© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. Pay-for-Performance: Incentive Rewards 1–1 The Challenges of Human Resources Management

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 2 of 36 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 2 of 49 Linking Pay to Performance Performance PayMotivation Improved Performance

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3 of 36 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 3 of 49 Pay for Performance 12–3

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4 of 36 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 4 of 49 How Incentives Sometimes “Work”

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5 of 36 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 5 of 49 Employee Opposition to Incentive Plans Production standards are set unfairly. Incentive plans are really “work speedup.” Incentive plans create competition among workers. Increased earnings result in tougher standards. Payout formulas are complex and difficult to understand. Incentive plans cause friction between employees and management.

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 6 of 36 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 6 of 49 Incentive Plans as Links to Organizational Objectives Incentive Plan PurposesIncentive Plan Purposes  Encourage employees to assume “ownership” of their jobs, thereby improving effort and job performance.  Motivate employees to expend more effort than under hourly and/or seniority-based compensation systems.  Support a compensation strategy to attract and retain top-performing employees. Incentive Plan EffectivenessIncentive Plan Effectiveness  There is evidence of a relationship between incentive plans and improved organizational performance.

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 7 of 36 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 7 of 49 Requirements for a Successful Plan  Identify important organizational metrics that encourage employee behavior.  Involve employees. Incentive programs should seem fair to employees.  Find the right incentive payout. Payout formulas should be simple and understandable.  Establish a clear link between performance and payout.

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 8 of 36 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 8 of 49 Why Incentive Plans Fail  They fail to meet employee expectations for pay gains.  There is confusion about incentive payment calculations due to poor design and implementation of the plan.  Employees do not have the capability to change their performance levels.  The organization environment does not support plan.

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 9 of 36 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 9 of 49 Incentive Plans as Links to Organizational Objectives Contemporary arguments for incentive plans focus on linking compensation rewards, both individual and group, to organizational goals.

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 10 of 36 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 10 of 49 Individual Incentive Plans Straight Piecework  An incentive plan under which employees receive a certain rate for each unit produced. Differential Piece Rate  A compensation rate under which employees whose production exceeds the standard amount of output receive a higher rate for all of their work than the rate paid to those who do not exceed the standard amount.

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 11 of 36 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 11 of 49 Computing the Piece Rate hourper units 5 unit)per time(standard minutes 12 hour)(per minutes 60 = unitper $2.55 hour)(per units 5 rate)(hourly $12.75 =

12–12 Pros and Cons of Piecework Easily understandable, equitable, and powerful incentivesEasily understandable, equitable, and powerful incentives Employee resistance to changes in standards or work processes affecting outputEmployee resistance to changes in standards or work processes affecting output Quality problems caused by an overriding output focusQuality problems caused by an overriding output focus Possibility of violating minimum wage standardsPossibility of violating minimum wage standards Employee dissatisfaction when incentives either cannot be earned or are withdrawnEmployee dissatisfaction when incentives either cannot be earned or are withdrawn May conflict with organizational culture and/or group normsMay conflict with organizational culture and/or group norms

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 13 of 36 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 13 of 49 Norms: A Group’s Unspoken Rules

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 14 of 36 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 14 of 49 Individual Incentive Plans (cont’d.) Standard Hour PlanStandard Hour Plan  An incentive plan that sets pay rates based on the completion of a job in a predetermined “standard time.”  If employees finish the work in less than the expected time, their pay is still based on the standard time for the job multiplied by their hourly rate.

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 15 of 36 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 15 of 49 Individual Incentive Plans (cont.) BonusBonus  Incentive payment that is supplemental to the base wage for cost reduction, quality improvement, or other performance criteria. Spot bonusSpot bonus  Unplanned bonus given for employee effort unrelated to an established performance measure.

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 16 of 36 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 16 of 49 Merit Pay Merit Pay Program (Merit Raise)Merit Pay Program (Merit Raise)  Links an increase in base pay to how successfully an employee achieved some objective performance standard. Merit GuidelinesMerit Guidelines  Guidelines for awarding merit raises that are tied to performance objectives.

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 17 of 36 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 17 of 49 Merit Pay and Motivation Evidence suggests that merit raises of 10-15% motivate changes in behavior. Typical merit raises range from 2-6% Rewards are more motivating if: –They are timely –They are public rather than secret –They are scarce rather than common

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 18 of 36 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 18 of 49 Example of Merit Increase Grid

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 19 of 36 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 19 of 49 Lump-Sum Merit Pay Lump-Sum Merit Program –Program under which employees receive a year-end merit payment, which is not added to base pay. –Advantages: Provides financial control by maintaining annual salary expenses and not escalating base salary levels. Contains employee benefit costs for levels of benefits normally calculated from current salary levels.

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 20 of 36 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 20 of 49 Problems with Merit Raises 1. 1.Money for merit increases may be inadequate to satisfactorily raise all employees’ base pay Managers may have no guidance in how to define and measure performance; there may be vagueness regarding merit award criteria Employees may not believe that their compensation is tied to effort and performance; they may be unable to differentiate between merit pay and other types of pay increases Employees and their managers may hold different views of the factors that contribute to job success Merit pay plans may create feelings of pay inequity.

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 21 of 36 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 21 of 49 Sales Incentives Straight Commission Straight Salary Salary and Commission Combinations Salary and Commission Combinations Sales Incentive Plans

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 22 of 36 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 22 of 49 Incentive Plans for Salespersons Straight Salary PlanStraight Salary Plan  Compensation plan that permits salespeople to be paid for performing various duties that are not reflected immediately in their sales volume.  Advantages: – Encourages building customer relationships. – Provides compensation during periods of poor sales.  Disadvantage: – May not provide sufficient motivation for maximizing sales volume.

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 23 of 36 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 23 of 49 Incentive Plans for Salespersons (cont.) Straight Commission PlanStraight Commission Plan  Compensation plan based upon a percentage of sales. – Draw is a cash advance that must be paid back as commissions are earned.  Disadvantages: – Salespeople will stress high-priced products. – Customer service after the sale is likely to be neglected. – Earnings tend to fluctuate widely between good and poor periods of business, an turnover of trained sales employees tends to increase in poor periods. – Salespeople are tempted to grant price concessions.

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 24 of 36 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 24 of 49 Incentive Plans for Salespersons (cont.) Combined Salary and Commission PlanCombined Salary and Commission Plan  A compensation plan that includes a straight salary and a commission component (“leverage”).  Advantages: – Combines the advantages of straight salary and straight commission forms of compensation. – Offers greater design flexibility – Can be used to develop the most favorable ratio of selling expense to sales. – Motivates sales force to achieve specific company marketing objectives in addition to sales volume.

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 25 of 36 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 25 of 49 Group/Team Incentive Plans Team Incentive PlansTeam Incentive Plans  Compensation plans where all team members receive an incentive bonus payment when production or service standards are met or exceeded. Establishing Team Incentive PaymentsEstablishing Team Incentive Payments  Set performance measures upon which incentive payments are based  Determine the size of the incentive bonus.  Create a payout formula and fully explain to employees how payouts will be distributed.

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 26 of 36 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 26 of 49 Team Incentive Plans AdvantagesAdvantages  Team incentives support group planning and problem solving, thereby building a team culture.  The contributions of individual employees depend on group cooperation.  Team incentives can broaden the scope of the contribution that employees are motivated to make.  Team bonuses tend to reduce employee jealousies and complaints over “tight” or “loose” individual standards.  Team incentives encourage cross-training and the acquiring of new interpersonal competencies.

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 27 of 36 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 27 of 49 Team Incentive Plans (cont.) DisadvantagesDisadvantages  Individual team members may perceive that “their” efforts contribute little to team success or to the attainment of the incentive bonus.  Intergroup social problems—pressure to limit performance and the “free-ride” effect may arise.  Complex payout formulas can be difficult for team members to understand.

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 28 of 36 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 28 of 49 Team Incentive Plans (cont.) Gainsharing PlansGainsharing Plans  Programs under which both employees and the organization share the financial gains according to a predetermined formula that reflects improved productivity and profitability. Increase in productivity is gained when:Increase in productivity is gained when:  Greater output is obtained with less or equal input.  Equal production output is obtained with less input.

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 29 of 36 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 29 of 49 Gainsharing Incentive Plans Scanlon Plan Rewards come from employee participation in improving productivity and reducing costs. Improshare Gainsharing based on increases in productivity of the standard hour output of work teams.

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 30 of 36 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 30 of 49 Gainsharing Plans Philosophy of cooperation Involvement system Identity Scanlon Plan Components Competence Benefits sharing formula

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 31 of 36 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 31 of 49 Scanlon Plan Suggestion Process

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 32 of 36 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 32 of 49 Improved Productivity through Sharing (Improshare): An Example A standard of the number of person-hours required to produce an expected level of output is developedA standard of the number of person-hours required to produce an expected level of output is developed 5000 hours of labor to produce 1000 units each week (5 hours per unit)5000 hours of labor to produce 1000 units each week (5 hours per unit) In a given week 5000 labor hours produced 1300 unitsIn a given week 5000 labor hours produced 1300 units 1500 hours have been saved (300 x 5)1500 hours have been saved (300 x 5) split between firm and employees; employees get 750 hour bonus50-50 split between firm and employees; employees get 750 hour bonus 750/5000 = 15% bonus750/5000 = 15% bonus Employees receive a 15% bonus for the weekEmployees receive a 15% bonus for the week

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 33 of 36 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 33 of 49 Enterprise Incentive Plans Profit SharingProfit Sharing  Any procedure by which an employer pays, or makes available to all regular employees, in addition to their base pay, current or deferred sums based upon the profits of the enterprise.  Deferred profit-sharing plans – A predetermined portion of profits based on the employee’s contribution to the firm’s profits is placed in each employee’s retirement account under a trustee’s supervision. – Employees’ income taxes on the distributions are deferred, often until the employee retires.

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 34 of 36 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 34 of 49 Enterprise Incentive Plans Profit Sharing Challenges Agreement over the percentages of shared of profits and the forms of distribution (cash or deferred) of profits between company and employees Annual variations and possibility of no payout due to financial condition of company Maintaining motivational connection of profit- sharing to performance of employees

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 35 of 36 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 35 of 49 Enterprise Incentive Plans (cont.) Stock OptionsStock Options  Granting employees the right to purchase a specific number of shares of the company’s stock at a guaranteed price (the option price) during a designated time period.  The value of an option is subject to stock market conditions at the time that option is exercised.

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 36 of 36 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 36 of 49 (cont.) Enterprise Incentive Plans (cont.) Employee Stock Ownership Plans (ESOPs)Employee Stock Ownership Plans (ESOPs)  Stock plans in which an organization contributes shares of its stock to an established trust for the purpose of stock purchases by its employees. – The employer establishes an ESOP trust that qualifies as a tax-exempt employee trust under Section 401(a) of the Internal Revenue Code – Stock bonus plans are funded by direct employer contributions of its stock or cash to purchase its stock. – Leveraged plans are funded by employer borrowing to purchase its stock for the ESOP.

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 37 of 36 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 37 of 49

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 38 of 36 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 38 of 49 (cont.) Enterprise Incentive Plans (cont.) Rewards and Risks of ESOPS Advantages Disadvantages Liquidity and value Pride of ownership Deferred taxes Single funding basis Not insured Retirement benefits

12–39 Advantages of ESOPs For the Company   Can take a tax deduction equal to the fair market value of the shares transferred to the ESOP trustee   Gets an income tax deduction for dividends paid on ESOP-owned stock   Can borrow against ESOP in trust and then repay the loan in pretax rather than after-tax dollars For the Employees   Develop a sense of ownership in and commitment to the firm.   Do not pay taxes on ESOP earnings until they receive a distribution. For the Shareholders of Closely-Held Corporations   Can place assets into an ESOP trust which will allow them to purchase other marketable securities to diversify their holdings

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 40 of 36 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 40 of 49 (cont.) Incentives for Executives (cont.) JustificationsJustifications  Large financial incentives reward superior performance.  Business competition is pressure-filled and demanding.  Good executive talent is in great demand.  Effective executives create shareholder value.

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 41 of 36 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 41 of 49 Incentives for Executives The Executive Pay PackageThe Executive Pay Package  Base salary  Short-term incentives or bonuses  Long-term incentives or stock plans  Benefits  Perquisites (perks)

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 42 of 36 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 42 of 49 Types of Long-Term Incentive Plans

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 43 of 36 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 43 of 49 The “Sweetness” of Executive Perks

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 44 of 36 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 44 of 49 Executive Compensation Reform Current Reform MeasuresCurrent Reform Measures  The Internal Revenue Service (IRS) is looking for tax- code violations in executive pay packages and will make executive pay a part of corporate audits.  The Securities and Exchange Commission issued pay disclosure rules which require companies listed on the New York Stock Exchange and NASDAQ to disclose the true size of their top executive pay packages.  The Financial Accounting Standards Board (FASB) now requires that stock options be recognized as an expense on income statements.

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 45 of 36 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 45 of 49 Executive Compensation Reform (cont.) Other Reform Measures:Other Reform Measures:  The adoption of performance formulas that peg executive compensation to organizational benchmarks other than stock price  Shareholder resolutions that allow shareholders the right to vote on executive pay packages  Greater accountability by compensation committees to justify large executive pay awards or severance or retirement packages

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 46 of 36 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 46 of 49 Pay for Performance??? Give Me a Break: Big Bucks for Execs as Companies FlounderGive Me a Break: Big Bucks for Execs as Companies Flounder Nardelli out at Home Depot

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 47 of 36 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 47 of 49 Nonfinancial and Recognition Awards Effects of Recognition-Based Awards –Recognition has a positive impact on performance, either alone or in conjunction with financial rewards. –Day-to-day recognition from supervisors, peers, and team members is important. Ways to Use Recognition –Social recognition –Performance-based recognition –Performance feedback

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 48 of 36 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 48 of Ways to Reward Employees (2012)

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 49 of 36 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 49 of 49 Social Recognition and Related Positive Reinforcement Managers Can Use Challenging work assignments Freedom to choose own work activity Having fun built into work More of preferred task Role as boss’s stand-in when he or she is away Role in presentations to top management Job rotation Encouragement of learning and continuous improvement Being provided with ample encouragement Being allowed to set own goals Compliments Expression of appreciation in front of others Note of thanks Employee-of-the-month award Special commendation Bigger desk Bigger office or cubicle

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 50 of 36 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 50 of 49 Customize Your Noncash Incentive Awards

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 51 of 36 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 51 of 49 Punished by Rewards (1999) Punished by Rewards Intrinsic v. extrinsic motivation

© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 52 of 36 © 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use. 52 of 49 Intrinsic Motivation and Creativity The issue of whether reward decreases or increases intrinsic interest and creativity is relevant to organizations because creative contributions help organizations become more efficient, adapt to change, and develop new products and services nberger/IMC.htmlhttp:// nberger/IMC.html 12–52