MGT 303 Chapter 10
What are the requirements for a successful incentive plan?
Identify important organizational metrics encouraging employee behavior Involve employees ◦Incentive programs should seem fair to employees Find the right incentive payout ◦Payout formulas should be simple and understandable Establish a clear link between performance and payout
What is a proxy statement?
In the annual proxy statement, a company must disclose information concerning the amount and type of compensation paid to its chief executive officer, chief financial officer and the three other most highly compensated executive officers. A company also must disclose the criteria used in reaching executive compensation decisions and the relationship between the company's executive compensation practices and corporate performance.
Incentive Pay programs?
Establish a performance "threshold" to qualify for incentive payments. ◦Emphasize a shared focus on organizational objectives. ◦Create shared commitment in that every individual contributes to organizational performance and success.
Incentives for Executives: discuss all areas of it
-Base salary= 30-40% of total compensation. Largest portion of pay is in long term incentive rewards and bonuses. Use competitive benchmarking to decide pay. -Short term incentives= annual bonuses. May take form of cash or stock and pay may be immediate, deferred for short time, or referred until retirement. -Long term= allow for executives to have significant stake in company. Good bc allows them to focus on long term goals of company over quarterly . (restricted stock, performance shares, phantom stock) -Benefits= broader and coverage free of charge. Also may be given financial assistance in the form of trusts for estate planning, payment of mortgage interest, and legal help -Perks?= perquisites. (private plans, health clubs, spas etc) must cross this with efficiency and effectiveness)
Advantage of incentive plans?
-HIGH EQUITY AND JUSTICE, FOCUSES EMPLOYEES, RELATED TO OPERATING PERFORMANCE Focus employees on specific Performance targets Incentive payouts are variable costs linked to the achievement of results ◦Base salaries are fixed costs unrelated to output Directly related to operating performance Encourage teamwork when payments are related to team results Distribute success among those related to producing that success Increase equity and justice Means to reward or top performers when salary budgets are low
Why do incentive Plans fail?
-ORG ENVIRONMENT DOESNT SUPPORT PLAN, SELF INTEREST AT EXPENSE OF TEAM, EMPLOYEES CANT CHANGE THEIR PERFORMANCE LEVEL. They fail to meet employee expectations for pay gains. ◦Many jobs do not have physical output measures ◦Confusion about incentive payment calculations due to poor design and implementation. ◦Self interest at the expense of the team. ◦Employees do not have the capability to change their performance levels. ◦The organization environment does not support plan.
What are some long term incentive plans?
-Stock options= Rights granted to executives to purchase shares of their organizations stock at an established price for a fixed period of time. Stock price is usually set at market value at the time the option is granted. -Restricted Stock: Grant of stock or stock units (Restricted Stock Units or RSUs) with the condition that the stock not be transferred or sold (by risk of forfeiture) before a specified employment date. -Stock Appreciation Rights (SARs): Cash or stock award determined by increase in stock price during the option period.
Challenges of profit sharing?
Agreement over the percentages of shared of profits and the forms of distribution (cash or deferred) of profits between company and employees Annual variations and possibility of no payout due to financial condition of company Maintaining motivational connection of profit-sharing to performance of employees
What is profit sharing? (enterprise incentive plan)
Any procedure by which an employer pays, or makes available to all regular employees, in addition to their base pay, current or deferred sums based upon the profits of the enterprise (company wide)
Whats included in the Executive Comp Reform?
Current Reform Measures ◦The Internal Revenue Service (IRS) is looking for tax-code violations in executive pay packages and will make executive pay a part of corporate audits. ◦The Securities and Exchange Commission issued pay disclosure rules which require companies listed on the New York Stock Exchange and NASDAQ to disclose the true size of their top executive pay packages. ◦The Financial Accounting Standards Board (FASB) now requires that stock options be recognized as an expense on income statements. ◦Shareholder resolutions that allow shareholders the right to vote on executive pay packages ◦Dodd-Frank—gives shareholders of a company "say on pay"
What are gainsharing incentive plans?
Gainsharing--> programs under which both employees and the org share financial gains according to a predetermined formula that reflects improved productivity and profitability. (been around for a while, profit sharing is company wide) THEY ARE DESIGNED TO INCREASE PRODUCTIVITY OR DECREASE LABOR COST AND SHARE $$ WITH EMPLOYEES. Scanlon plan--> employees should offer ideas and suggestions to improve productivity and in turn be rewarded for their constructive efforts. bonus incentive plan using employee and mgt committees to gain cost-reduction improvements Improshare--> bonuses based on the overall productivity of the team. ********Gainsharing based on increase in productivity of the standard hour output of work teams. Improshare pays a bonus when the time needed in the production process is reduced************
Problems with Merit pay?
Money available for merit increases may be inadequate to satisfactorily raise all employees'base pay Managers may have no guidance in how to define and measure performance Employees may not believe that compensation is tied to effort and performance ◦Unable to differentiate between merit pay and other types of pay increases Employees and managers may hold different views of the factors contributing to job success Creates feelings of pay inequity What % increase is truly motivating?
Incentive awards?
Often used to recognize productivity gains, special contributions or achievements, and service to the organization. ◦Employees feel appreciated when employers tie awards to performance and deliver awards in a timely, sincere and specific way Noncash Incentive Award Are most effective as motivators when the award is combined with a meaningful employee recognition program. (ex: sports tickets, vacations, dining out, gift cards etc)
What are the types of restricted stock?
Restricted Stock Awards - A grant of company stock in which your rights to take full ownership of the stock are restricted until the shares vest. Once the vesting requirements are met you own the shares outright and may treat them as you would any other shares in your account. You'll typically have voting and dividend benefits, if applicable, from the grant date. Restricted Units-You are given a grant valued in terms of company stock, though actual stock is not issued until your vesting requirements are satisfied. As with restricted stock awards, these requirements can be based on time and/or performance. Typically, you will not have voting or dividend benefits until the shares vest. Performance Awards - A grant of restricted stock awards or units in which your rights to the shares are contingent upon the achievement of certain pre-established performance goals. At the end of the performance period, your company will assess whether you have met the original performance goals and may adjust the awarded number of shares you receive accordingly.
What are the types of incentive plans?
Straight Salary--> permits SP to be paid for performing various duties not reflected immediately in their sales volume. Straight commission--> based on % of sales, provides max incentive and is easy to compute and understand. (not always motivating) Combined salary and commission plan--> includes straight salary and commission 50% base pay and 50% variable pay.
What are individual Incentive Plans?
Straight piecework--> An incentive plan under which employees receive a certain rate for each unit produced. Ex: 60(min per hr)/12(standard time per hr)= 5 units per hr. Differential Piece rate-->A compensation rate under which employees whose production exceeds the standard amount of output receive a higher rate for all of their work than the rate paid to those who do not exceed the standard amount. Good for when output can be easily measured, quality is not critical, job pretty standardized, constant flow of work can be maintained. Standard hour time--> An incentive plan that sets pay rates based on the completion of a job in a predetermined "standard time." -Automobile dealerships, good for long cycle operations Bonuses--> Incentive payment that is supplemental to the base wage for cost reduction, quality improvement, or other performance criteria.
What is Variable Pay?
Tying pay to some measure of individual, group, or organizational performance. They consist of bonuses, incentives, or recognition for good work.
Purpose of incentive plan?
WE WANT TO MOTIVATE ATTRACT AND RETAIN TOP EMPLOYERS. ITS GOOD ADVERTISEMENT FOR COMPANY, ◦Encourages employees to assume ownership of their jobs, thereby improving effort and job performance ◦Motivates employees to expend more effort than under hourly and/or seniority-based compensation systems ◦Supports a compensation strategy to attract and retain top-performing employees
What are the unique needs of sales incentive plans?
Wide variety of sales jobs so makes it difficult. Often external factors effect their performance like sales comp. seasonal fluctuations, changes in demand, etc must give them some sort of income stability
What is the Merit Pay Program?
◦Links an increase in base pay to how successfully an employee achieved some objective performance standard(s) - unlike bonuses once merit increases are given they become part of base pay regardless of future performance. -A strategic compensation policy must differentiate between outstanding and good or avg performance.
Whats the employee stock ownership plan? (ESOPs) (enterprise incentive)
◦Stock plans in which an organization contributes shares of its stock to an established trust for the purpose of stock purchases by its employees The employer establishes an ESOP trust that qualifies as a tax-exempt employee trust under Section 401(a) of the Internal Revenue Code Stock bonus plans are funded by direct employer contributions of its stock or cash to purchase its stock. Leveraged plans are funded by employer borrowing to purchase its stock for the ESOP.