COMPENSATING EMPLOYEES

1
COMPENSATING EMPLOYEES

• Incentive Pay Systems

2
Chapter 15 Overview

• Requirements of Incentive Plans
• Individual Incentives
• Group Incentives
• Variable Pay
• Making Incentives Work

3
Incentive Pay Plans

• Attempt to relate pay to performance
• Two basic requirements to be effective
• Procedures and methods used to rate employee
  performance must be accurate
• Incentives must be based on true performance

4
Advantages of Incentive Pay Programs

• Employee efforts are focused on important topics
• Rewards are variable costs linked to results
• Incentives directly related to improved
  performance
• Incentives reward those responsible for higher
  performance
• Can foster teamwork

5
Individual Incentives

• Versus group incentives
• Advantage - clearly see relationship between
  performance and reward
• Disadvantage competition between employees may
  reduce quality or performance

6
Types of Individual Incentives

• Piece rate plans simplest, most common
• Straight piece rate
• Differential piece rate
• Plans based on time saved
• Commission plans
• Straight percentage of sales
• Guaranteed base plus percentage
• Monthly draw from commissions

7
Piece Rate Plans (Continued)

• Individual bonuses
• Merit pay
• Cash prizes
• Other prizes
• Disadvantage is that they may become expected
• Suggestion systems

8
Types of Individual Incentives (cont.)

• Incentives for Managerial personnel
• Annual bonuses
• Long-term performance plans
• Stock options
• Qualified vs Non-qualified
• Incentive stock options
• Other

9
Status of Executive Pay

• Average more than 475 times average employee
• Going up rapidly
• Stock options try to link pay to performance, but
  often do not
• Very controversial
• Controversy over reporting

10
Top Executives Eligible for Non-Wage/Salary
Compensation

• Position Number of Executives Eligible for Award
• Chief Executive Officer 646 83.6
• Chief Operating Officer 333 85.0
• CEO/President-Subsidiary 256 91.8
• Top Division Executive 430 92.8
• Executive Vice President 253 84.2
• Top Human Resource Executive 409 83.4

11
Top-Paid Chief Executives

2001 Salary and Bonus Long-Term
Total
(in millions of dollars) Compensation
Pay 1. Lawrence Ellison, Oracle
0 706.1 706.1 2. Jozef Straus, JDS
Uniphase 0.5 150.3 150.8 3. Howard
Solomon, Forest Laboratories 1.2 147.3 148.5 4.
Richard Fairbank, Capital One
Financial 0 142.2 142.2 5. Louis
Gerstner, IBM 10.1 117.3 127.4 6. Charles
Wang, Computer Associates Intl. 1.0 118.1 119.1
7. Richard Fuld, Jr., Lehman
Brothers 4.8 100.4 105.2 8. James
McDonald, Scientific-Atlanta 2.1 84.7 86.8 9. S
teve Jobs, Apple Computer 43.5 40.5 84.0 10. Ti
mothy Koogle, Yahoo! 0.2 64.4 64.6
12
Group Incentives

• Good when jobs are interdependent
• May lead to excessive compensation
• Self-directed work teams
• Organization-wide incentives

13
Types of Group Incentive Plans

• Gain sharing or Profit sharing Plan
• Scanlon-Type Plans
• Employee Stock Ownership Plans (ESOPs)
• Variable Pay

14
Gain Sharing or Profit Sharing Plans

• Organization and employees share
• Use of predetermined formula
• Target improved productivity or profitability
• Based on total organizational performance
• Profit-sharing most common

15
Scanlon Type Plans

• Bonus incentive plan using employee and
  management committees to gain cost-reduction
  improvements
• Variants
• Rucker Plans
• Improshare Plans
• Earnings-at-risk Plans

16
ESOPs

• Stock plans in which an organization contributes
  share of its stock to an established trust for
  the purpose of stock purchases by its employees
• Employee ownership results in potential for
  employee share in success of company
• Allows for employee voice in company
• Tax advantages
• Often used to rescue distressed companies

17
Employee Opposition to Incentive Plans

• Production standards set unfairly
• Incentive plans are really work speed-up
• Competition created among employees
• Increased earnings tougher standards
• Payout formulas, complex difficult to understand
• Friction caused between employees and management

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Six Components of Effective Incentives Plans

• Incentives based on true performance
• Adequate financial resources to reward
• Clearly defined and acceptable performance
  standards
• Easily understood payout formula
• Reasonable administrative costs
• Wide coverage of employees

19
Making Incentive Plans Work

• Must communicate clearly
• Trust is an extremely important issue

20
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Questions