Human Resource Management TENTH EDITON © 2003 Southwestern College Publishing. All rights reserved. PowerPoint Presentation by Charlie Cook Variable Pay and Executive Compensation Variable Pay and Executive Compensation Chapter 13 SECTION 4 Compensating Human Resources Robert L. Mathis  John H. Jackson

© 2002 Southwestern College Publishing. All rights reserved. 13–2 Learning Objectives After you have read this chapter, you should be able to: –Define variable pay and give examples of three types of variable pay. –Identify four guidelines for successful incentive programs. –Discuss three types of individual incentives. –Explain three different way that sales employees typically are compensated. –Identify key factors that must be addressed when using team variable pay plans.

© 2002 Southwestern College Publishing. All rights reserved. 13–3 Learning Objectives (cont’d) –Discuss why gainsharing, profitsharing, and employee stock options have grown as organizational incentive plans. –Identify the components of executive compensation and discuss criticisms of executive compensation levels.

© 2002 Southwestern College Publishing. All rights reserved. 13–4 Variable Pay: Incentives for Performance

© 2002 Southwestern College Publishing. All rights reserved. 13–5 Types of Variable Pay Plans Figure 13–1

© 2002 Southwestern College Publishing. All rights reserved. 13–6 Factors Affecting Variable Pay Plans Does the plan fit the organization? Are the right behaviors encouraged by the plan? Is the plan being administered properly? Variable Pay Plan Success

© 2002 Southwestern College Publishing. All rights reserved. 13–7 Factors for Successful Variable Pay Plans Figure 13–2

© 2002 Southwestern College Publishing. All rights reserved. 13–8 Individual Incentives Individualism Stressed in Organizational Culture Identification of Individual Performance Independent Work Individual Competitiveness Desired Individual Incentive Pay Plans

© 2002 Southwestern College Publishing. All rights reserved. 13–9 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.

© 2002 Southwestern College Publishing. All rights reserved. 13–10 Bonuses and Special Incentive Programs  Bonus –A one-time payment that does not become part of the employee’s base pay.  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.

© 2002 Southwestern College Publishing. All rights reserved. 13–11 Sources of Bonuses Figure 13–3 Source: Kathryn F. Clark, “Incentives Increase But Competitive Base Salary Key in Talent Race,” Human Resource Executive, June 2, 2000, 30. Used with permission.

© 2002 Southwestern College Publishing. All rights reserved. 13–12 Different Bases for Sales Incentives, In Order of Use Figure 13–4

© 2002 Southwestern College Publishing. All rights reserved. 13–13 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. Draw system make advance payments against future commissions to salesperson. –Salary Plus Commission or Bonus Compensation is part salary for income stability and part commission for incentive.

© 2002 Southwestern College Publishing. All rights reserved. 13–14 Why Organizations Establish Team Pay Plans Figure 13–5

© 2002 Southwestern College Publishing. All rights reserved. 13–15 Group/Team-Based Variable Pay Determining Individual Rewards Timing of Team Incentives Deciding the Allocation of Rewards Distributing Team Incentives

© 2002 Southwestern College Publishing. All rights reserved. 13–16 Conditions for Successful Team Incentives Figure 13–6

© 2002 Southwestern College Publishing. All rights reserved. 13–17 GainsharingGainsharing  Gainsharing –The sharing with employees of greater-than- expected gains in productivity. –Alternatives for rewards distribution: A flat amount for all employees Same percentage of base salary for all employees Percentage of the gains by category of employees A percentage based on individual performance against measures

© 2002 Southwestern College Publishing. All rights reserved. 13–18 Profit Sharing  Profit Sharing –A system to distribute a portion of the profits of the organization to employees. –Primary objectives: Improve productivity Recruit or retain employees Improve product/service quality Improve employee morale –Drawbacks Disclosure of financial information Variability of profits from year to year Profit results not strongly tied to employee efforts

© 2002 Southwestern College Publishing. All rights reserved. 13–19 Profit-Sharing Plan Framework Choices Figure 13–7

© 2002 Southwestern College Publishing. All rights reserved. 13–20 Employee Stock Ownership Plans (ESOPs)  Employee Stock Ownership Plans –A plan whereby employees gain stock ownership in the organization for which they work.  ESOP Advantages –Favorable tax treatment for ESOP earnings –Employees motivated by ownership in the firm  ESOP Disadvantages –Retirement benefit is tied to the firm’s performance –Management tool to fend off hostile takeover attempts.

© 2002 Southwestern College Publishing. All rights reserved. 13–21 U.S. CEO Remuneration Figure 13–8 Source: The Economist, May 8, 2000, 16.

© 2002 Southwestern College Publishing. All rights reserved. 13–22 Executive Compensation Components Figure 13–9

© 2002 Southwestern College Publishing. All rights reserved. 13–23 Common Executive Perks Figure 13–10

© 2002 Southwestern College Publishing. All rights reserved. 13–24 Arguments in the Executive Pay Debate Figure 13–11