Download pdf - MJ11eCh13Variable Pay and Executive Compensation · 2013. 2. 1. · Variable Pay: Incentives for Performance • Variable Pay Compensation linked to individual, group/team, and/or

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ROBERT L. MATHIS

JOHN H. JACKSON

Variable Pay and Executive CompensationVariable Pay and Executive Compensation

Chapter 13

SECTION 4Compensating

Human Resources

Presented by:

Prof. Dr. Deden Mulyana, SE.,M,Si.

http://www.deden08m.wordpress.com

http://www.deden08m.wordpress.com 13–2

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.

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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.

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Effective Incentive Plans

Figure 13–1


Metrics for Variable Pay Plans

Figure 13–2

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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

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Individual Incentives

IndividualismStressed in

OrganizationalCulture

Identification ofIndividual

Performance

IndependentWork

IndividualCompetitiveness

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.

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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.

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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.

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Determining Sales Effectiveness

Figure 13–5


Why Organizations Establish Variable Pay Plansfor Groups/Teams

Figure 13–6

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Group/Team Incentives

Distribution of

Group/Team

Incentives

Timing of

Group/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.

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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

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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

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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.

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Components of Executive Compensation Packages

Figure 13–9


Executive 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?

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Common Executive Compensation Issues

Figure 13–10