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

Copyright © 2005 Thomson Business & Professional Publishing. All rights reserved.13–2 Types of Variable Pay Plans Figure 13–3

Copyright © 2005 Thomson Business & Professional Publishing. All rights reserved.13–3 Types of Sales Compensation Plans Salary-Only 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.

Copyright © 2005 Thomson Business & Professional Publishing. All rights reserved.13–4 Determining Sales Effectiveness Figure 13–5

Copyright © 2005 Thomson Business & Professional Publishing. All rights reserved.13–5 Special Incentive Programs Performance Awards Recognition Awards Service Awards Bonus Spot Bonus

Copyright © 2005 Thomson Business & Professional Publishing. All rights reserved.13–6 Other Types of Organizational/Team Incentives Profit Sharing Gainsharing (Teamsharing or Goal Sharing) Stock Option Plan Employee Stock Ownership Plan (ESOP)

Copyright © 2005 Thomson Business & Professional Publishing. All rights reserved.13–7 Types of Benefits Figure 14–4

Copyright © 2005 Thomson Business & Professional Publishing. All rights reserved.13–8 Organizational Incentives  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

Copyright © 2005 Thomson Business & Professional Publishing. All rights reserved.13–9 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

Copyright © 2005 Thomson Business & Professional Publishing. All rights reserved.13–10 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.

Copyright © 2005 Thomson Business & Professional Publishing. All rights reserved.13–11 Successes and Failures of Variable Pay Plans Successful incentive plans require:  Clearly communicated.  Realistic performance measures.  Current plans and linked to organizational objectives.  Strong links among performance results and payouts.  Clear identification of variable pay incentives separately from base pay.

Copyright © 2005 Thomson Business & Professional Publishing. All rights reserved.13–12 Learning Objectives  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.

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

Copyright © 2005 Thomson Business & Professional Publishing. All rights reserved.13–14 Group/Team Incentives (cont’d) 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.

Copyright © 2005 Thomson Business & Professional Publishing. All rights reserved.13–15 Employee Stock Plans  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.

Copyright © 2005 Thomson Business & Professional Publishing. All rights reserved.13–16 Employee Stock Plans  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.

Copyright © 2005 Thomson Business & Professional Publishing. All rights reserved.13–17 Components of Executive Compensation Packages Figure 13–9

Copyright © 2005 Thomson Business & Professional Publishing. All rights reserved.13–18 Common Executive Compensation Issues Figure 13–10