Chapter 12: Incentive Plans and Executive Compensation
Commission (unethically)
Only get paid for what you sell
Group/Team Results
"Self-funding" pay plans for groups/teams that reward through improved organizational results on the basis of group output, cost savings, or quality improvement
Effective Incentive Plan
*make sure plan rewards people for what they should be *mechanics say something is wrong to make money
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"
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 tied to the firm's future performance, Management tool to fend off hostile takeover attempts)
Salary-Only
-All compensation is paid as a base wage with no incentives -Only get $50,000
Straight Commission
-Compensation is computed as a percentage of sales in units or dollars -The draw system makes advance payments against future commissions to the salesperson
Variable Pay
-Compensation linked to individual, group/team, and/or organizational performance -Pay varies with sales
Effective Incentive Plans
-Does the Plan Fit the Organization? -Does the Plan Reward the Appropriate Actions? -Is the Plan Administered Properly?
Group/Teamm
-Group team results -Gainsharing/goal sharing (set goal as x, will make more money if hit y or z) -Quality improvement -Cost reduction
Variable Pay Plans
-Individual -Group/Team -Organizational
Individual
-Piece-rate system (straight piece-rate system, sewing zipper, .25 per one) -Differential piece-rate system (.25 for the first 75, then $1 for the next 76-100) -Bonuses (spot bonuses) -Special incentive programs (trips, merchandise, awards, service- how long people worked there) -Sales compensation
Organizational
-Profit sharing (if make profit -> will share w/ employees) -Employee stock plans (A plan that gives employees the right to purchase a fixed number of shares of company stock at a specified price for a limited time) -Executive stock options -Deferred compensation
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
Distributing Rewards
-Same-size reward for each member -Different-size reward for each member
Piece-Rate Systems
-Straight piece-rate system -Differential piece-rate system
Gainsharing (Teamsharing or Goal Sharing)
-The sharing with employees of great-than-expected gains in productivity through increased discretionary efforts (Improshare, Scanlon Plan)
"Reasonableness" of Executive Compensation
Companies use to check themselves
Salary-Plus-Commission or Bonuses
Compensation is part salary for income stability and part commission for incentive
Spot Bonus
Employer sees someone do something so good that they give a bonus right there (in front of others)