PowerPoint Presentation by Charlie Cook The University of West Alabama SECTION 4 Compensation © 2011 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. CHAPTER 12 Incentive Plans and Executive Compensation

© 2011 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.12–2 Chapter Objectives Define variable pay and identify three elements of successful pay-for-performance plans.Define variable pay and identify three elements of successful pay-for-performance plans. Discuss three types of individual incentives.Discuss three types of individual incentives. Identify key concerns that must be addressed when designing group/team variable pay plans.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.Discuss why profit sharing and employee stock ownership are common organizational incentive plans. Explain three ways that sales employees are typically compensated.Explain three ways that sales employees are typically compensated. Identify the components of executive compensation and discuss criticisms of executive compensation levels.Identify the components of executive compensation and discuss criticisms of executive compensation levels. After you have read this chapter, you should be able to:

© 2011 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.12–3 Variable: Incentives for Performance Variable PayVariable Pay  Compensation linked to individual, group/ team, and/or organizational performance.

© 2011 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.12–4 Why Use Variable Pay? Variable Pay Assumptions Some people perform better and are more productive than others Better performing employees should receive more compensation Some jobs contribute more to organizational success than others Total compensation should be tied directly to performance and results

© 2011 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.12–5 FIGURE 12–1 Effective Variable Pay Plans

© 2011 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.12–6 Developing Successful Pay-for-Performance Plans Reasons for Pay-for-Performance Plans Enhance results and reward employees financially Link strategic goals and employee performance Reward and recognize employee performance Promote achievement of HR objectives

© 2011 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.12–7 Successful Variable Pay Plans Effective Incentive Plans Does the Plan Fit the Organization? Does the Plan Reward the Appropriate Actions? Is the Plan Administered Properly?

© 2011 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.12–8 FIGURE 12–2 Metric Options for Variable Pay Plans

© 2011 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.12–9 Why Variable Pay Plans Fail Plan incentives are not seen as desirable Plan doesn’t reward doing a good job Plan doesn’t motivate Plan rewards teams/groups rather than individuals Plan doesn’t increase base pay Employees’ View of Variable Pay Plan

© 2011 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.12–10 Developing Successful Incentive Plans Develop clear, understandable plans that are continually communicated Use realistic performance measures Keep plans current and linked to organizational objectives Link results to payouts that recognize differences Identify variable pay incentives separately from base pay Successful Incentive Plans

© 2011 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.12–11 FIGURE 12–3 Categories of Variable Pay Plans

© 2011 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.12–12 Individual Incentives Necessary Conditions For Individual Incentive Plans Individual performance must be identified Individual competitiveness must be desired Individualism must be stressed in the organizational culture

© 2011 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.12–13 Individual Incentives Piece-Rate SystemsPiece-Rate Systems  Straight piece-rate system  Differential piece-rate system BonusBonus “Spot” Bonuses“Spot” Bonuses Special Incentive ProgramsSpecial Incentive Programs  Performance awards  Recognition awards  Service awards

© 2011 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.12–14 FIGURE 12–4 Purposes of Special Incentives

© 2011 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.12–15 Why Organizations Establish Variable Pay Plans for Groups/Teams Group/Team- Based Variable Pay Plans Improve productivity Tie pay to team performance Improve customer service or production quality Increase employee retention

© 2011 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.12–16 FIGURE 12–5 Teams and Variable Pay Plan Results

© 2011 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.12–17 Design of Group/Team Incentive Plans Group/Team Incentive Plan Issues Distribution of Group/Team Incentives Timing of Group/Team Incentives Decisions About Group/Team Incentive Amounts

© 2011 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.12–18 Group/Team Incentives (cont’d) Distributing RewardsDistributing Rewards  Same-size reward for each member  Different-size reward for each member Problems with Group/Team IncentivesProblems 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.

© 2011 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.12–19 FIGURE 12–6 Conditions for Successful Group/Team Incentives

© 2011 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.12–20 Types of Group/Team Incentives Group/Team ResultsGroup/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)Gainsharing (Teamsharing or Goal Sharing)  The sharing with employees of greater-than-expected gains in productivity through increased discretionary efforts.  Improshare  Scanlon Plan

© 2011 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.12–21 Organizational Incentives 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 Profit Sharing

© 2011 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.12–22 FIGURE 12–7 Framework Choices for a Profit-Sharing Plan

© 2011 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.12–23 Employee Stock Plans Stock Option PlanStock 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.

© 2011 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.12–24 Employee Stock Plans Employee Stock Ownership Plan (ESOP)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 tied to the firm’s future performance  Management tool to fend off hostile takeover attempts.

© 2011 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.12–25 Types of Sales Compensation Plans Salary-OnlySalary-Only  All compensation is paid as a base wage with no incentives. CommissionCommission  Straight Commission  Compensation is computed as a percentage of sales in units or dollars.  The draw system makes advance payments against future commissions to the salesperson.  Salary-Plus-Commission or Bonuses  Compensation is part salary for income stability and part commission for incentive.

© 2011 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.12–26 FIGURE 12–8 Sales Metric Possibilities

© 2011 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.12–27 Effectiveness of Sales Incentive Plans Frequent changes in sales plans An “entitlement” culture Pay without performance Poor quota setting Small differences in pay for top and bottom performers Causes of Ineffectiveness in Incentive Plans

© 2011 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.12–28 Executive Compensation Executive Salaries Executive Benefits Executive Perquisites (Perks) Annual Executive Incentives and Bonuses Performance Incentives: Long Term vs. Short Term Elements of Executive Compensation

© 2011 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.12–29 FIGURE 12–9 Components of Executive Compensation Packages

© 2011 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.12–30 “Reasonableness” of Executive Compensation Executive Compensation Considerations and Concerns Would another company hire this person as an executive? How does the executive’s compensation compare with that for executives in similar companies? What would an investor pay for the level of performance of the executive? Is the executive’s pay consistent with pay for other employees within the company?

© 2011 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.12–31 FIGURE 12–10 Common Executive Compensation Criticisms