Presentasi MCS Management Compensation

MANAGEMENT COMPENSATION

MANAGEMENT COMPENSATIONResearch Findings on Organizational IncentivesIndividuals tend to be more strongly motivated by the potential of earning rewards than by the fear of punishment.A personal reward is relative or situational.Individuals are highly motivated when they received reports, or feedback, about their performance.Incentives beome less effective as the period between an action and feedback on it increases.Motivation is weakest when the person believes an incentive is either unattainable or too easily attainable.The incentive that a budget or other statement of objective provides is strongest when managers work with their superiors to arrive at the budgeted amounts.Characteristics of Incentive Compensation PlansIncentives for Business Unit ManagersA wide array of options exists in developing an incentive compensation package for business unit managersTypes of IncentivesThere are two types of Incentives:Financial RewardsPsychological and Social Rewards

In this chapter, we discuss the financial incentives for business managers, while recognizing that managers motivation is influenced by both financial and nonfinancial incentives.Size of Bonus Relative to SalaryUpper CutoffsIs the level of performance at which a maximum bonus is reached.Lower CutoffsIs the level below which no bonus awards will be made.

Bonus BasisA business unit managers incentive bonus could be based on:Total Corporate Profits, orBusiness Unit Profits, orCombination of the Two.

Performance CriteriaA difficult problem in the incentive bonus plan for business unit managers is to decide which criteria shall be used to determine the bonus.Financial CriteriaAdjustment for UncontrollableBenefits and Shortcomings of Short-Term Financial TargetsMechanism to Overcome Short-Term BiasBenchmarks for ComparisonPerformance CriteriaFinancial CriteriaIf the Business Unit is a profit center, choosing financial criteria could include Contribution Margin, Direct Business Unit Profit, Controllable Business Unit Profit, Income Taxes, and Net Income.If the Unit is an Investment Center, the decisions need to be made in three areas: Definition of Profit, Definition of Investment, and choice between ROI and EVA.Performance CriteriaAdjustments for Uncontrollable FactorsTypically, there are two kinds of influencesRemove expenses that result from decisions made by executives above the business unit level.Another adjustment eliminates the effects of losses caused by acts of nature and accidents not caused by the managers negligence.Performance CriteriaBenefits and Shortcomings of Short-Term Financial Targetsit is a good idea to link business unit managers bonus to achieving annual financial targets (after making allowances for uncontrollable events).Performance CriteriaMechanisms to Overcome Short-Term BiasSupplementing financial criteria with additional incentive mechanisms may overcome the short-term orientation of annual financial goals.

Performance CriteriaBenchmarks for ComparisonA business unit managers performance can be apraised by comparing actual results to the profit budget, past performance, or competitors performance.Bonus Determination ApproachA bonus award for a business unit manaher can be determined by formula-based, or by subjective, or by combination of the two.Form of Bonus PaymentCashStockStock OptionsPhantom SharesPerformance SharesAgency TheoryAgency theory explores how contracts and incentives can be written to motivate individuals to achieve goal congruence.It attempts to describe the major factors that should be considered in designing incentive contracts.ConceptsAn agency relationship exists whenever one party (the principal) hires another party (the agent) to perform some service and, in so doing.One of the key elements of agency theory is that principals and agents have divergent preferences or objectives. Incentive contracts can reduce these divergent preferences.Divergent Objectives of Principals and AgentsFor example, some agents may prefer leisure to hard work or effort.Leisure is assumed to be the opposite of effort. Managers efforts increase the value of the firm, while leisure does not. An agents preference for leisure over effort is called work aversion.Agents and principals alse diverge with respect to risk preferences.

Nonobservability of Agents ActionsDivergent preferences associated with compensation and perquisites arise whenever the principal cannot easily monitor the agents actions.The divergence of preferences between the principal and agent, and the agents private information, may lead the agent to misrepresent information to the principal. The misrepretation is of such a general nature that the name moral hazard has been given to the situation in which an agent being controlled is motivated to misrepresent private information by natuure of the control system.Control MechanismMonitoringIncentive ContractingCEO Compensation and Stock Ownership PlansBusiness Unit Managers and Accounting-Based IncentivesA CritiqueAgency theory was inverted in the 1960s and since then has been written about extensively in academic journals. But the theory has had no discrenible practical influence on the management control process.