compensation Committee consisting of independent directors, with the purpose of incentivizing the executive team, who have a significant impact on company strategy, decision-making, and value creation (Pay for Performance) as well as enhancing Executive Retention.

Executive Compensation There are following basic features of executive

compensation or remuneration: Salary Short-term incentives (STIs), sometimes known as bonuses Long-term incentive plans (LTIPs) Employee benefits and paid expenses (perquisites) Insurance and Golden parachute Plans Stocks

The President & Chief Executive Officer (CEO) of United Bank Limited (UBL) is the highest paid banker in Pakistan who had drawn annual remuneration of approximately Rs. 246.5 million in year 2014.

His monthly salary package of UBL’s President and CEO, Mr. Wajahat Husain, is Rs. 20 million or Rs. 2 crore. UBL CEO is currently the highest paid bankers in Pakistan. His salary package increased by 78.2% in 2014 as compared to the preceding year. In year 2014, the financial position of UBL even went up 17.8% to Rs 21.9 billion in the case of net profit, and 33.3% in stock on the Karachi Stock Exchange. In terms of profit, it is the third largest bank of the country after Habib Bank Limited (Rs. 31.1 billion), and Muslim Commercial Bank Limited (Rs. 24.3 billion).

One-dollar Salary A number of top executives in large businesses and

governments work for an annual salary of one dollar.

Many executives who take a one-dollar salary also choose not to take any other forms of compensation. In some cases, in lieu of a salary, the executives receive stock options and bonuses.

The assumption is that stock prices will reflect the actual value of a company, which reflect the management performance of the company.

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Facebook founder and CEO Mark Zuckerberg is now the company’s lowest-paid employee, according to its latest proxy filing. Zuckerberg — worth $27.8 billion mostly in Facebook stock — requested an annual wage of $1 in 2013, joining the ranks of a handful of other very wealthy CEOs who take a symbolically negligible base pay.

Zuckerberg, who earned $770,000 in combined salary and bonus in 2012, is now in good company among giants of the tech sector. Google's GOOG -1.73% Sergey Brin and Larry Page, worth roughly $30 billion a piece, have been drawing a $1 salary for a decade now.

“The dollar salary really for them is meant to signify that they have large stakes in their company. The value they’re going to receive – the compensation they’ll earn – is coming solely from their stock,” “You’re not going to question whether or not Larry Page is interested in growing a company’s stock as a shareholder. As one of the largest shareholders, he’s all in.”

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Related Article

Kerr, S. (1995). On the folly of rewarding A, while hoping for B. The Academy of Management Executive (1993-2005), 7-14.