Copyright © 2009Copyright © 2009

Compensation of Compensation of Special GroupsSpecial Groups

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Chapter TopicsChapter TopicsWho are Special Groups?Who are Special Groups?

Compensation Strategy for Special GroupsCompensation Strategy for Special GroupsYour Turn: Compensation of Special

Groups

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Who Are Special Groups?Who Are Special Groups? SupervisorsSupervisors

Corporate directorsCorporate directors

Top management executivesTop management executives

Professional employeesProfessional employees

Sales staffSales staff

Contingent workersContingent workers

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Characteristics of Special GroupsCharacteristics of Special Groups Tend to be strategically important to a companyTend to be strategically important to a company

Positions tend to have built-in conflict that Positions tend to have built-in conflict that arises because different factions place arises because different factions place incompatible demands on members of group incompatible demands on members of group

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Issues: Supervisory PayIssues: Supervisory Pay Caught between Caught between demandsdemands of: of:

– Upper management in terms of production andUpper management in terms of production and

– Employees in terms of rewards, reinforcements, and Employees in terms of rewards, reinforcements, and counselingcounseling

Major Major challengechallenge in paying supervisors in paying supervisors– EquityEquity

Provide Provide incentivesincentives to entice nonexempt employees to entice nonexempt employees to accept challenges of being a supervisorto accept challenges of being a supervisor

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Strategies: Supervisory PayStrategies: Supervisory Pay Pay strategiesPay strategies

– Key base salaries of supervisors to an amount Key base salaries of supervisors to an amount exceeding highest paid employeeexceeding highest paid employee

– Pay supervisors for scheduled overtimePay supervisors for scheduled overtime

Trend in supervisory compensationTrend in supervisory compensation

– Increased use of variable payIncreased use of variable pay

– More than half of all companies have a variable pay More than half of all companies have a variable pay component for supervisorscomponent for supervisors

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Corporate DirectorsCorporate Directors Stockholders blame corporate directors for Stockholders blame corporate directors for

excessively high executive compensationexcessively high executive compensation– Directors are much more active in decision making Directors are much more active in decision making

and somewhat less prone to grant huge salaries to and somewhat less prone to grant huge salaries to the CEOthe CEO

– Approximately two-thirds of boards now include Approximately two-thirds of boards now include more outside directors than inside directorsmore outside directors than inside directors

– In exchange for meeting at least quarterly a typical In exchange for meeting at least quarterly a typical director receives about $55,000 in cash and director receives about $55,000 in cash and incentives and a total of about $150,000incentives and a total of about $150,000

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ExecutivesExecutives Pay is linked to company performancePay is linked to company performance

– Company performance exceeds industry standards, Company performance exceeds industry standards, big bonuses and stock payouts followbig bonuses and stock payouts follow

– Poor financial performance means much smaller pay Poor financial performance means much smaller pay packagespackages

Ways to rein in executive compensationWays to rein in executive compensation– Use of tally sheetUse of tally sheet– Increase government regulationIncrease government regulation

Stockholders can vote/ propose limits to compensationStockholders can vote/ propose limits to compensation

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Explanations for CEO CompensationExplanations for CEO Compensation Social comparisonsSocial comparisons

– Executive salaries bear a consistent relative Executive salaries bear a consistent relative relationship to pay of lower-level employees relationship to pay of lower-level employees

Economic approachEconomic approach– Value of CEO should correspond to some measure of Value of CEO should correspond to some measure of

organizational success organizational success Agency theoryAgency theory

– Incorporates political motivationsIncorporates political motivations– CEO compensation should be designed to ensure CEO compensation should be designed to ensure

executives focus on best interests of firm and executives focus on best interests of firm and stockholdersstockholders

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Components of an Executive Components of an Executive Compensation PackageCompensation Package

Base salaryBase salary

Short-term (annual) incentives or bonusesShort-term (annual) incentives or bonuses

Long-term incentives and capital appreciation Long-term incentives and capital appreciation plansplans

Executive benefitsExecutive benefits

PerquisitesPerquisites

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Exhibit 14.4: Breakdown of Executive Compensation Exhibit 14.4: Breakdown of Executive Compensation ComponentsComponents

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Exhibit 14.7: Description of Long-Term Exhibit 14.7: Description of Long-Term Incentives for ExecutivesIncentives for Executives

Incentive stock optionsIncentive stock options

Non-qualified stock optionsNon-qualified stock options

Phantom stock plansPhantom stock plans

Stock appreciation rightsStock appreciation rights

Restricted stock plansRestricted stock plans

Performance share/unit plansPerformance share/unit plans

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Exhibit 14.8: Popular PerksExhibit 14.8: Popular PerksOffered to ExecutivesOffered to Executives

Physical examPhysical exam Company carCompany car Financial counselingFinancial counseling Company planeCompany plane Income tax preparationIncome tax preparation First-class air travelFirst-class air travel Country club membershipCountry club membership Luncheon club Luncheon club

membershipmembership Estate planningEstate planning

Personal liability insurancePersonal liability insurance Spouse travelSpouse travel Chauffeur serviceChauffeur service Reserved parkingReserved parking Executive dining roomExecutive dining room Home security systemHome security system Car phoneCar phone Financial seminarsFinancial seminars Loans at low or no interestLoans at low or no interest Legal counselingLegal counseling

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Scientists and Engineers in High-Scientists and Engineers in High-Technology IndustriesTechnology Industries

Scientists and engineers are classified as Scientists and engineers are classified as professionalsprofessionals

Problems in designing payProblems in designing pay– Salary plateaus due to knowledge obsolescence of Salary plateaus due to knowledge obsolescence of

mature professionalsmature professionals Dual-Career LadderDual-Career Ladder

– Question of equityQuestion of equity

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Reward Components: Professional EmployeesReward Components: Professional EmployeesDual-career laddersDual-career laddersPerformance-based incentivesPerformance-based incentives

– Profit sharingProfit sharing– Stock ownershipStock ownership

BonusesBonuses– Completion of projects on or before deadlinesCompletion of projects on or before deadlines– PatentsPatents– PublicationsPublications– Elections to professional societiesElections to professional societies– Attainment of professional licensesAttainment of professional licenses

PerksPerks based on unique needs of professional based on unique needs of professional employeesemployees

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Exhibit 14.9: IBM Dual LaddersExhibit 14.9: IBM Dual Ladders

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Exhibit 14.10: Maturity Curve: Years Since Last Degree Exhibit 14.10: Maturity Curve: Years Since Last Degree Relative to SalaryRelative to Salary

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Conflicts Faced by Sales StaffConflicts Faced by Sales Staff Often go for extended periods in field with little Often go for extended periods in field with little

supervisionsupervision

ChallengesChallenges

– Staying motivatedStaying motivated

– Continuing to make sales calls despite little Continuing to make sales calls despite little supervisionsupervision

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Exhibit 14.11: Sales Compensation Exhibit 14.11: Sales Compensation ComponentsComponents

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Key Factors: Designing a Sales Key Factors: Designing a Sales Compensation PlanCompensation Plan

Nature of people who enter sales professionNature of people who enter sales profession Organizational strategyOrganizational strategy Market maturityMarket maturity Competitor practicesCompetitor practices Economic environmentEconomic environment Product soldProduct sold

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Sales Compensation PackagesSales Compensation Packages Guaranteed base salaryGuaranteed base salary Guaranteed base salary + commissionGuaranteed base salary + commission Guaranteed base salary + bonusGuaranteed base salary + bonus Guaranteed base salary + commission + bonusGuaranteed base salary + commission + bonus Commission onlyCommission only Combination planCombination plan

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Contingent WorkersContingent Workers Types include a person who worksTypes include a person who works

– Through a temporary help agencyThrough a temporary help agency

– On an on-call basisOn an on-call basis

– As an independent contractorAs an independent contractor

Typical salary arrangementsTypical salary arrangements– Workers in first two categories often earn less than Workers in first two categories often earn less than

workers in traditional arrangementsworkers in traditional arrangements

– Independent contractors often earn moreIndependent contractors often earn more

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Key Issues in Contingent Workforce Key Issues in Contingent Workforce CompensationCompensation

Identify ways to deal with equity issuesIdentify ways to deal with equity issues

– View workers as pool ofView workers as pool ofcandidates for morecandidates for morepermanent hiring statuspermanent hiring status

– Champion idea ofChampion idea ofboundary less careersboundary less careers