Chapter 11.ppt

Part 4: Compensating Human ResourcesChapter 11: Variable Pay and Executive CompensationPrepared by Linda Eligh, University of Western Ontario

Learning ObjectivesAfter 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.

Variable Pay: Incentives for PerformanceVariable 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.

Developing Successful Pay-for-Performance PlansReasons 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.

Effective Incentive Plans Fig. 11-1

Metrics for Variable Pay Plans Fig. 11-2

Successes and Failures of Variable Pay PlansSuccessful 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.

Types of Variable Pay Plans Fig. 11-3

Individual IncentivesIndividualism Stressed in Organizational CultureIdentification of Individual PerformanceIndependent WorkIndividual Competitiveness DesiredIndividual Incentive Systems

Individual Incentives: Piece-Rate SystemsStraight Piece-Rate SystemsWages are determined by multiplying the number of pieces produced by the piece rate for one unit.Differential Piece-Rate SystemsEmployees 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.

Individual Incentives: BonusesBonusA one-time payment that does not become part of the employees base pay.Spot BonusA special type of bonus used is a spot bonus, so called because it can be awarded at any time.

Special Incentive ProgramsPerformance AwardsCash or merchandise used as an incentive reward.Recognition AwardsRecognition of individuals for their performance or service to customers in areas targeted by the firm.Service AwardsRewards to employees for lengthy service with an organization.

Purposes of Special Incentives Fig. 11-4

Types of Sales Compensation PlansSalary-OnlyAll compensation is paid as a base wage with no incentives.CommissionStraight CommissionCompensation 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 BonusesCompensation is part salary for income stability and part commission for incentive.

Determining Sales Effectiveness Fig. 11-5

Why Organizations Establish Variable Pay Plans or Groups/Teams Fig. 11-6

Group/Team IncentivesDesign of Group/Team Incentive Plans

Group/Team Incentives (contd)Distributing RewardsSame-size reward for each memberDifferent-size reward for each memberProblems with Group/Team IncentivesRewards 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.

Conditions for Successful Group/Team Incentives Fig. 11-7

Types of Group/Team IncentivesGroup/Team ResultsSelf-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, RuckerEarnings-at Risk (EAR)Incentive plans designed to enhance performance by creating enough dissatisfaction with base wages that employees become more interested in directing behaviours to what is rewarded with incentive pay.

GainsharingImproshareImproved productivity through sharing planTime studies determine how many hours it should take to produce one unit of productWhen actual productivity is greater than the baseline, a percentage of savings is shared with employeesEasiest of the gainsharing plans to understand and installFocus is on quantity, not quality

Scanlon Plan Gains Example Fig. 11-8

Rucker Plan Gains Example Fig. 11-9

Organizational IncentivesProfit SharingA system to distribute a portion of the profits of the organization to employees.Primary objectives:Increase productivity and organizational performanceAttract or retain employeesImprove product/service qualityEnhance employee moraleDrawbacksDisclosure of financial informationVariability of profits from year to yearProfit results not strongly tied to employee efforts

Framework Choices for a Profit-Sharing Plan Fig. 11-10

Employee Stock PlansStock Option PlanA 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.

Employee Stock PlansEmployee Stock Ownership Plan (ESOP)A plan whereby employees gain significant stock ownership in the organization for which they work.AdvantagesFavourable tax treatment for ESOP earningsEmployees motivated by their ownership stake in the firmDisadvantagesRetirement benefit is tied to the firms future performanceManagement tool to fend off hostile takeover attempts

Components of Executive Compensation Packages Fig. 11-11

Performance Incentives: Long-Term vs. Short TermSarbanes-Oxley Act (SOX)U.S. Act containing numerous provisions that affect accounting and financial reporting requirements of different types of executive compensation. Mandates that CEOs and CFOs of companies listed on the U.S. stock exchanges must certify and sign off on interim and annual statements as well as their corporate governance framework.Penalties can be swift and severeDelisting of stock, heavy fines, prosecution of top executivesBill C-198 Canadas SOX equivalent

Executive CompensationReasonableness of Executive CompensationWould another company hire this person as an executive?How does the executives compensation compare with that for executives in similar companies in the industry?Is the executives pay consistent with pay for other employees within the company?What would an investor pay for the level of performance of the executive?

Common Executive Compensation Issues Fig. 11-12

Executive CompensationBoards of DirectorsMajor policy setting entity that must approve executive compensation packagesCompensation CommitteesUsually a subgroup of the Board of DirectorsComposed of Directors who are not officers of the firmMake recommendations to the Board on overall pay policiessalaries for top officerssupplemental compensation (stock options, bonuses)additional perks for executives

Compensation Committees CriticismsBase pay and bonuses of CEOs is often set by members of Board Compensation Committees who are themselves CEOs and who receive similar compensation packages in other companies.Compensation consultants and advisers to CEOs often collect large fees which can distort objectivity of advice provided.

Corrective ActionsChange composition of Board compensation committees to prohibit insider company officers from serving on them. Empower compensation committees to hire and pay compensation consultants without involving executive management.