compensation management chapter 4 ppt

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whole or in part.
Chapter 4
Variable pay and executive
compensation

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whole or in part.
Variable: Incentives for
Performance
 Variable pay - Compensation tied to performance
o Individual
o Group/ team
o Organizational
 Beneficial for both employees and employer
 Employers - More output per employee
 Employee - More pay

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whole or in part.
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

4. Variety of Possible Incentives

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whole or in part.
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

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whole or in part.
Categories of Variable Pay

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whole or in part.
Individual Incentives

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whole or in part.
Individual Incentives
 Piece-rate systems
 Straight piece-rate system
• Wages are determined by multiplying the
number of units produced by the piece rate for
one unit
 Differential piece-rate system
• Pays employees one piece-rate wage for units
produced up to a standard output and a higher
piece-rate wage for units produced over the
standard

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whole or in part.
Individual Incentives
 Bonus
o One-time payment that does not become
part of the employee’s base pay
 Massive kinked bonuses
o Very large all or nothing bonus
 Spot bonuses
o Can be awarded at any time

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whole or in part.
Individual Incentives
 Nonmonetary incentives
 Performance awards
o Incentive rewards for performance
Recognition awards
o Recognizes individual employees for their work
Service awards
o Recognize service

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whole or in part.
Individual Incentives
 Commissions
o Percentage of the money taken in on sales
o Usually given in addition to a salary to an agent or
sales person

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whole or in part.
Purposes of Nonmonetary Incentives

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whole or in part.
Possible Reasons for Using
Group/Team Variable Pay

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whole or in part.
Design of Group/Team Incentive
Plans

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whole or in part.
Group/Team Incentives
 Distributing rewards
o Same-size reward for each member
o Different-size reward for each
member

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whole or in part.
Group/Team Incentives
 Challenges with group/team incentives
o Rewards distributed in equal amounts to all
members may be perceived as unfair
o Free riders - Member of the group who
contributes little
o Team size - Individual efforts of employees have
little effect on the total performance of the group
in large groups

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whole or in part.
Conditions for Successful
Group/Team Incentives

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whole or in part.
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 efforts

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whole or in part.
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

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whole or in part.
Employee Stock Plans
 Stock option plan
 Employees can buy fixed number of shares of
company stock
o At a specified price for a limited period of time
 Employee stock ownership plan (ESOP)
 Gives employees significant stock ownership
in the organization they work

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whole or in part.
Advantages and Disadvantages of
ESOP
 Advantages
o Favorable tax treatment for ESOP earnings
o Employees motivated by their ownership stake in
the firm
 Disadvantages
o Retirement benefit tied to the firm’s future
performance

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whole or in part.
Metric Options for Variable Pay
Plans

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whole or in part.
Types of Sales Compensation
Plans
 Salary-only
o All compensation is paid as a base wage with no incentives
 Straight commission
o Compensation is computed as a percentage of sales in
units or dollars
o Draw system makes advance payments against future
commissions to the salesperson
 Salary-plus-commission or bonuses
o Compensation is part salary for income stability and part
commission for incentive

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whole or in part.
Sales Metric Possibilities

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whole or in part.
Executive Compensation
o Handled differently than other employees’ pay
o Usually more than business unit heads with similar
responsibilities
o Is a measure of the power that a CEO brings to the
organizational relationship

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whole or in part.
Difficult CEO Responsibilities

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whole or in part.
Components of Executive
Compensation Packages

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whole or in part.
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
Compensation

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whole or in part.
Common Executive
Compensation Criticisms