Incentive Pay Chapter # 8 Resource person: Furqan-ul-haq Siddiqui Reference Books: Strategic Compensation: A Human Resource Management Approach (6 th Edition), Joseph J., Martocchio Joe, Pearson Education. Strategic Compensation in Canada (4th Edition), Richard J. Long, Nelson Education Ltd. Internet
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Incentive Pay Chapter # 8 Resource person: Furqan-ul-haq Siddiqui Reference Books: Strategic Compensation: A Human Resource Management Approach (6 th.
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Incentive Pay
Chapter # 8
Resource person: Furqan-ul-haq Siddiqui
Reference Books:
Strategic Compensation: A Human Resource Management Approach (6th Edition), Joseph J., Martocchio Joe, Pearson Education.Strategic Compensation in Canada (4th Edition), Richard J. Long, Nelson Education Ltd.Internet
Incentive Pay or Variable Pay
Compensation fluctuates according to A pre-established formula Individual or group goals Company earnings
other than fixed pay Controls costs Motivates employees
Incentive Pay Categories
Individual
Group
Company-wide
Performance Measures
Individual incentive plans
Quantity of work output
Quality of work output
Monthly sales
Work safety record
Work attendance
Types of Individual Incentive Plans
Piecework plans
Management incentive plans
Behavior encouragement plans
Referral plans
Piecework Plans
Awards based on individual production or objective standards
Awards based on individual performance standards using objective & Subjective criteria
Quantity and / or quality goals
Individual Incentive Plan Advantages
Helps relate pay to performance
Promotes equitable distribution of compensation
Helps retain best performers Compatible with America’s individualistic culture
Disadvantages
May promote inflexibility Unrealistic standards may hamper employee motivation
Factors beyond employee’s control may affect outcomes Factors not rewarded may be overlooked
Group Incentive Plans
Rewards employees for their collective performance Use has increased in industry
2 types Team - based or small group Gain sharing
Allocation Methods Equal incentive payments
Differential payments based on
contribution to goals
Differential payments according
to base pay
Gain Sharing
Gainsharing is a system of management used by a business to increase profitability by motivating employees to improve their performance through involvement and participation. As their performance improves, employees share financially in the gain (improvement).
In gain sharing, gain means savings. An employee or team shares in the amount saved by a business as a result of a suggestion he made or task performed.
Company - Wide Incentive Plans
Rewards employees when company meets performance standards
Sales volume, which indicates the amount of sales that should be achieved for a specified period.
New business, which refers to making sales from customers who have not made previous purchases.
Retaining sales, which simply targets a level of sales from existing customers.
Product mix, which rewards sales professionals for selling a pre-established mix of a company’s product goods or services.
Win-back sales, which is designed to motivate sales professionals to regain business from former.
Designing Sales Incentive Compensation Plans Alternative Sales Compensation Choosing the appropriate plan depends on the
company’s competitive strategy Five main alternativesa. Salary-only b. Salary-plus-bonusc. Salary-plus-commissiond. Commission-plus-drawe. Commission-only
Designing Sales Incentive Compensation Plans Multiple-tiered commissions Award sales professionals with higher
percentages of the sales made in a given period,
If the sales level exceeds a pre-determined level
Example: Multiple-Tiered Commissions* 8% commissions per unit for sales up to 1000
units* 12% commissions per unit for sales exceeding
1000 units
Executive Compensation
Executive Compensation is a broad term for the financial compensation awarded to a firm's executives. Executive Compensation packages are designed by a company's Board of Directors, typically by the Compensation Committee consisting of independent directors, with the purpose of incentivizing the executive team, who have a significant impact on company strategy, decision-making, and value creation (Pay for Performance) as well as enhancing Executive Retention.
Executive Compensation There are following basic features of executive
compensation or remuneration: Salary Short-term incentives (STIs), sometimes known as bonuses Long-term incentive plans (LTIPs) Employee benefits and paid expenses (perquisites) Insurance and Golden parachute Plans Stocks
The President & Chief Executive Officer (CEO) of United Bank Limited (UBL) is the highest paid banker in Pakistan who had drawn annual remuneration of approximately Rs. 246.5 million in year 2014.
His monthly salary package of UBL’s President and CEO, Mr. Wajahat Husain, is Rs. 20 million or Rs. 2 crore. UBL CEO is currently the highest paid bankers in Pakistan. His salary package increased by 78.2% in 2014 as compared to the preceding year. In year 2014, the financial position of UBL even went up 17.8% to Rs 21.9 billion in the case of net profit, and 33.3% in stock on the Karachi Stock Exchange. In terms of profit, it is the third largest bank of the country after Habib Bank Limited (Rs. 31.1 billion), and Muslim Commercial Bank Limited (Rs. 24.3 billion).
One-dollar Salary A number of top executives in large businesses and
governments work for an annual salary of one dollar.
Many executives who take a one-dollar salary also choose not to take any other forms of compensation. In some cases, in lieu of a salary, the executives receive stock options and bonuses.
The assumption is that stock prices will reflect the actual value of a company, which reflect the management performance of the company.
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Facebook founder and CEO Mark Zuckerberg is now the company’s lowest-paid employee, according to its latest proxy filing. Zuckerberg — worth $27.8 billion mostly in Facebook stock — requested an annual wage of $1 in 2013, joining the ranks of a handful of other very wealthy CEOs who take a symbolically negligible base pay.
Zuckerberg, who earned $770,000 in combined salary and bonus in 2012, is now in good company among giants of the tech sector. Google's GOOG -1.73% Sergey Brin and Larry Page, worth roughly $30 billion a piece, have been drawing a $1 salary for a decade now.
“The dollar salary really for them is meant to signify that they have large stakes in their company. The value they’re going to receive – the compensation they’ll earn – is coming solely from their stock,” “You’re not going to question whether or not Larry Page is interested in growing a company’s stock as a shareholder. As one of the largest shareholders, he’s all in.”
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Related Article
Kerr, S. (1995). On the folly of rewarding A, while hoping for B. The Academy of Management Executive (1993-2005), 7-14.