CHAPTER 11

golden handcuffs

tied to the company cuz of the unexercised stock options

Most of executive comp is

variable pay

Group Incentives

A standard is established against which team performance is compared to determine the magnitude of the incentive pay.

stock purchase/ownership program

is a company-run program in which participating employees can purchase company shares at a discounted price. ( if you want employees to feel like they own place, make them become owners) - May only be allowed for senior executives ( depending on company) ( you force them own the stock)

examples of short term individual pay for performance plans

merit pay, lump sum bonus, individual spot award

Improshare (improved productivity through sharing)

Any savings arising from production of agreed-upon output in fewer than expected hours is shared by firm and workers

Say on Pay

This term refers to the right of shareholders to have a direct vote regarding executive compensation

Issues with Merit Pay

Expensive Doesn't achieve the desired goal: improving employee and corporate performance

Profit Sharing Plans

, employees receive bonuses tied directly to the company's overall profitability. ... Both types of programs aim to give employees a stake in the success of the company,

Problems with individual incentive plans

- Cant control the factor your being measured on - quality standard - health and safety violations ( time pressure to get stuff done, might cut corners)

Good with piece work

- The stuff you do is linked to revenue of the company

disadvantages of merit pay

- expensive -Doesn't achieve the desired goal: improving employee and corporate performance

Issues with Executive Compensation

- extreme differences to people directly below them -structural issues - certain executives are getting better pay outs when companies don't do well

advantage gain sharing has over profit sharing

- gain sharing create gain through own productivity - profit sharing is organization wide and gain sharing is usually each department - line of sight - Free riding: Employees who work a lot get only a fraction

advantages of piece work

- guides motivation - time management from worker -efficiant production

disadvantages of piece work

- older workers may not advantage over younger workers. can't work as fast - feel rushed - sick or injured workers ( occupational and health and safety issues) -reduced quality, because the focus in on quantity

disadvantages of stock plan

- some employees can't afford it - take some risk

Individual Spot Awards

-Viewed as highly or moderately effective -Awarded for exceptional performance

advantages of merit pay

-employees can see link between pay and performance -complexities of performance are factored in

Advantages of Profit Sharing

-profit sharing encourages employees to think more like owners -labor costs are automatically reduced during difficult economic times, and wealth is shared during good times

merit pay system

A compensation system in which base pay increases are determined by individual performance

Advantages of Bonuses

Less expensive than merit pay over the long run

lump-sum bonuses

a bonus is received for meeting individual goals but no change is made to base salary Viewed as less of an entitlement than merit pay Less expensive than merit pay over the long run

Piecework

a compensation system in which employees are paid a set rate for each item they produce

gain sharing plans

annual bonuses paid to employees based on achieving specific goals such as quality measures, customer satisfaction measures, and production targets employees share in cost-savings or productivity gains bonuses are more closely tied to the performance of specific employees or groups of employees.

executives

base pay is small, 10-15% variable compensation is bigger and where they make most of their money

5 basic elements of executive comp***

base salary short term incentives long term incentives executive benefits perquisites

gain sharing=

bonuses are more closely tied to the performance of specific employees or groups of employees.

solutions to executive pay

change how companies run say on pay increasing employee pay at bottoms level taxing away

contigent workers

employees who do not expect regular, full-time jobs, including temporary full-time workers, independent contractors, and temporary agency or contract agency workers

classic problem with profit sharing

free riders ( don't pull your share) when there is a good (likely to be a public good) that everyone enjoys the benefits of without having to pay for the good. ...

Example of piece work

golf course ( worms)

vanderbilt eggs case

good: The employees don't have to pay for the shares themselves, come from profit share money bad:

Executives received much

higher compensation than the average Canadian. A significant portion of which can be attributed to stock option gains

Merit pay works well

in companies with lots of room for promotions

earnings-at-risk plans

incentive plans sharing profits in successful years and reducing base pay in unsuccessful years

why do company use stock options

incentive to stay at the company because of the stock options

profit sharing =

overall profitability

licoln electric

piece work plan advantages and disadvantages older employees have trouble keeping up with peiceowrk system

Individual Incentives examples

piece work, merit pay and lump sum

individual incentive plans

reward individual performance on a real-time basis Offer a promise of pay for some objective, pre-established level of performance

gain sharing plans types

scalon plans Rucker plans Improshare

stock option programs

the employee has the right to buy shares of the company at future established times at an old stock price ( the right to acquire stock at certain times) - typically the price of the stock when you join the company - not as risky