Executive Performance

Measures & Compensation

Chapter 25
“ Recruiting, motivating and
retaining effective managers
are critical to success of all
firm.
”
Objective of Management
compensation

 To motivate managers to exert a high level of

effort to achieve the goals set by top
management.
 To provide the incentive for managers, acting
autonomously, to make decision consistent with
the goal set by top management
 To determain fairly the rewards, earned by
managers for their effort and skill and the This Photo by Unknown Author is licensed under CC BY-SA

effectiveness of their decision making.

 Study shows manager’s compensation includes
mixed of:
>> Salary
>> Bonus

Executive >> Long term compensation tied up to earnings &

stock price of the company such as stock option

Performance >> Non-cash compensation

Survey of reported average annual incentive
Measures & component are:
>> Average annual cash & stock compensation base
Compensation on long run performance
equal to 57% of current salary.
>> Bonuses base on short run performance equal to
40% of current salary.
Cash Compensation

 It includes salaries & bonus. Salaries can include

periodic raise which are permanent in nature while,
bonuses give a company flexibility.
 Many companies used combination of these to reward
performance by keeping salaries fairly level & allowing
bonus to fluctuate with reported income.
 Possible unethical & dysfunctional behavior can be as fo
llows:
>>>Postponing needed maintenance
>>>Postponing revenue recognition at end of year.
This Photo by Unknown Author is licensed under CC BY-SA-NC
Non-cash compensation

 It may include:
>>improvement of title, office location, trapping, use of corporate country
club facilities, etc.
>>Autonomy in conduct of daily business.
>>Stock option- right to buy stock at specified price within specified period.
 Factors to consider in designing manager’s compensation plan:
1. achievement of organization’s goal
2. ease of administering the plan
3. ensuring that affected executives perceive the plan.

This Photo by Unknown Author is licensed under CC BY-SA

Bonus Plan

 It is the fastest growing element of compensation package & often the

largest.
 Three aspects of bonus plan:
>>Base of the compensation (i.e. a) stock price; cost, b) revenue,
profit or investment unit based; c) balance score card.
>>Compensation pools can either be a) earnings in manager’s own unit
and firmwide pool based on firm’s total earnings
>>Payment options refers to how bonus will be rewarded, most
common of which are cash & stocks. The cash or stock can be awarded
currently or deferred for future years.

This Photo by Unknown Author is licensed under CC BY-NC-ND

Advantage & Disadvantages of Different Bonus
Bases relative to Compensation Objective (Fig 25.1)
Advantage & Disadvantages of Different
bonus Pools (Fig 25.2)
Bonus payment Option

The four most common payment options are:

 Current bonus – the most common form usually current
performance.
 Deferred bonus – earned currently but not paid for two
or more years. This type of plan can also be used to
retain key managers because the deferred
compensation stay with the firm.
 Stock option – confers the right to purchase stock at
some future date at predetermined price.
 Performance shares – shares granted for achieving
certain performance goals over two years or more.
This Photo by Unknown Author is licensed under CC BY-SA
Pros & Cons of Bonus Payment Option (Fig 25.3)
 Evaluating performance involve two issues:
1. Designing performance measures of activity that
require multiple task.
2. Designing performance measures for activities

Performance done in team.

Measures Performing task

 Employees to allocate their time & effort
intelligently among various tasks or aspect of their
job.
 Performance measurement should measure the
different aspects of an employee’s job and to
balance incentives so that all aspects are properly
emphasized.
 Team-based Compensation
 Company pool talents of employees with multiple
skills, knowledge,
experiences & judgements that can resolve many
business problems.
 A team accomplishes better securities than
Performance individual employee acting alone.
 Team based incentive encourages individuals to
Measures help one another as they strive towards common
goals
 The desirability of team based compensation
depends on the culture and management style of
particular organization.
 Company managers should be constantly aware
of their environment & ethical responsibilities.

Environmental Illegal practices & environmental pollution

carry heavy fines & prison under the law of
& Ethical each country. If business ethics present
difficulties in a single country context, they
responsibilities pose more problems in global context.

Ethical behavior on the part of manager should

not tainted by “ creative accounting”, thus
management should promptly & severely
reprimand unethical conduct irrespective of
the benefit accruing to the company.
 Strong underlying system is important for enforcing
contracts & provide basis for confidence in ethical
dealings.

Environmental US companies had unfavorable publicity on use of child

& Ethical labor (i.e. Nike) while, Middle East had issue of bribery,
in many instance becomes necessary part of doing

responsibilities business.

A very strict environment goals & measure like a

company make environmental performance a line item on
every employee’s salary appraisal report or appraising
employees on their part in reducing solid waste, outing
emissions and discharges & implementing environmental
protection.