Transcript Human Resource Management 11e.

ROBERT L. MATHIS
JOHN H. JACKSON
Chapter 13
Variable Pay and
Executive Compensation
SECTION 4
Compensating
Human Resources
Copyright © 2005 Thomson Business & Professional Publishing.
All rights reserved.
PowerPoint Presentation by Charlie Cook
The University of West Alabama
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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13–2
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.
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13–3
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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13–4
Effective Incentive Plans
Figure 13–1
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13–5
Metrics for Variable Pay Plans
Figure 13–2
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13–6
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.
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13–7
Types of Variable Pay Plans
Figure 13–3
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13–8
Individual Incentives
Identification of
Individual
Performance
Independent
Work
Individual
Incentive
Systems
Individualism
Stressed in
Organizational
Culture
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Individual
Competitiveness
Desired
13–9
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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13–10
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.
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13–11
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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13–12
Purposes of Special Incentives
Figure 13–4
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13–13
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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13–14
Determining Sales Effectiveness
Figure 13–5
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13–15
Why Organizations Establish Variable Pay Plans
for Groups/Teams
Figure 13–6
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13–16
Group/Team Incentives
Distribution of
Group/Team
Incentives
Timing of
Group/Team
Incentives
Design of
Group/Team
Incentive Plans
Decision Making
About Group/Team
Amounts
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13–17
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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13–18
Conditions for Successful Group/Team Incentives
Figure 13–7
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13–19
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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13–20
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

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13–21
Framework Choices for a Profit-Sharing Plan
Figure 13–8
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13–22
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.
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13–23
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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13–24
Components of Executive
Compensation Packages
Figure 13–9
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13–25
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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13–26
Common Executive Compensation Issues
Figure 13–10
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13–27