Chapter 13 Variable Pay and Executive Compensation

Copyright © 2005 Thomson Business & Professional Publishing.
All rights reserved.
ROBERT L. MATHIS
JOHN H. JACKSON
PowerPoint Presentation by Charlie Cook
The University of West Alabama
Variable Pay andVariable Pay and
Executive CompensationExecutive Compensation
Chapter 13Chapter 13
SECTION 4SECTION 4
CompensatingCompensating
Human ResourcesHuman Resources

Copyright © 2005 Thomson Business & Professional 13–2
Learning ObjectivesLearning ObjectivesLearning ObjectivesLearning Objectives
• After 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: Incentives for PerformanceVariable Pay: Incentives for PerformanceVariable Pay: Incentives for Performance
• Variable 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
Plans
Developing Successful Pay-for-Performance
Plans
• Reasons 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 PlansEffective Incentive PlansEffective Incentive PlansEffective Incentive Plans
Figure 13–1

Metrics for Variable Pay PlansMetrics for Variable Pay PlansMetrics for Variable Pay PlansMetrics for Variable Pay Plans
Figure 13–2

Successes and Failures of
Variable Pay Plans
Successes and Failures of
Variable Pay Plans
• Successful 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 PlansTypes of Variable Pay PlansTypes of Variable Pay PlansTypes of Variable Pay Plans
Figure 13–3

Individual IncentivesIndividual IncentivesIndividual IncentivesIndividual Incentives
Individualism
Stressed in
Organizational
Culture
Individualism
Stressed in
Organizational
Culture
Identification of
Individual
Performance
Identification of
Individual
Performance
Independent
Work
Independent
Work
Individual
Competitiveness
Desired
Individual
Competitiveness
Desired
IndividualIndividual
IncentiveIncentive
SystemsSystems
IndividualIndividual
IncentiveIncentive
SystemsSystems

Piece-Rate SystemsPiece-Rate SystemsPiece-Rate SystemsPiece-Rate Systems
• Straight Piece-Rate Systems
Wages are determined by
multiplying the number of pieces
produced by the piece rate for one
unit.
• Differential Piece-Rate Systems
Employees 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: BonusesIndividual Incentives: BonusesIndividual Incentives: BonusesIndividual Incentives: Bonuses
• Bonus
A one-time payment that does not become part
of the employee’s base pay.
• Spot Bonus
A special type of bonus used is a “spot” bonus,
so called because it can be awarded at any
time.

Special Incentive ProgramsSpecial Incentive ProgramsSpecial Incentive ProgramsSpecial Incentive Programs
• Performance Awards
Cash or merchandise used as an incentive reward.
• Recognition Awards
Recognition of individuals for their performance or service to
customers in areas targeted by the firm.
• Service Awards
Rewards to employees for
lengthy service with an organization.

Purposes of Special IncentivesPurposes of Special IncentivesPurposes of Special IncentivesPurposes of Special Incentives
Figure 13–4

Types of Sales Compensation PlansTypes of Sales Compensation PlansTypes of Sales Compensation PlansTypes of Sales Compensation Plans
• Salary-Only
All compensation is paid as a base wage with no
incentives.
• Commission
Straight Commission
 Compensation 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 Bonuses
 Compensation is part salary for income stability and part
commission for incentive.

Determining Sales EffectivenessDetermining Sales EffectivenessDetermining Sales EffectivenessDetermining Sales Effectiveness
Figure 13–5

Why Organizations Establish Variable Pay PlansWhy Organizations Establish Variable Pay Plans
for Groups/Teamsfor Groups/Teams
Why Organizations Establish Variable Pay PlansWhy Organizations Establish Variable Pay Plans
for Groups/Teamsfor Groups/Teams
Figure 13–6

Group/Team IncentivesGroup/Team IncentivesGroup/Team IncentivesGroup/Team Incentives
Distribution ofDistribution of
Group/TeamGroup/Team
IncentivesIncentives
Distribution ofDistribution of
Timing ofTiming of
Timing ofTiming of
Decision MakingDecision Making
About Group/TeamAbout Group/Team
AmountsAmounts
Decision MakingDecision Making
About Group/TeamAbout Group/Team
AmountsAmounts
Design ofDesign of
Incentive PlansIncentive Plans
Design ofDesign of
Incentive PlansIncentive Plans

Group/Team Incentives (cont’d)Group/Team Incentives (cont’d)Group/Team Incentives (cont’d)Group/Team Incentives (cont’d)
• Distributing Rewards
Same-size reward for each member
Different-size reward for each member
• Problems with Group/Team Incentives
Rewards 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 IncentivesConditions for Successful Group/Team IncentivesConditions for Successful Group/Team IncentivesConditions for Successful Group/Team Incentives
Figure 13–7

Types of Group/Team IncentivesTypes of Group/Team IncentivesTypes of Group/Team IncentivesTypes of Group/Team Incentives
• Group/Team Results
“Self-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

Organizational IncentivesOrganizational IncentivesOrganizational IncentivesOrganizational Incentives
• Profit Sharing
A system to distribute a portion of the profits of the
organization to employees.
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

Framework Choices for a Profit-Sharing PlanFramework Choices for a Profit-Sharing PlanFramework Choices for a Profit-Sharing PlanFramework Choices for a Profit-Sharing Plan
Figure 13–8

Employee Stock PlansEmployee Stock PlansEmployee Stock PlansEmployee Stock Plans
• Stock Option Plan
A 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 PlansEmployee Stock PlansEmployee Stock Plans
• Employee Stock Ownership Plan (ESOP)
A plan whereby employees gain significant stock
ownership in the organization for which they work.
Advantages
 Favorable tax treatment for ESOP earnings
 Employees motivated by their ownership stake in the firm
Disadvantages
 Retirement benefit is tied to the firm’s future performance
 Management tool to fend off hostile takeover attempts.

Components of ExecutiveComponents of Executive
Compensation PackagesCompensation Packages
Components of ExecutiveComponents of Executive
Compensation PackagesCompensation Packages
Figure 13–9

Executive CompensationExecutive CompensationExecutive CompensationExecutive Compensation
• “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 in the
industry
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?

Common Executive Compensation IssuesCommon Executive Compensation IssuesCommon Executive Compensation IssuesCommon Executive Compensation Issues
Figure 13–10

Chapter 13 Variable Pay and Executive Compensation

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