Incentive Pay

Incentive Pay

• • • Basic issues Types of incentives Executive incentives...a special case Page 2 MGMT 412 | Incentive Pay Fall 2008

Incentive Pay: Basic Issues

• • • “Compensation that rewards an employee for efforts beyond normal performance expectations” Why incentives?

• • Control costs (pay contingent on performance) Motivate employees (pay contingent on performance) Decisions to make • •

What’s rewarded

• Extra time worked • Results / outcomes

Basis of reward

• Individual • Group / department • Company Page 3 MGMT 412 | Incentive Pay Fall 2008

A Good Incentive Plan...

• Perceived as fair (not a

reward for sucking up !)

• Aimed toward

controllable behaviors

• Understandable to the

user

• Challenging but realistic • Clear objectives on front

end

•

Reward desired behaviors (easier said than done...) Equity Theory Goal Setting Behavior Modification

Page 4 MGMT 412 | Incentive Pay Fall 2008

Payment for Time Worked

• • • Overtime • • • Some legally required, but a reward nevertheless Some not required by law, but by market Can pay more OT than required by law Shift differentials Holiday pay Page 5 MGMT 412 | Incentive Pay Fall 2008

Payment for Outcomes / Results

• • • • • Piece rate plans Sales commissions Other performance incentives Spot bonuses (immediate, small cash / kind payments) Overall plans • Profit sharing • • Gainsharing Stock purchase / option plans Page 6 MGMT 412 | Incentive Pay Fall 2008

Executive Incentives

• • • Very dependent on tax laws; idea is to get maximum tax advantage for firm and employee Basis of reward • • • Profits Stock price Other (service, growth) Issues • • • • Timing Investment needed?

Amounts Link to performance ???

Carl Icahn Page 7 MGMT 412 | Incentive Pay Fall 2008

Is It Too Much????

Employee

James A. Skinner (CEO, McDonald’s) Fast food cook Food service manager Maids and housekeeping cleaners Police, fire and ambulance dispatchers Chemical engineer Accountants and auditors Plumbers, pipefitters, and steamfitters

Annual Pay

$9,443,486 * $16,860 $48,660 $19,550 $34,060 $84,240 $63,180 $47,350 * 2007 pay and incentives. All other numbers from DoL, May 2007 U.S. average Page 8 MGMT 412 | Incentive Pay Fall 2008

Some Other CEOs

CEO Steven P. Jobs Howard R. Levine Frederick W. Smith Jeffrey R. Immelt John M. Stropki Steven A. Ballmer E. Stanley O'Neal Company Apple, Inc.

Family Dollar Stores, Inc.

FedEx General Electric Company Lincoln Electric Holdings Inc. * 2007 Pay $1 $3,900,911 $17,015,354 $19,591,580 $3,499,288 Microsoft Merrill Lynch & Co. Inc.

$1,279,821 $24,306,586 * 2003 employee bonuses (most recent info available) were average $10,800 Page 9 MGMT 412 | Incentive Pay Fall 2008