Human

Human Resource
Resource SECTION
SECTION 44
Compensating
Compensating
Management
Management Human
Human Resources
Resources

TENTH
TENTHEDITON
EDITON

Robert L. Mathis  John H. Jackson

Chapter 13

Variable
VariablePay
Pay and
and
Executive
ExecutiveCompensation
Compensation

PowerPoint Presentation
© 2003 Southwestern College Publishing. All rights reserved.
by Charlie Cook
 Learning
Learning Objectives
Objectives

After you have read this chapter, you should be

able to:
– Define variable pay and give examples of three
types of variable pay.
– Identify four guidelines for successful incentive
programs.
– Discuss three types of individual incentives.
– Explain three different way that sales employees
typically are compensated.
– Identify key factors that must be addressed when
using team variable pay plans.
© 2002 Southwestern College Publishing. All rights reserved. 13–2
 Learning
Learning Objectives
Objectives (cont’d)
(cont’d)
– Discuss why gainsharing, profitsharing, and
employee stock options have grown as
organizational incentive plans.
– Identify the components of executive compensation
and discuss criticisms of executive compensation
levels.

© 2002 Southwestern College Publishing. All rights reserved. 13–3

 Variable
Variable Pay:
Pay: Incentives
Incentives for
for Performance
Performance

Variable Pay Systems Service Pay Systems

Some jobs contribute more to the Time spent is the primary
organization than others. measure of employee contribution

Some people perform better than Length of service is the primary

others. differentiating factor among
people.

Employees who perform better Contributions are recognized

should receive more through different amounts of base
compensation. pay.

A portion of some employees’ Apportioning rewards based on

total compensation should be individual performance is
contingent on performance. considered to be divisive.

© 2002 Southwestern College Publishing. All rights reserved. 13–4

 Types
Typesof
of Variable
VariablePay
PayPlans
Plans

Figure 13–1
© 2002 Southwestern College Publishing. All rights reserved. 13–5
 Factors
Factors Affecting
Affecting Variable
Variable Pay
Pay Plans
Plans

Does
Doesthe
theplan
planfit
fit
the
theorganization?
organization?

Variable
VariablePay
Pay Are
Arethe
theright
rightbehaviors
behaviors
Plan
PlanSuccess
Success encouraged
encouragedby bythe
theplan?
plan?

Is
Isthe
theplan
planbeing
being
administered
administeredproperly?
properly?

© 2002 Southwestern College Publishing. All rights reserved. 13–6

 Factors
Factorsfor
for
Successful
Successful
Variable
VariablePay
Pay
Plans
Plans

Figure 13–2
© 2002 Southwestern College Publishing. All rights reserved. 13–7
 Individual
Individual Incentives
Incentives

Identification
Identificationof
of Independent
Independent
Individual
Individual Work
Work
Performance
Performance

Individual
Individual
Incentive
IncentivePay
Pay
Plans
Plans
Individualism
Individualism Individual
Individual
Stressed
Stressedin
in Competitiveness
Competitiveness
Organizational
Organizational Desired
Desired
Culture
Culture

© 2002 Southwestern College Publishing. All rights reserved. 13–8

 Piece-Rate
Piece-Rate Systems
Systems
 Straight Piece-Rate Systems
– Wages are determined by multiplying the number
of pieces produced by the piece rate for one unit.
 Differential Piece-Rate Systems
– Employees are paid one piece-rate for units
produced up to a standard output and a higher
piece-rate wage for units produced over the
standard.

© 2002 Southwestern College Publishing. All rights reserved. 13–9

 Bonuses
Bonuses and
and Special
Special Incentive
Incentive Programs
Programs
 Bonus
– A one-time payment that does not become part of
the employee’s base pay.
 Awards
– Cash or merchandise used as an incentive reward.
 Recognition Awards
– Recognition of individuals for their performance or
service to customers in areas targeted by the firm.
 Service Awards
– Rewards to employees for lengthy service with an
organization.

© 2002 Southwestern College Publishing. All rights reserved. 13–10

 Sources
Sourcesof
ofBonuses
Bonuses

Source: Kathryn F. Clark, “Incentives Increase But Competitive Base Salary Key in
Talent Race,” Human Resource Executive, June 2, 2000, 30. Used with permission. Figure 13–3
© 2002 Southwestern College Publishing. All rights reserved. 13–11
 Different
Different Bases
Basesfor
forSales
SalesIncentives,
Incentives, In
InOrder
Orderof
of Use
Use

Figure 13–4
© 2002 Southwestern College Publishing. All rights reserved. 13–12
 Sales
Sales Compensation
Compensation Plans
Plans
 Salary Only
– All compensation is paid as a base wage with no
incentives.
 Commission
– Straight Commission
• Compensation is computed as a percentage of sales in
units or dollars.
• Draw system make advance payments against future
commissions to salesperson.
– Salary Plus Commission or Bonus
• Compensation is part salary for income stability and
part commission for incentive.

© 2002 Southwestern College Publishing. All rights reserved. 13–13

 Why
WhyOrganizations
OrganizationsEstablish
EstablishTeam
TeamPay
PayPlans
Plans

Figure 13–5
© 2002 Southwestern College Publishing. All rights reserved. 13–14
 Group/Team-Based
Group/Team-Based Variable
Variable Pay
Pay

Determining
Determining
Individual
Individual
Rewards
Rewards

Distributing
Distributing
Timing
Timingofof Team
Team
Team
TeamIncentives
Incentives Incentives
Incentives

Deciding
Decidingthe
the
Allocation
Allocationof
of
Rewards
Rewards

© 2002 Southwestern College Publishing. All rights reserved. 13–15

 Conditions
Conditionsfor
forSuccessful
SuccessfulTeam
TeamIncentives
Incentives

Figure 13–6
© 2002 Southwestern College Publishing. All rights reserved. 13–16
 Gainsharing
Gainsharing
 Gainsharing
– The sharing with employees of greater-than-
expected gains in productivity.
– Alternatives for rewards distribution:
• A flat amount for all employees
• Same percentage of base salary for all employees
• Percentage of the gains by category of employees
• A percentage based on individual performance against
measures

© 2002 Southwestern College Publishing. All rights reserved. 13–17

 Profit
Profit Sharing
Sharing
 Profit Sharing
– A system to distribute a portion of the profits of the
organization to employees.
– Primary objectives:
• Improve productivity
• Recruit or retain employees
• Improve product/service quality
• Improve employee morale
– Drawbacks
• Disclosure of financial information
• Variability of profits from year to year
• Profit results not strongly tied to employee efforts

© 2002 Southwestern College Publishing. All rights reserved. 13–18

 Profit-Sharing
Profit-SharingPlan
Plan Framework
FrameworkChoices
Choices

Figure 13–7
© 2002 Southwestern College Publishing. All rights reserved. 13–19
 Employee
Employee Stock
Stock Ownership
Ownership Plans
Plans (ESOPs)
(ESOPs)
 Employee Stock Ownership Plans
– A plan whereby employees gain stock ownership in
the organization for which they work.
 ESOP Advantages
– Favorable tax treatment for ESOP earnings
– Employees motivated by ownership in the firm
 ESOP Disadvantages
– Retirement benefit is tied to the firm’s performance
– Management tool to fend off hostile takeover
attempts.

© 2002 Southwestern College Publishing. All rights reserved. 13–20

 U.S.
U.S.CEO
CEO Remuneration
Remuneration

Source: The Economist, May 8, 2000, 16. Figure 13–8

© 2002 Southwestern College Publishing. All rights reserved. 13–21
 Executive
ExecutiveCompensation
CompensationComponents
Components

Figure 13–9
© 2002 Southwestern College Publishing. All rights reserved. 13–22
 Common
CommonExecutive
ExecutivePerks
Perks

Figure 13–10
© 2002 Southwestern College Publishing. All rights reserved. 13–23
Arguments
Arguments
in
inthe
the
Executive
Executive
Pay
PayDebate
Debate

Figure 13–11
© 2002 Southwestern College Publishing. All rights reserved. 13–24