1. Variable Pay and Executive Compensation
Chapter 12
14e

2. Learning Objectives
Define variable pay and identify three elements of successful pay-for-performance plans
Discuss three types of individual incentives
Identify key concerns that must be addressed when designing group/team variable pay plans

3. Learning Objectives
Specify why profit sharing and employee stock ownership are common organizational incentive plans
Explain three ways that sales employees are typically compensated
Indicate the components of executive compensation and discuss criticisms of executive compensation levels

4. Variable: Incentives for Performance
Variable pay - Compensation tied to performance
Individual
Group/ team
Organizational
Beneficial for both employees and employer
Employers - More output per employee
Employee - More pay

5. Why Use Variable Pay? Variable Pay Assumptions
Some people perform better and are more productive than others
Better performing employees should receive more compensation
Some jobs contribute more to organizational success than others
Total compensation should be tied directly to performance and results

6. Figure12.1 - A Variety of Possible Incentives

7. Developing Successful Pay-for-Performance Plans
Reasons for Pay-for-Performance Plans
Enhance results and reward employees financially
Link strategic goals and employee performance
Reward and recognize employee performance
Promote achievement of HR objectives

8. Combating Variable Pay Complexity
Develop clear, understandable 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

9. Figure12.2 - Factors for Successful Variable Pay Plans

10. Combating Variable Pay Complexity

11. Figure12.3 - Categories of Variable Pay

12. Individual Incentives

13. Individual Incentives
Piece-rate systems
Straight piece-rate system
Wages are determined by multiplying the number of units produced by the piece rate for one unit
Differential piece-rate system
Pays employees one piece-rate wage for units produced up to a standard output and a higher piece-rate wage for units produced over the standard

14. Individual Incentives
Bonus
One-time payment that does not become part of the employee’s base pay
Massive kinked bonuses
Very large all or nothing bonus
Spot bonuses
Can be awarded at any time

15. Individual Incentives
Nonmonetary incentives
Performance awards
Incentive rewards for performance
Recognition awards
Recognizes individual employees for their work
Service awards
Recognize service

16. Individual Incentives
Commissions
Percentage of the money taken in on sales
Usually given in addition to a salary to an agent or sales person

17. Figure12.4 - Purposes of Nonmonetary Incentives

18. Figure12.5 - Possible Reasons for Using Group/Team Variable Pay

19. Design of Group/Team Incentive Plans

20. Group/Team Incentives
Distributing rewards
Same-size reward for each member
Different-size reward for each member

21. Group/Team Incentives
Challenges with group/team incentives
Rewards distributed in equal amounts to all members may be perceived as unfair
Free riders - Member of the group who contributes little
Team size - Individual efforts of employees have little effect on the total performance of the group in large groups

22. Figure12.6 - Conditions for Successful Group/Team Incentives

23. Types of Group/Team Incentives
Group/team results
Group production
Cost savings
Quality improvement
Gainsharing: Sharing with employees of greater-than-expected gains in productivity through increased discretionary efforts
Improshare
Scanlon plan

24. Organizational Incentives
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
Profit Sharing

25. Figure12.7 - Framework Choices for a Profit-Sharing Plan

26. Employee Stock Plans Stock option plan
Employees can buy 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 the organization they work

27. Advantages and Disadvantages of ESOP
Favorable tax treatment for ESOP earnings
Employees motivated by their ownership stake in the firm
Disadvantages
Retirement benefit tied to the firm’s future performance

28. Figure12.8 - Metric Options for Variable Pay Plans

29. Types of Sales Compensation Plans
Salary-only
All compensation is paid as a base wage with no incentives
Straight commission
Compensation is computed as a percentage of sales in units or dollars
Draw system makes advance payments against future commissions to the salesperson

30. Types of Sales Compensation Plans
Salary-plus-commission or bonuses
Compensation is part salary for income stability and part commission for incentive

31. Types of Commission
Straight commission system - Percentage of the value of the sales is given to the sales person
Advantage - Requires the sales representative to sell in order to earn
Disadvantage - Offers no security for the sales staff
Draw: Amount advanced against, and repaid from, future commissions earned

32. Types of Commission Salary-plus-commission or bonuses
Compensation is part salary for income stability and part commission for incentive

33. Figure12.9 - Sales Metric Possibilities

34. Executive Compensation
Handled differently than other employees’ pay
Usually more than business unit heads with similar responsibilities
Is a measure of the power that a CEO brings to the organizational relationship

35. Executive Compensation
Controversy
Should include an element of risk for the executive
Based more on peer group practices than on a rational executive compensation strategy

36. Figure 12–10 Difficult CEO Responsibilities

37. Changes in the Context of Executive Compensation
Say on Pay
Publically listed companies must allow share holders to vote on executive compensation
Clawbacks
Allows a company to recover any incentive based pay that was paid out during the prior 3 years if it would not have been paid under restated financial statements

38. Figure12.11 - Components of Executive Compensation Packages

39. Reasonableness of Executive Compensation
Executive Compensation Considerations and Concerns
Would another company hire this person as an executive?
How does the executive’s compensation compare with that for executives in similar companies?
What would an investor pay for the level of performance of the executive?
Is the executive’s pay consistent with pay for other employees within the company?

40. Figure12.12 - Common Executive Compensation Criticisms

41. Executive Compensation and Boards of Directors
In most organizations the board of directors is the major policy-setting entity
Must approve executive compensation packages
Compensation committee : Subgroup of the board of directors that is composed of directors who are not officers of the firm