1. R OBERT L. M ATHIS J OHN H. J ACKSON PowerPoint Presentation by Charlie Cook The University of West Alabama Copyright © 2005 Thomson Business & Professional Publishing. All rights reserved. Variable Pay and Executive Compensation Chapter 13 SECTION 4 Compensating Human Resources

2. Copyright © 2005 Thomson Business & Professional Publishing. All rights reserved.13–2 Learning Objectives After you have read this chapter, you should be able to:  Define variable pay and identify three elements of successful pay-for-performance plans.  Discuss three types of individual incentives.  Explain three ways that sales employees are typically compensated.  Identify key concerns that must be addressed when designing group/team variable pay plans.  Discuss why profit sharing and employee stock ownership are common organizational incentive plans.  Identify the components of executive compensation and discuss criticisms of executive compensation levels.

3. Copyright © 2005 Thomson Business & Professional Publishing. All rights reserved.13–3 Variable Pay: Incentives for Performance Variable Pay  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.

4. Copyright © 2005 Thomson Business & Professional Publishing. All rights reserved.13–4 Developing Successful Pay-for-Performance Plans Reasons for Adopting Pay or Incentive Plans:  Link more directly strategic business goals and employee performance.  Enhance organizational results and reward employees financially for their contributions.  Reward employees to recognize different levels of employee performance.  Achieve HR objectives, such as increasing retention, reducing turnover, recognizing training, or rewarding safety and attendance.

5. Copyright © 2005 Thomson Business & Professional Publishing. All rights reserved.13–5 Effective Incentive Plans Figure 13–1

6. Copyright © 2005 Thomson Business & Professional Publishing. All rights reserved.13–6 Metrics for Variable Pay Plans Figure 13–2

7. Copyright © 2005 Thomson Business & Professional Publishing. All rights reserved.13–7 Successes 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.  Keeping plans current and linked to organizational objectives.  Strong links among performance results and payouts that truly recognize performance differences.  Clear identification of variable pay incentives separately from base pay.

8. Copyright © 2005 Thomson Business & Professional Publishing. All rights reserved.13–8 Types of Variable Pay Plans Figure 13–3

9. Copyright © 2005 Thomson Business & Professional Publishing. All rights reserved.13–9 Individual Incentives Individualism Stressed in Organizational Culture Identification of Individual Performance Independent Work Individual Competitiveness Desired Individual Incentive Systems

10. Copyright © 2005 Thomson Business & Professional Publishing. All rights reserved.13–10 Piece-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 Systems  Employees 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.

11. Copyright © 2005 Thomson Business & Professional Publishing. All rights reserved.13–11 Individual Incentives: Bonuses Bonus  A one-time payment that does not become part of the employee’s base pay. Spot Bonus  A special type of bonus used is a “spot” bonus, so called because it can be awarded at any time.

12. Copyright © 2005 Thomson Business & Professional Publishing. All rights reserved.13–12 Special Incentive Programs Performance Awards  Cash or merchandise used as an incentive reward. Recognition Awards  Recognition of individuals for their performance or service to customers in areas targeted by the firm. Service Awards  Rewards to employees for lengthy service with an organization.

13. Copyright © 2005 Thomson Business & Professional Publishing. All rights reserved.13–13 Purposes of Special Incentives Figure 13–4

14. Copyright © 2005 Thomson Business & Professional Publishing. All rights reserved.13–14 Types of Sales Compensation Plans Salary-Only  All compensation is paid as a base wage with no incentives. Commission  Straight Commission  Compensation 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 Bonuses  Compensation is part salary for income stability and part commission for incentive.

15. Copyright © 2005 Thomson Business & Professional Publishing. All rights reserved.13–15 Determining Sales Effectiveness Figure 13–5

16. Copyright © 2005 Thomson Business & Professional Publishing. All rights reserved.13–16 Why Organizations Establish Variable Pay Plans for Groups/Teams Figure 13–6

17. Copyright © 2005 Thomson Business & Professional Publishing. All rights reserved.13–17 Group/Team Incentives Distribution of Group/Team Incentives Timing of Group/Team Incentives Decision Making About Group/Team Amounts Design of Group/Team Incentive Plans

18. Copyright © 2005 Thomson Business & Professional Publishing. All rights reserved.13–18 Group/Team Incentives (cont’d) Distributing Rewards  Same-size reward for each member  Different-size reward for each member Problems with Group/Team Incentives  Rewards 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.

19. Copyright © 2005 Thomson Business & Professional Publishing. All rights reserved.13–19 Conditions for Successful Group/Team Incentives Figure 13–7

20. Copyright © 2005 Thomson Business & Professional Publishing. All rights reserved.13–20 Types of Group/Team Incentives Group/Team Results  “Self-funding” pay plans for groups/teams that reward through improved organizational results on the basis of group output, cost savings, or quality improvement. Gainsharing (Teamsharing or Goal Sharing)  The sharing with employees of greater-than-expected gains in productivity through increased discretionary efforts.  Improshare  Scanlon Plan

21. Copyright © 2005 Thomson Business & Professional Publishing. All rights reserved.13–21 Organizational Incentives Profit Sharing  A system to distribute a portion of the profits of the organization to employees.  Primary objectives:  Increase productivity and organizational performance  Attract or retain employees  Improve product/service quality  Enhance employee morale  Drawbacks  Disclosure of financial information  Variability of profits from year to year  Profit results not strongly tied to employee efforts

22. Copyright © 2005 Thomson Business & Professional Publishing. All rights reserved.13–22 Framework Choices for a Profit-Sharing Plan Figure 13–8

23. Copyright © 2005 Thomson Business & Professional Publishing. All rights reserved.13–23 Employee 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.

24. Copyright © 2005 Thomson Business & Professional Publishing. All rights reserved.13–24 Employee Stock Plans Employee Stock Ownership Plan (ESOP)  A plan whereby employees gain significant stock ownership in the organization for which they work.  Advantages  Favorable tax treatment for ESOP earnings  Employees motivated by their ownership stake in the firm  Disadvantages  Retirement benefit is tied to the firm’s future performance  Management tool to fend off hostile takeover attempts.

25. Copyright © 2005 Thomson Business & Professional Publishing. All rights reserved.13–25 Components of Executive Compensation Packages Figure 13–9

26. Copyright © 2005 Thomson Business & Professional Publishing. All rights reserved.13–26 Executive Compensation “Reasonableness” of Executive Compensation  Would another company hire this person as an executive?  How does the executive’s compensation compare with that for executives in similar companies in the industry  Is 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?

27. Copyright © 2005 Thomson Business & Professional Publishing. All rights reserved.13–27 Common Executive Compensation Issues Figure 13–10