Chapter 12 14e 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 ID: 537580
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Slide1
Variable Pay and Executive Compensation
Chapter 12
14eSlide2
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 resultsSlide3
Figure12.1 - A Variety of Possible
IncentivesSlide4
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 objectivesSlide5
Combating Variable Pay Complexity
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 Slide6
Figure12.2 - Factors
for Successful Variable Pay PlansSlide7
Combating Variable Pay ComplexitySlide8
Figure12.3 - Categories of Variable
PaySlide9
Individual IncentivesSlide10
Figure12.4 - Purposes of Nonmonetary
IncentivesSlide11
Figure12.5 - Possible Reasons for Using Group/Team Variable
PaySlide12
Design of Group/Team Incentive PlansSlide13
Group/Team Incentives
Challenges with
group/team incentives
Rewards distributed in equal amounts to all members may be perceived as unfair
Free riders - Member of the group who contributes little
Team size - Individual efforts of employees have little effect on the total performance of the group in large groupsSlide14
Figure12.6 - Conditions for Successful Group/Team
IncentivesSlide15
Types of Group/Team Incentives
Group/team results
Group production
Cost savings
Quality improvement
Gainsharing: Sharing with employees of greater-than-expected gains in productivity through increased discretionary effortsImproshare
Scanlon planSlide16
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 SharingSlide17
Figure12.7 - Framework Choices for a Profit-Sharing
PlanSlide18
Employee Stock Plans
Stock option planEmployees
can buy fixed number of shares of company stock
At a specified price for a limited period of time
Employee stock ownership plan (ESOP)
Gives employees significant stock ownership in the organization they workSlide19
Figure12.8 - Metric Options for Variable Pay PlansSlide20
Types of Sales Compensation Plans
Salary-only
All compensation is
paid as a base wage with no incentives
Straight commission
Compensation is computed as a percentage of sales in units or dollarsDraw system makes advance payments against future commissions to the salespersonSlide21
Types of Sales Compensation Plans
Salary-plus-commission or bonuses
Compensation is part salary for income stability and part commission for incentiveSlide22
Types of Commission
Straight commission system - Percentage of the value of the sales is given to the sales person
Advantage - Requires the sales representative to
sell in order to
earn
Disadvantage - Offers no security for the sales staff
Draw: Amount advanced against, and repaid from, future commissions earned Slide23
Types of Commission
Salary-plus-commission or bonuses
Compensation is part salary for income stability and part commission for
incentiveSlide24
Figure12.9 - Sales Metric
PossibilitiesSlide25
Executive Compensation
Handled differently than other employees’ pay Usually more than business unit heads with similar
responsibilities
Is a measure of the power that a CEO brings to the organizational
relationshipSlide26
Figure 12.10 - Difficult
CEO ResponsibilitiesSlide27
Changes in the Context of Executive Compensation
Say on PayPublically listed companies must allow share holders to vote on executive compensation
Clawbacks
Allows a company to recover any incentive based pay that was paid out during the prior 3 years if it would not have been paid under restated financial
statementsSlide28
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?
Reasonableness of Executive CompensationSlide29
Figure12.12 - Common Executive Compensation
Criticisms