Chapter 12: Incentive Plans & Executive Compensation

Differential Piece-Rate System

for every widget you make over the required number

Bonus

one-time payment that does not become part of the employee's base pay

Stock Options Plan

plan the gives employees the right to purchase a fixed number of shares of company stock at a specified price for a limited period of time

Perquisites (Perks)

special benefits -usually noncash items- given to executives

compensation committee

subgroup of the board of directors that is composed of directors who are not officers of the firm

Profit Sharing

system to distribute a portion of the profits of an organization to employees

Gainsharing

the sharing with employees of greater-than-expected gains in productivity through increased discretionary efforts

Long-Term Incentives

Most important -especially for retention

Incentive Plan Success

-Does the plan fit with business strategies and organizational goals?

Successful P4P Plans

-Link strategic business goals and employee performance -Achieve HR Objectives; retention, reduced turnover, `

Reasonableness of Executive Compensation

-Would another company hire this exec? -How does compensation compare with the market?

Profit Sharing Drawbacks

-disclosure of financial information -variability of profits from year to year

Design of Group/Team Incentives

-distribution -timing

Executive Compensation

-exec salaries -benefits -perks

Ineffectiveness of Sales Incentive Plans

-frequent changes in sales plans -entitlement culture -pay without performance

Why use Variable Pay Plans for Groups/Teams?

-improves productivity -tie pay to team performance

Profit Sharing Objectives

-increase productivity and organizational performance -attract or retain employees

Why Incentive Plans Fail

-not desirable -doesn't reward doing a good job -doesn't motivate

Problems with Group/Team incentives

-reward in equal amounts deemed unfair -members unwilling to handle decisions for rewards of the others

Distributing Rewards

-same sized reward for each member -different sized reward for each member

Piece-Rate Systems

Certain amount per widget made or per so many made

Employee Stock Ownership Plan

Employees are motivated by their ownership stake in the firm

Straight piece-rate system

Pay system in which wages are determined by multiplying the number of units produced by the piece rate for one unit

Salary Only Sales Compensation Plan

all compensation is paid as a base wage with no incentives

the draw system

amount advanced against, and repaid from,future commissions earned by the employee

"Straight" Commission

compensation is computed as a percentage of sale in units or dollars

Salary Plus Commission

compensation is part salary for incomes stability and part commission for incentive

Variable Pay

compensation linked to individual, group/team, and/or organizational performance