ROBERT L. MATHIS JOHN H. JACKSON Chapter 13 Variable Pay and Executive Compensation Presented by: Prof. Dr. Deden Mulyana, SE.,M,Si. SECTION 4 Compensating Human Resources http://www.deden08m.wordpress.com 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. http://www.deden08m.wordpress.com 13 2 1
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. http://www.deden08m.wordpress.com 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. http://www.deden08m.wordpress.com 13 4 2
Effective Incentive Plans Figure 13 1 http://www.deden08m.wordpress.com 13 5 Metrics for Variable Pay Plans Figure 13 2 http://www.deden08m.wordpress.com 13 6 3
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. http://www.deden08m.wordpress.com 13 7 Types of Variable Pay Plans Figure 13 3 http://www.deden08m.wordpress.com 13 8 4
Individual Incentives Identification of Individual Performance Independent Work Individual Incentive Systems Individualism Stressed in Organizational Culture Individual Competitiveness Desired http://www.deden08m.wordpress.com 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. http://www.deden08m.wordpress.com 13 10 5
Bonus Individual Incentives: Bonuses 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. http://www.deden08m.wordpress.com 13 11 Performance Awards Special Incentive Programs 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. http://www.deden08m.wordpress.com 13 12 6
Purposes of Special Incentives Figure 13 4 http://www.deden08m.wordpress.com 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. http://www.deden08m.wordpress.com 13 14 7
Determining Sales Effectiveness Figure 13 5 http://www.deden08m.wordpress.com 13 15 Why Organizations Establish Variable Pay Plans for Groups/Teams Figure 13 6 http://www.deden08m.wordpress.com 13 16 8
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 http://www.deden08m.wordpress.com 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. http://www.deden08m.wordpress.com 13 18 9
Conditions for Successful Group/Team Incentives Figure 13 7 http://www.deden08m.wordpress.com 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 http://www.deden08m.wordpress.com 13 20 10
Profit Sharing Organizational Incentives 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 http://www.deden08m.wordpress.com 13 21 Framework Choices for a Profit-Sharing Plan Figure 13 8 http://www.deden08m.wordpress.com 13 22 11
Stock Option Plan Employee Stock Plans 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. http://www.deden08m.wordpress.com 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. http://www.deden08m.wordpress.com 13 24 12
Components of Executive Compensation Packages Figure 13 9 http://www.deden08m.wordpress.com 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? http://www.deden08m.wordpress.com 13 26 13
Common Executive Compensation Issues Figure 13 10 http://www.deden08m.wordpress.com 13 27 14