Presentation on theme: "Variable Pay and Executive Compensation"— Presentation transcript:
1Variable Pay and Executive Compensation Chapter 12
2CEO Pay CEO Pay Made in America—My Story Sam Walton and John Huey (1993)“A lot of what goes on these days with high-flying companies and these overpaid CEO’s who’re really looting from the top and aren’t watching out for anyone but themselves, really upsets me.”CEO Pay
3Write it downIf you were creating an executive compensation plan, what criteria would you include?
4Variable Pay: Incentives for Performance 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.
6Successes 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.Strong links among performance results and payouts that truly recognize performance differences.Clear identification of variable pay incentives separately from base pay.
8Piece-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 SystemsEmployees 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.
9Individual Incentives: Bonuses A one-time payment that does not become part of the employee’s base pay.Spot BonusA special type of bonus used is a “spot” bonus, so called because it can be awarded at any time.
10Special Incentive Programs Performance AwardsCash or merchandise used as an incentive reward.Recognition AwardsRecognition of individuals for their performance or service to customers in areas targeted by the firm.Service AwardsRewards to employees for lengthy service with an organization.
11Types of Sales Compensation Plans Salary-OnlyAll compensation is paid as a base wage with no incentives.CommissionStraight CommissionCompensation 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 BonusesCompensation is part salary for income stability and part commission for incentive.
13Group/Team Incentives (cont’d) Distributing RewardsSame-size reward for each memberDifferent-size reward for each memberProblems with Group/Team IncentivesRewards 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.Social LoafingThe folly of rewarding A and hoping for B
15Organizational Incentives Profit SharingA system to distribute a portion of the profits of the organization to employees.Primary objectives:Increase productivity and organizational performanceAttract or retain employeesImprove product/service qualityEnhance employee moraleDrawbacksDisclosure of financial informationVariability of profits from year to yearProfit results not strongly tied to employee efforts
17Employee Stock Plans Stock Option Plan 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.
18Employee Stock Plans Employee Stock Ownership Plan (ESOP) A plan whereby employees gain significant stock ownership in the organization for which they work.AdvantagesFavorable tax treatment for ESOP earningsEmployees motivated by their ownership stake in the firmDisadvantagesRetirement benefit is tied to the firm’s future performanceManagement tool to fend off hostile takeover attempts.
20Executive Compensation “Reasonableness” of Executive CompensationWould another company hire this person as an executive?How does the executive’s compensation compare with that for executives in similar companies in the industryIs 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?Investors are ownersWe as managers are stewards (agency theory)