Human Resource Management Variable Pay and Executive Compensation

Human Resource Management Variable Pay and Executive Compensation Chapter 12 Robert L. Mathis | John H. Jackson | Sean R. Valentine 14 e © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

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 © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

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 © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Variable: Incentives for Performance Variable pay - Compensation tied to performance Individual Group/ team Organizational Beneficial for both employees and employer Employers Employee - More output per employee - More pay © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Why Use Variable Pay? Some people perform better and are more productive than others Better performing employees should receive more compensation Variable Pay Assumptions Total compensation should be tied directly to performance and results Some jobs contribute more to organizational success than others © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Figure 12. 1 - A Variety of Possible Incentives © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Developing Successful Pay-for. Performance Plans Link strategic goals and employee performance Enhance results and reward employees financially Reasons for Pay-for-Performance Plans Reward and recognize employee performance Promote achievement of HR objectives © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Combating Variable Pay Complexity Develop clear, understandable plans that are continually communicated Use realistic performance measures Keep plans current and linked to organizational objectives Successful Incentive Plans Link results to payouts that recognize differences Identify variable pay incentives separately from base pay © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Figure 12. 2 - Factors for Successful Variable Pay Plans © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Combating Variable Pay Complexity © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Figure 12. 3 - Categories of Variable Pay © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Individual Incentives © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Individual Incentives Piece-rate Straight systems 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 © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Individual Incentives Bonus One-time payment that does not become part of the employee’s base pay Massive Very Spot kinked bonuses large all or nothing bonuses Can be awarded at any time © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Individual Incentives Nonmonetary Performance Incentive awards rewards for performance Recognition awards Recognizes Service incentives individual employees for their work awards Recognize service © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Individual Incentives Commissions Percentage Usually of the money taken in on sales given in addition to a salary to an agent or sales person © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Figure 12. 4 - Purposes of Nonmonetary Incentives © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Figure 12. 5 - Possible Reasons for Using Group/Team Variable Pay © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Design of Group/Team Incentive Plans © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Group/Team Incentives Distributing Same-size rewards reward for each member Different-size reward for each member © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

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 © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Figure 12. 6 - Conditions for Successful Group/Team Incentives © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Types of Group/Team Incentives Group/team Group Cost results production savings Quality improvement Gainsharing: Sharing with employees of greaterthan-expected gains in productivity through increased discretionary efforts Improshare Scanlon plan © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Organizational Incentives Profit Sharing Primary Objectives Drawbacks • Increase productivity and organizational performance • Disclosure of financial information • Attract or retain employees • Variability of profits from year to year • Improve product/service quality • Enhance employee morale • Profit results not strongly tied to employee efforts © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Figure 12. 7 - Framework Choices for a Profit-Sharing Plan © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

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 © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Advantages and Disadvantages of ESOP Advantages 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 © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Figure 12. 8 - Metric Options for Variable Pay Plans © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

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 © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Types of Sales Compensation Plans Salary-plus-commission or bonuses Compensation is part salary for income stability and part commission for incentive © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

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 © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Types of Commission Salary-plus-commission or bonuses Compensation is part salary for income stability and part commission for incentive © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Figure 12. 9 - Sales Metric Possibilities © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

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 © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

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 © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Figure 12– 10 Difficult CEO Responsibilities © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

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 © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Figure 12. 11 - Components of Executive Compensation Packages © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

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? Executive Compensation Considerations and Concerns 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? © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

Figure 12. 12 - Common Executive Compensation Criticisms © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.

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 © 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible Web site, in whole or in part.