BUSMHR 3200: Compensation

What are restricted shares?

- An alternative/complement to stock options - Rather than option to buy, after vesting the recipient receives actual shares

What is equity/ownership?

- Encourages employees to focus on the success of the organization as a whole entity - Stock options give employees the opportunity to buy company stock at a fixed price (the "strike price") set each option cycle

What are some important conditions required for merit-based pay?

- Individual performances can be measured - Increases decided equitably based on performance

What is included in the rewards portion of performance management?

- Merit increase - Bonus (variable compensation) - Profit sharing - Equity (options) Compensations is an important element of performance excellence.

What is profit sharing?

- Payments are based on a measure of organization performance (profits) and payments do not become part of base pay - It may encourage employees to think more like owners - Can enhance feelings of procedural and distributive justice

What are some concerns with stock option programs?

- Same challenges exist as with merit and incentive pay regarding the need to be equitable and use options as a means of "sending a message" - Need to keep in mind that they should be used to reward "value", both current and future; be careful not to focus too much on high-potential employees at the expense of known high-value employees - As with bonuses (incentive pay), these can become seen as an established and expected aspect of compensation - when it doesn't deliver can cause significant problems (e.g. turnover, etc.)

What is the drawback of profit sharing?

- That employees may not see strong link between their performance and organization performance - can also be seen as an "expected" element of compensation

What do we mean by "total rewards"

- The sum total of all the things in the work experience that affect (or are available) to an employee - these can be tangible or intangible

What is a stock option?

- Typically used at higher levels of an organization - Gives an employee the option to purchase stock at a later date, at a price (the strike price) that is set at a given point (the strike date) - Some amount of options or "dollars at work" used as an indicator of number of options, and this will usually vary across organization levels - Can help employees focus on overall organization performance and success

What is incentive/variable compensation?

- Variable in nature - Can be supplemental income (e.g. commissions in addition to base pay) or sole source of income (e.g. some realtor commissions) - Typically are linked to some previously-set performance targets, accountabilities, etc. - Includes bonus compensation for senior level non-exempt

What are the two key elements of incentive pay used as bonuses?

1) Funding: Organization targets need to be met to fund bonus pools 2) Distribution: Bonus pool distributed according to plan, targets, etc.

What are the different types of employee compensation?

1) Merit pay 2) Incentive pay (variable pay as primary or secondary income source) 3) Senior-level compensation (deferred compensation, etc.) 4) Ownership (aka "equity") - Employee Stock Ownership Plans (ESOPs) - Traditional stock option plans (typically at higher levels) 4) Profit sharing 5) Skill-based pay

What are the two types of organizations for pay levels?

1) Pay Levels or Pay Grades 2) Pay Bands

What is a merit increase grid?

A merit increase grid combines an employee's performance rating with the employee's position in a pay range (the "comp-ratio") to determine the size and frequency of his or her pay increase. - Merit increase grids can also help bring about perceived pay equity. - Some organizations provide guidelines regarding the percentage of employees who should fall into each performance category (e.g. a forced distribution).

Why would someone exercise an option rather than let it sit?

A number of reasons, including desire to own stock, use as a gift, etc.

What is a vesting period?

A stock option typically have a vesting period until they can actually be exercised (e.g. 3-5 years, either partial-vesting or cliff-vesting)

What happens if I leave the company voluntarily (I quit?

All unvested options go away. You have a limited time (e.g. 90 days) to exercise any remaining vested option grants.

What is absolutely critical to perceived equity, justice, and related engagement?

Clear communication of programs, targets, guidelines, etc.

What are employee stock ownership plans (ESOPs)?

Employee ownership plans that give employers certain tax and financial advantages when stock is granted to employees.

True or False: Total compensation is the same as total rewards.

FALSE.

True or False: Compensation is not strongly related to individual motivation, engagement, and retention.

FALSE. It is strongly related .

What are some government regulations regarding compensation?

FLSA, Equal Pay Act of 1963

What is gainsharing?

Gains in productivity, etc. are distributed among employees

What is a standard hour plan?

If work finished sooner than projected, still get the full time's pay

Are stock options a short term or long term incentive?

Long-term incentive, and therefore linked to an individual's future potential vs. current performance

What is merit-based compensation?

Merit pay programs link performance- appraisal ratings to annual pay increases.

What is most important regarding an incentive pay program?

Need to ensure program is clearly communicated and understood

What is the difference between non-exempt and exempt jobs?

Non-exempt: NOT exempted from FLSA (e.g. >40 hours/week = overtime!) - Exempt are "exempted" from Fair Labor Standards Act (FLSA)

Do you get to keep a vested stock option forever?

Nope. You need to exercise them before the expiration period ends (usually 5 or 10 years after the option vests)

Do you have to exercise a stock option grant once it vests?

Nope. in fact, companies like it if you hold 'em. It shows confidence.

Which offers more flexibility and effectiveness to organization?

Pay "bands". They are larger

What change occurred in 2005 regarding stock option programs?

Per FASB, after June 15, 2005 organizations must expense (provide an estimate of cost) option grants as formal part of P&L.

What are differential piecework rates?

Rate per piece increases above target number/goal

What are straight piecework rates?

Set rate per acceptable piece produced, regardless of amount

True or False: Compensation can cause internal conflicts (e.g. team effectiveness) when equity is not perceived to be present

TRUE

True or False: Compensation directly relates to an organization's ability to attract, select, and hire the best possible employees/organization members

TRUE

True or False: Each person's ideal total rewards will be different

TRUE

True or False: Compensation can present challenges in global organization management.

TRUE - In the US, compensation is intensely personal and related to self worth.

True or False: Compensation needs to be aligned with the goals and strategy of the organization.

TRUE. - Different elements of compensation plan (merit vs. bonus, etc.) - Focus for compensation (individual vs. group. vs. organization level)

True or False: The more an organization uses options as part of their total compensation package, the more vulnerable they are.

TRUE. Re: stock price

What is compensation?

The rewards, usually monetary in nature (either short- and/or long-term) that reinforce behavior, organizational membership, performance, and retention

What are extrinsic vs. intrinsic rewards?

The tangible vs. intangible

What is the goal for total rewards?

To find a set of total rewards that are meaningful to widest possible group of employees

True or False: You want to come in as high in the range (comp-ratio) as possible.

True. Otherwise, on can stay near the bottom of each range as they progress.

What types of performance are incentive pay used for?

Typically focused on both individual and organizational performance but can be set up to reward team-level performance as well

Describe a balanced scorecard.

Typically will provide a focus on variety of different important elements of organization success (e.g. customers, organization growth, internal operating efficiency, people development) - Need to review it each year to ensure it is competitive, is driving correct behaviors and results, is clearly understood, etc.

What is a "balanced scorecard" approach to compensation?

Uses a combination of different types of compensation strategies (e.g. merit pay, incentive pay, stock options, etc.) - When carefully thought through and developed, can provide a balanced focus on individual, team, and organization-level performance - Because it is more complex, it requires more thoughtful development, ongoing maintenance, and very clear communication to employees

When is incentive pay more objective?

When objective performance metrics (e.g. sales $) exist, but can be used for qualitative situations (e.g. accountabilities)

What if the strike price is higher than the "street price" of the stock?

it's essentially worthless (aka "under water"). And yes, it stinks.

What is important to remember when creating a compensation system?

what behaviors are you incenting? Need to understand ALL behaviors you're incenting/not incenting