1. C h a p t e r PART FOUR - COMPENSATING EMPLOYEES Incentive Pay Systems 15

2. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc. All rights reserved. 15 - 2 Chapter 15 Overview Requirements of Incentive Plans Individual Incentives Group Incentives Variable Pay Making Incentive Plans Work

3. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc. All rights reserved. 15 - 3 Requirements of Incentive Plans Individual Incentives  Piece Rate Plans  Plans Based on Time Saved  Plans Based on Commissions  Individual Bonuses  Suggestion Systems  Incentives for Managerial Personnel  Annual Bonus   Long-Term Performance Plans  Stock Options for Managerial Personnel   The Status of Executive Pay Requirements of Incentive Plans Individual Incentives  Piece Rate Plans  Plans Based on Time Saved  Plans Based on Commissions  Individual Bonuses  Suggestion Systems  Incentives for Managerial Personnel  Annual Bonus   Long-Term Performance Plans  Stock Options for Managerial Personnel   The Status of Executive Pay Requirements of Incentive Plans Individual Incentives  Piece Rate Plans  Plans Based on Time Saved  Plans Based on Commissions  Individual Bonuses  Suggestion Systems  Incentives for Managerial Personnel  Annual Bonus   Long-Term Performance Plans  Stock Options for Managerial Personnel   The Status of Executive Pay Requirements of Incentive Plans Individual Incentives  Piece Rate Plans  Plans Based on Time Saved  Plans Based on Commissions  Individual Bonuses  Suggestion Systems  Incentives for Managerial Personnel  Annual Bonus   Long-Term Performance Plans  Stock Options for Managerial Personnel   The Status of Executive Pay Requirements of Incentive Plans Individual Incentives  Piece Rate Plans  Plans Based on Time Saved  Plans Based on Commissions  Individual Bonuses  Suggestion Systems  Incentives for Managerial Personnel  Annual Bonus   Long-Term Performance Plans  Stock Options for Managerial Personnel   The Status of Executive Pay Requirements of Incentive Plans Individual Incentives  Piece Rate Plans  Plans Based on Time Saved  Plans Based on Commissions  Individual Bonuses  Suggestion Systems  Incentives for Managerial Personnel  Annual Bonus   Long-Term Performance Plans  Stock Options for Managerial Personnel   The Status of Executive Pay Requirements of Incentive Plans Individual Incentives  Piece Rate Plans  Plans Based on Time Saved  Plans Based on Commissions  Individual Bonuses  Suggestion Systems  Incentives for Managerial Personnel  Annual Bonus   Long-Term Performance Plans  Stock Options for Managerial Personnel   The Status of Executive Pay

4. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc. All rights reserved. 15 - 4 Table 15.1 Source: The 2002/2003 Geographic Report on Top Management Compensation, Vol 2 (Rochelle Park, N. J.: Watson Wyatt Data Services, 2002) p. 1828. PositionNumber of ExecutivesEligible for Award Chief Executive Officer64683.6% Chief Operating Officer33385.0% CEO/President-Subsidiary25691.8% Top Division Executive43092.8% Executive Vice President25384.2% Top Human Resource Executive40983.4% Top Executives Eligible for Bonus and/or Other Cash Compensation Payments

5. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc. All rights reserved. 15 - 5 Requirements of Incentive Plans Individual Incentives  Piece Rate Plans  Plans Based on Time Saved  Plans Based on Commissions  Individual Bonuses  Suggestion Systems  Incentives for Managerial Personnel  Annual Bonus   Long-Term Performance Plans  Stock Options for Managerial Personnel   The Status of Executive Pay

6. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc. All rights reserved. 15 - 6 Table 15.2 Source: Adapted from Business Week Online, April 15, 2002, www.businessweek.com/magazine/content/02_15/b3778014.htm, accessed October 21, 2002. 2001 Salary and Bonus Long-Term Total (in millions of dollars) Compensation Pay 1.Lawrence Ellison, Oracle$ 0$706.1$706.1 2.Jozef Straus, JDS Uniphase0.5150.3150.8 3.Howard Solomon, Forest Laboratories1.2147.3148.5 4.Richard Fairbank, Capital One Financial0142.2142.2 5.Louis Gerstner, IBM10.1117.3127.4 6.Charles Wang, Computer Associates Intl.1.0118.1119.1 7.Richard Fuld, Jr., Lehman Brothers4.8100.4105.2 8.James McDonald, Scientific-Atlanta2.184.786.8 9.Steve Jobs, Apple Computer43.540.584.0 10.Timothy Koogle, Yahoo!0.264.464.6 The Top-Paid Chief Executives: In Millions of Dollars

7. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc. All rights reserved. 15 - 7 Requirements of Incentive Plans Individual Incentives  Piece Rate Plans  Plans Based on Time Saved  Plans Based on Commissions  Individual Bonuses  Suggestion Systems  Incentives for Managerial Personnel  Annual Bonus   Long-Term Performance Plans  Stock Options for Managerial Personnel   The Status of Executive Pay

8. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc. All rights reserved. 15 - 8 Group Incentives  Gain-Sharing or Profit-Sharing Plans  Scanlon-Type Plans  Employee Stock Ownership Plans (ESOPs)   Variable Pay Making Incentive Plans Work Group Incentives  Gain-Sharing or Profit-Sharing Plans  Scanlon-Type Plans  Employee Stock Ownership Plans (ESOPs)   Variable Pay Making Incentive Plans Work Group Incentives  Gain-Sharing or Profit-Sharing Plans  Scanlon-Type Plans  Employee Stock Ownership Plans (ESOPs)   Variable Pay Making Incentive Plans Work

9. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc. All rights reserved. 15 - 9 Table 15.3 To Organization Allows use of pretax dollars to finance debt. Increases cash flow. Provides a ready buyer for stock. Provides protection against unwanted tender offers. Protects the company from estate problems. Can result in substantial tax savings. Can motivate employees by giving them a piece of the action. To Employees Favorable tax treatment of lump-sum distribution, deferment of tax until distribution, and gift and estate tax exemptions. Allows employees to share in the success of the company. Provides a source of capital gains income for employees. Can allow employees some voice in running the company. Major Benefits of Employee Stock Ownership Plans To Stockholders Provides ready market to sell stock. Establishes definite worth of shares for estate purposes. Maintains voting control of company. Protects the company from having to come up with large sums of money to settle an estate. Can result in preferential consideration for a government-guaranteed loan.

10. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc. All rights reserved. 15 - 10 Table 15.4 Personnel Nonmanagers Managers Individual Piece rate plans Plans based on time saved Commission plans Bonuses based on individual performance Suggestion systems Bonuses based on organi- zational performance (annual and long-term) Stock option plans: Stock appreciation rights (SARs) Phantom stock plans Restricted stock plans Suggestion systems Summary of Most Commonly Used Incentive Plans Group Bonuses based on group performance Bonuses based on group performance Organizational Lincoln electric plan Gain-sharing/profit- sharing plans Scanlon-type plans Employee stock owner- ship plans (ESOPs) Lincoln electric plan Gain-sharing/profit- sharing plans Scanlon-type plans Employee stock owner- ship plans (ESOPs) Type of Plan

11. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc. All rights reserved. 15 - 11 Group Incentives  Gain-Sharing or Profit-Sharing Plans  Scanlon-Type Plans  Employee Stock Ownership Plans (ESOPs)   Variable Pay Making Incentive Plans Work Group Incentives  Gain-Sharing or Profit-Sharing Plans  Scanlon-Type Plans  Employee Stock Ownership Plans (ESOPs)   Variable Pay Making Incentive Plans Work

12. McGraw-Hill/Irwin © 2004 The McGraw-Hill Companies, Inc. All rights reserved. 15 - 12 Questions