CHAPTER 13
Variable Pay and Executive Compensation
S E C T I O N 4 Compensating Human Resources
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PowerPoint Presentation by Charlie Cook The University of West Alabama
Chapter Objectives
After you have read this chapter, you should be able to:
Define variable pay and identify three elements of successful paypayforfor-performance plans. Discuss three types of individual incentives. 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. Explain three ways that sales employees are typically compensated. Identify the components of executive compensation and discuss criticisms of executive compensation levels.
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Variable Pay: Incentives for Performance
Some people perform better and are more productive than others Better performing employees should receive more compensation
Variable Pay Assumptions
Part of compensation should be tied directly to performance and results
Some jobs contribute more to organizational success than others
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FIGURE 13-1 Examples of Incentives
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Developing Successful Pay-forPay-for-Performance Plans
Pay-forPerformance Plans
Link strategic goals and employee performance
Enhance results and reward employees financially
Reward and recognize employee performance
Promote achievement of HR objectives
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FIGURE 13-2 Metric Options for Variable Pay Plans
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Successful Variable Pay Plans
Effective Incentive Plans
Does the Plan Fit the Organization?
Does the Plan Reward the Appropriate Actions?
Is the Plan Administered Properly?
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Why Variable Pay Plans Fail
Plan incentives are not seen as desirable Plan doesnt reward doing a good job
Employees View of Variable Pay Plan Plan rewards teams/groups rather than individuals
Plan doesnt motivate
Plan doesnt increase base pay
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Developing Successful Incentive Plans
Develop clear, understandable plans that are continually communicated.
Use realistic performance measures.
Keep plans current and linked to organizational objectives.
Successful Incentive Plans
Link results to payouts that recognize differences.
Identify variable pay incentives separately from base pay.
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Individual Incentives
Necessary Conditions For Individual Incentive Plans
Individual performance must be identified
Individual competitiveness must be desired
Individualism must be stressed in the organizational culture
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FIGURE 13-3
Categories of Variable Pay Plans
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Individual Incentives
Piece-Rate Systems PieceStraight piece-rate system pieceDifferential piece-rate system piece-
Bonus Spot Bonuses Special Incentive Programs
Performance awards Recognition awards Service awards
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FIGURE 13-4
Purposes of Special Incentives
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Why Organizations Establish Variable Pay Plans for Groups/Teams
Group/TeamBased Variable Pay Plans
Improve productivity
Tie pay to team performance
Improve customer service or production quality
Increase employee retention
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Design of Group/Team Incentive Plans
Group/Team Incentive Plan Issues
Distribution of Group/Team Incentives
Timing of Group/Team Incentives
Decisions About Group/Team Incentive Amounts
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Group/Team Incentives (cont d)
Distributing Rewards
Same-size reward for each member Same Different-size reward for each member Different-
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. co Many employees still expect to be paid according to
individual performance.
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FIGURE 13-5
Conditions for Successful Group/Team Incentives
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Types of Group/Team Incentives
Group/Team Results
Self-funding pay plans for groups/teams that reward Self-
through improved organizational results on the basis of group output, cost savings, or quality improvement.
Gainsharing (Teamsharing or Goal Sharing) (Teamsharing Sharing)
The sharing with employees of greater-than-expected greater-than-
gains in productivity through increased discretionary efforts.
Improshare Scanlon
Plan
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Organizational Incentives
Profit Sharing
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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FIGURE 13-6
Framework Choices for a Profit-Sharing Plan
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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. the market price of the stock is below the specified option price, the stock option is underwater and is worthless to employees.
If
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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 firms future performance Management tool to fend off hostile takeover attempts.
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Types of Sales Compensation Plans
Salary-Only Salary All compensation is paid as a base wage with no
incentives.
Commission
Straight Commission
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 Salary-Plus Compensation is part salary for income stability and part commission for incentive.
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Compensation
FIGURE 13-7
Sales Metric Possibilities
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Effectiveness of Sales Incentive Plans
Frequent changes in sales plans
An entitlement culture
Pay without performance
Causes of Ineffectiveness in Incentive Plans
Poor quota setting
Small differences in pay for top and bottom performers
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Executive Compensation
Executive Salaries
Executive Benefits
Executive Perquisites (Perks) Annual Executive Incentives and Bonuses Performance Incentives: Long Term vs. Short Term
Elements of Executive Compensation
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Reasonableness of Executive Compensation
Would another company hire this person as an executive? How does the executives compensation compare with that for executives in similar companies?
Executive Compensation Considerations and Concerns
Is the executives 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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FIGURE 13-8
Common Executive Compensation Criticisms
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