Chapter 12 Incentive Plans and Executive Compensation

1. Chapter 12Incentive Plans and Executive Compensation

2. Variable pay: incentives for performance • Variable Pay: compensation linked to individual, group/team, and/or organizational performance • Incentives are tangible rewards for performance above normal expectations

3. Developing successful pay for performance plans • To link business goals to employee performance, enhance organizational results, recognize different levels of employee performance, achieve HR objectives like increase retention, reduce turnover, recognize training, and reward safety • Plan must fit organization’s strategies and culture, are appropriate actions rewarded, and is the plan administered properly?

4. Global Variable pay: goals may be different in different parts of world, laws may be different • Metrics for variable pay plans: ROI such as reducing unemployment ( p. 400, paragraph 1) • Organizational performance: actual change v planned change, revenue growth, ROI, average employee productivity change • Sales program: increase in market share, customer acquisition rate, growth of existing customer sales, and customer satisfaction • HR related: employee satisfaction, turnover costs, absenteeism cost, workers’ comp claims, and accident rates

5. Success and failure of variable pay plans • Some employees just don’t care • Some employees want monetary and others non monetary • Fails if too complex to understand • Success: clear understandable and well communicated plans, use realistic performance measures, keep plans current and linked to organizational objectives, clearly link performance results to payouts that truly recognize performance differences, and identify variable pay incentives separately from base pay

6. Three categories of variable pay • Individual: piece rate systems, bonuses, trips, merchandise, awards, sales compensation • Group/team: group team results, gain sharing/goal sharing, quality improvement, cost reduction • Organizational: profit sharing, employee stock plans, executive stock options, deferred compensation

7. Individual incentives • Individual performance must be identified • Individual competiveness must be desired • Individualism must be stressed in the organizational culture

8. Piece-rate systems • Straight piece-rate system: pay system in which wages are determined by multiplying the number of units produced by the piece rate for one unit ( garments made, assessments performed) • Differential piece-rate system: pay employees one piece rate wage for units produced up to a standard output and a higher piece rate wage for units produced over the standard

9. bonuses • One time payment that does not become part of the employee’s base pay • Can recognize performance of individual, team or organization as whole • Spot bonus: can be awarded at any time, such as for extra time worked

10. Special incentive programs • Performance awards: cash, merchandise, gift certificates, and travel • Recognition awards: employee of the month • Service awards: for years of service

11. Group/team incentives • Design • Distribution of incentives: same size for each member of different sixe for each member • Timing: should be close to performance of desired result and may be given more often in smaller amounts • Decision making about amounts: members may vote on how to distribute to coworkers

12. Group team incentive challenges • Reward team members equally OR equitably is problematic • Groups should not be too big

13. Types of group/team incentives • Group/team results: the incentive is self funded due to improvement of organizational results • Gain sharing/team sharing, or goal sharing: system of sharing with employees greater than expected gains in profits and/or productivity • Figure 12-6: when it works and when it doesn’t

14. Organizational incentives • Profit sharing: system to distribute a portion of the profits of an organization to employees • Profit sharing can be lots or little, far removed from employees efforts, and viewed with distrust in accurate financial information

15. Employee stock plans • Stock option plan: 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 • Employee stock ownership plans (ESOP): plan designed to give employees significant stock ownership in their employers.

16. Sales compensation • Salary only for first 6 months of new job or to only serve or retain existing customers • Straight commission: commission or compensation computed as a percentage of the sales in units or dollars is ALL you get! • Draw: amount advanced against, and repaid from, future commissions earned by the employee • Salary plus commission or bonuses: salary and commission AND • Lump sum bonus: the more sales for all results in more reward

17. Sales compensation challenges • Technology and sales compensation programs • Sales performance metrics • Effectiveness of sales incentive plans

18. Executive compensation • Elements of executive compensation: salaries, benefits, perquisites (perks), annual incentives and bonuses, long term performance incentives • Global executive compensation • Reasonableness of executive compensation • Link between executive compensation and corporate performance • Executive compensation and Boards of Directors • Compensation committee: subgroup of the board of directors that is composed of directors who are not officers of the firm