MJ11eCh13Variable Pay and Executive … more directly strategic business goals and ... Figure 13–2. ... MJ11eCh13Variable Pay and Executive Compensation.ppt [Compatibility Mode]

ROBERT L. MATHIS

JOHN H. JACKSON

Variable Pay and

Executive Compensation

Variable Pay and


Chapter 13

SECTION 4Compensating

Human Resources

Presented by:Prof. Dr. Deden Mulyana, SE.,M,Si.

http://www.deden08m.com


Learning 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.


Variable 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.


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.


Effective Incentive Plans

Figure 13–1


Metrics for Variable Pay Plans

Figure 13–2


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.


Types of Variable Pay Plans

Figure 13–3


Individual Incentives

IndividualismStressed in

Organizational

Culture

Identification of

IndividualPerformance

IndependentWork

Individual

Competitiveness

Desired

Individual Incentive Systems


Piece-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.


Individual 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.


Special 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.


Purposes of Special Incentives

Figure 13–4


Types 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.


Determining Sales Effectiveness

Figure 13–5


Why Organizations Establish Variable Pay Plans

for Groups/Teams

Figure 13–6


Group/Team Incentives

Distribution of Group/Team Incentives

Timing ofGroup/Team Incentives

Decision Making About Group/Team

Amounts

Design of Group/Team

Incentive Plans


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.


Conditions for Successful Group/Team Incentives

Figure 13–7


Types 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


Organizational 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


Framework Choices for a Profit-Sharing Plan

Figure 13–8


Employee 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.


Employee 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.


Components of Executive

Compensation Packages

Figure 13–9



• “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?


Common Executive Compensation Issues

Figure 13–10

Documents

MJ11eCh13Variable Pay and Executive … more directly strategic business goals and ... Figure 13–2. ... MJ11eCh13Variable Pay and Executive Compensation.ppt [Compatibility Mode]