1. © 2017 Cengage Learning ®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. CHAPTER 12 Variable Pay and Executive Compensation

2. © 2017 Cengage Learning ®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Variable Pay: Incentive for Performance  Basic assumptions:  Some people or groups contribute more to organizational success than do others  Some people perform better and are more productive than are others  Employees or groups who perform better or contribute more should receive greater compensation

3. © 2017 Cengage Learning ®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure 12-1: A Variety of Possible Incentives

4. © 2017 Cengage Learning ®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Effective Variable Pay Link strategic goals and employee performance Enhance results and reward employees financially Reward and recognize employee performance Promote achievement of HR objectives Reduce fixed costs Reasons for Variable Pay Plans

5. © 2017 Cengage Learning ®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Combating Variable Pay Complexity Develop clear 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

6. © 2017 Cengage Learning ®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure 12-2: Factors for Effective Variable Pay Plans

7. © 2017 Cengage Learning ®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Effective Variable Pay  Combating variable pay complexity:  Develop clear plans  Use realistic performance measures  Keep plans current and linked to objectives  Link results to payouts  Identify incentives separately from base pay  Fit the plan to the organization  Reward appropriate actions

8. © 2017 Cengage Learning ®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure 12-4: Levels of Variable Pay

9. © 2017 Cengage Learning ®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Individual Incentives Effective Individual Incentive Plans Individual performance must be identified Individual competitiveness must be desirable Individuals must be in control of the place of production Individualism must be stressed in the organizational culture

10. © 2017 Cengage Learning ®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure 12-5: Purposes of Nonmonetary Incentives

11. © 2017 Cengage Learning ®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure 12-6: Possible Reasons for Using Work Unit or Team Variable Pay

12. © 2017 Cengage Learning ®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Design of Work Unit/Team Variable Pay Work Unit/Team Variable Pay Issues Distribution of Work Unit/Team Incentives Timing of Work Unit/Team Incentives Determining Work Unit/Team Incentive Amounts

13. © 2017 Cengage Learning ®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Work Unit/Team Incentives  Challenges with work unit/team incentives:  Rewards distributed in equal amounts to all members may be perceived as unfair  Free rider : Member of the group who contributes little  Group size: Individual efforts of employees have little effect on the total performance of the group in large groups

14. © 2017 Cengage Learning ®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure 12-7: Conditions for Effective Work Unit or Team Incentives

15. © 2017 Cengage Learning ®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Types of Work Unit/Team Incentives  Work Unit/Team Results:  Group Production  Cost Savings  Customer Satisfaction  Quality Improvement  Gainsharing: Sharing with employees greater than expected gains in profits and/or productivity

16. © 2017 Cengage Learning ®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Organizational Incentives Primary Objectives Improve organizational results Attract or retain employees Improve product/service quality Enhance employee morale Focus employees on goals Drawbacks Disclosure of financial information Variability of profits from year to year Rewards not obviously linked to employee efforts Profit Sharing

17. © 2017 Cengage Learning ®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure 12-9: Plan Design Choices for Profit Sharing Programs

18. © 2017 Cengage Learning ®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Employee Stock Plans  Stock option plan: 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 plan (ESOP): Gives employees significant stock ownership in their organizations

19. © 2017 Cengage Learning ®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure 12-10: Possible Metrics for Variable Pay Plans

20. © 2017 Cengage Learning ®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Types of Sales Compensation Plans  Salary Only  All compensation is paid as a base wage  Commission Plans  Commission: Percentage of the revenue generated by sales that is given to an agent or salesperson  Straight Commission  Compensation is computed as a percentage of sales in units or dollars  Draw: Amount advanced against, and repaid from, future commissions earned

21. © 2017 Cengage Learning ®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Types of Sales Compensation Plans  Salary Plus Commission  Salary plus commission: Combines the stability of a salary with a commission based on sales generated  Bonuses  Percentage of base pay tied to how well employee meets targets

22. © 2017 Cengage Learning ®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure 12-11: Possible Metrics for Sales Compensation

23. © 2017 Cengage Learning ®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Executive Compensation  Handled differently from employee pay  CEO responsibilities:  Establish strategic direction for the organization  Create shareholder value  Ensure the sustainability of the enterprise

24. © 2017 Cengage Learning ®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Reigning in Executive Compensation  Say on Pay  Public corporations must allow shareholders to vote on the presumed fairness of executive pay packages  Clawbacks  Allows for the recovery of incentive-based pay that was provided to executives and later determined to have been paid under false pretenses

25. © 2017 Cengage Learning ®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure 12-13: Point/Counterpoint Regarding Executive Compensation