Human Resource Management 11e.
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Transcript Human Resource Management 11e.
Variable Pay and
Executive Compensation
Module 4
CEO Pay
Made in America—My Story
Sam Walton and John Huey (1993)
“A lot of what goes on these days with high-flying
companies and these overpaid CEO’s who’re really
looting from the top and aren’t watching out for
anyone but themselves, really upsets me.”
CEO Pay
Write it down
If you were creating an executive compensation
plan, what criteria would you include?
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.
Effective Incentive Plans
Boeing, Nordstrom, Wal-Mart, Safeway
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.
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 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.
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
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.
Social Loafing
The folly of rewarding A and hoping for B
Conditions for Successful Group/Team Incentives
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
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
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?
Investors are owners
We as managers are stewards (agency theory)
Common Executive Compensation Issues
Discussion- did it change?
If you were creating an executive compensation
plan, what criteria would you include?
Exercise On Variable Pay