1. Variable Pay and Executive Compensation
Chapter 12

2. CEO Pay CEO Pay Made in America—My Story
Sam Walton and John Huey (1993)
“A lot of what goes on these days with high-flying companies and these overpaid CEO’s who’re really looting from the top and aren’t watching out for anyone but themselves, really upsets me.”
CEO Pay

3. Write it down
If you were creating an executive compensation plan, what criteria would you include?

4. Variable Pay: Incentives for Performance
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.

5. Effective Incentive Plans
Boeing, Nordstrom, Wal-Mart, Safeway

6. 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.
Strong links among performance results and payouts that truly recognize performance differences.
Clear identification of variable pay incentives separately from base pay.

7. Types of Variable Pay Plans

8. Piece-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.

9. Individual Incentives: Bonuses
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.

10. Special 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.

11. Types 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.

12. Determining Sales Effectiveness

13. 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.
Social Loafing
The folly of rewarding A and hoping for B

14. Conditions for Successful Group/Team Incentives

15. Organizational 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

16. Framework Choices for a Profit-Sharing Plan

17. Employee 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.

18. Employee 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.

19. Components of Executive Compensation Packages

20. Executive 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?
Investors are owners
We as managers are stewards (agency theory)

21. Common Executive Compensation Issues

22. Discussion- did it change?
If you were creating an executive compensation plan, what criteria would you include?

23. Exercise On Variable Pay