variable pay & comp

8/3/2019 variable pay & comp

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PowerPoint Presentation by Charlie CookThe University of West Alabama

PowerPoint Presentation by Charlie CookThe University of West Alabama

2008 Thomson/South-Western All rights reserved. 2008 Thomson/South-Western All rights reserved.

CHAPTER 13CHAPTER 13

Variable Pay and ExecutiveVariable Pay and ExecutiveCompensationCompensation

S E C T I O N 4 Compensating Human Resources


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2008 Thomson/South-Western. All rights reserved. 132

Chapter ObjectivesChapter Objectives

Chapter ObjectivesChapter Objectives

Define variable pay and identify three elements of successful payDefine variable pay and identify three elements of successful pay--

forfor--performance plans.performance plans.

Discuss three types of individual incentives.Discuss three types of individual incentives.

Identify key concerns that must be addressed when designingIdentify key concerns that must be addressed when designinggroup/team variable pay plans.group/team variable pay plans.

Discuss why profit sharing and employee stock ownership areDiscuss why profit sharing and employee stock ownership are

common organizational incentive plans.common organizational incentive plans.

Explain three ways that sales employees are typicallyExplain three ways that sales employees are typicallycompensated.compensated.

Identify the components of executive compensation and discussIdentify the components of executive compensation and discuss

criticisms of executive compensation levels.criticisms of executive compensation levels.

After you have read this chapter, you should be able to:After you have read this chapter, you should be able to:


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Variable Pay: Incentives for PerformanceVariable Pay: Incentives for Performance

Variable

Pay

Assumptions

Some people perform

better and are more

productive than others

Better performingemployees should

receive more

compensation

Some jobs contribute

more to

organizational

success than others

Part of compensation

should be tied directlyto performance and

results


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FIGURE 13-1

Examples of

Incentives


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Developing SuccessfulDeveloping SuccessfulPayPay--forfor--Performance PlansPerformance Plans

Pay-for-

PerformancePlans

Link strategic goalsand employee

performance

Enhance resultsand rewardemployeesfinancially

Reward andrecognize

employeeperformance

Promoteachievement ofHRobjectives


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FIGURE 13-2

Metric Options

for VariablePay Plans


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Successful Variable Pay PlansSuccessful 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 FailWhy Variable Pay Plans Fail

Plan incentivesare not seen as

desirable

Plan doesntreward doing a

good job

Plan doesnt

motivate

Plan rewardsteams/groups

rather thanindividuals

Plan doesntincrease base pay

EmployeesView of Variable

Pay Plan


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Developing Successful Incentive PlansDeveloping Successful Incentive Plans

Develop clear, understandable

plans that are continually

communicated.

Use realistic performance

measures.

Keep plans current and linked to

organizational objectives.

Link results to payouts that

recognize differences.

Identify variable pay incentives

separately from base pay.

Successful

Incentive

Plans


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Individual IncentivesIndividual Incentives

Necessary Conditions For

Individual Incentive Plans

Individualperformance must

be identified

Individualcompetitiveness

must be desired

Individualism mustbe stressed in the

organizational

culture


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FIGURE 13-3 Categories of Variable Pay Plans


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Individual IncentivesIndividual Incentives

PiecePiece--Rate SystemsRate SystemsStraight pieceStraight piece--rate systemrate system

Differential pieceDifferential piece--rate systemrate system

BonusBonus

Spot BonusesSpot Bonuses

Special Incentive ProgramsSpecial Incentive Programs

Performance awardsPerformance awards

Recognition awardsRecognition awardsService awardsService awards


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FIGURE 13-4 Purposes of Special Incentives


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Why Organizations Establish Variable PayWhy Organizations Establish Variable PayPlans for Groups/TeamsPlans for Groups/Teams

Group/Team-Based Variable

Pay Plans

Improve

productivity

Tie pay to team

performance

Improvecustomer service

or productionquality

Increaseemployee

retention


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Design of Group/Team Incentive PlansDesign of Group/Team Incentive Plans

Group/Team Incentive Plan

Issues

Distribution of

Group/TeamIncentives

Timing of

Group/TeamIncentives

Decisions About

Group/TeamIncentive

Amounts


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Group/Team Incentives (contd)Group/Team Incentives (contd)

Distributing RewardsDistributing RewardsSameSame--size reward for each membersize reward for each member

DifferentDifferent--size reward for each membersize reward for each member

Problems with Group/Team IncentivesProblems with Group/Team Incentives

Rewards in equal amounts may be perceived asRewards in equal amounts may be perceived as

unfair by employees who work harder, have moreunfair by employees who work harder, have more

capabilities, or perform more difficult jobs.capabilities, or perform more difficult jobs.

Group/team members may be unwilling to handleGroup/team members may be unwilling to handle

incentive decisions for coincentive decisions for co--workers.workers.

Many employees still expect to be paid according toMany employees still expect to be paid according to

individual performance.individual performance.


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FIGURE 13-5 Conditions for Successful Group/Team Incentives


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Types of Group/Team IncentivesTypes of Group/Team Incentives

Group/Team ResultsGroup/Team ResultsSelfSelf--funding pay plans for groups/teams that rewardfunding pay plans for groups/teams that reward

through improved organizational results on the basisthrough improved organizational results on the basis

of group output, cost savings, or quality improvement.of group output, cost savings, or quality improvement.

Gainsharing (Gainsharing (Teamsharing or Goal SharingTeamsharing or Goal Sharing))

The sharing with employees of greaterThe sharing with employees of greater--thanthan--expectedexpected

gains in productivity through increased discretionarygains in productivity through increased discretionary

efforts.efforts.

ImproshareImproshare

Scanlon PlanScanlon Plan


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Organizational IncentivesOrganizational Incentives

Primary Objectives

Increase productivity and

organizational performance

Attract or retain employees

Improve product/servicequality

Enhance employee morale

Drawbacks

Disclosure of financial

information

Variability of profits from year

to year Profit results not strongly tied

to employee efforts

Profit Sharing


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FIGURE 13-6 Framework Choices for a Profit-Sharing Plan


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Employee Stock PlansEmployee Stock Plans

Stock Option PlanStock Option PlanA plan that gives employees the right to purchase aA plan that gives employees the right to purchase a

fixed number of shares of company stock at afixed number of shares of company stock at a

specified price for a limited period of time.specified price for a limited period of time.

If market price of the stock is above the specifiedIf market price of the stock is above the specifiedoption price, employees can purchase the stockoption price, employees can purchase the stock

and sell it for a profit.and sell it for a profit.

If the market price of the stock is below theIf the market price of the stock is below the

specified option price, the stock option isspecified option price, the stock option is

underwater and is worthless to employees.underwater and is worthless to employees.


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Employee Stock PlansEmployee Stock Plans

Employee Stock Ownership Plan (ESOP)Employee Stock Ownership Plan (ESOP)A plan whereby employees gain significant stockA plan whereby employees gain significant stock

ownership in the organization for which they work.ownership in the organization for which they work.

AdvantagesAdvantages

Favorable tax treatment for ESOP earningsFavorable tax treatment for ESOP earningsEmployees motivated by their ownership stake inEmployees motivated by their ownership stake in

the firmthe firm

DisadvantagesDisadvantages

Retirement benefit is tied to the firms futureRetirement benefit is tied to the firms futureperformanceperformance

Management tool to fend off hostile takeoverManagement tool to fend off hostile takeover

attempts.attempts.


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Types of Sales Compensation PlansTypes of Sales Compensation Plans

SalarySalary--OnlyOnlyAll compensation is paid as a base wage with noAll compensation is paid as a base wage with no

incentives.incentives.

CommissionCommission

Straight CommissionStraight CommissionCompensation is computed as a percentage ofCompensation is computed as a percentage of

sales in units or dollars.sales in units or dollars.

The draw system make advance payments againstThe draw system make advance payments against

future commissions to salesperson.future commissions to salesperson.SalarySalary--PlusPlus--Commission orBonusesCommission orBonuses

Compensation is part salary for income stabilityCompensation is part salary for income stability

and part commission for incentive.and part commission for incentive.


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FIGURE 13-7 Sales Metric Possibilities


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Effectiveness of Sales Incentive PlansEffectiveness of Sales Incentive Plans

Frequent changes in sales plans

An entitlement culture

Pay without performance

Poor quota setting

Small differences in pay for top

and bottom performers

Causes of

Ineffectiveness

in Incentive

Plans


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Executive CompensationExecutive 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 CompensationReasonableness of Executive Compensation

ExecutiveCompensation

Considerations

and

Concerns

Would another company

hire this person as an

executive?

How does the executives

compensation comparewith that for executives in

similar companies?

What would an investor

pay for the level of

performance of the

executive?

Is the executives pay

consistent with pay for

other employees within

the company?


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FIGURE 13-8 Common Executive Compensation Criticisms

variable pay & comp

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