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)