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Variable Pay & Executive Compensation
MN 301 – Human Resource Management
Craig W. Fontaine, Ph.D.Pine Manor College
Fall 2014
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Variable: Incentives for Performance
• Variable pay - Compensation tied to performance• Individual• Group/ team• Organizational
• Beneficial for both employees and employer• Employers - More output per employee• Employee - More pay
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Why Use Variable Pay?
Variable Pay
Assumptions
Some people perform better and are more
productive than others
Better performing employees
should receive more
compensation
Some jobs contribute more
to organizational success than
others
Total compensation should be tied
directly to performance and
results
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A Variety of Possible Incentives
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Pay-for-Performance Plans
Reasons for Pay-for-
Performance Plans
Enhance results and reward employees financially
Link strategic goals and employee
performance
Reward and recognize employee
performance
Promote achievement of HR objectives
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Factors for Successful Variable Pay Plans
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Categories of Variable Pay
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Individual Incentives
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Individual Incentives• Piece-rate systems • Straight piece-rate system
• Wages are determined by multiplying the number of units produced by the piece rate for one unit
• Differential piece-rate system• Pays employees one piece-rate wage for units produced up to a
standard output and a higher piece-rate wage for units produced over the standard
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Individual Incentives• Bonus• One-time payment that does not become part of the employee’s
base pay• Massive kinked bonuses • Very large all or nothing bonus (example: golfer)
• Spot bonuses• Can be awarded at any time
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Individual Incentives• Nonmonetary incentives• Performance awards
• Incentive rewards for performance• Recognition awards
• Recognizes individual employees for their work• Service awards
• Recognize service
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Individual Incentives• Commissions• Percentage of the money taken in on sales• Often given on top of salary
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Design of Group/Team Incentive Plans
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Group/Team Incentives• Distributing rewards issue:• Same-size reward for each member• Different-size reward for each member
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Group/Team Incentives• Challenges with group/team incentives• Rewards distributed in equal amounts to all members may be
perceived as unfair • Free riders - Member of the group who contributes little• Team size - Individual efforts of employees have little effect on
the total performance of the group in large groups
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Conditions for Successful Group/Team Incentives
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Types of Group/Team Incentives
• Group/team results• Group production
• Cost savings
• Quality improvement
• Gainsharing: Sharing with employees of greater-than-expected gains in productivity through increased discretionary efforts
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Organizational Incentives
Primary Objectives
• Increase productivity and organizational performance
• Attract or retain employees
• Improve product/service quality
• Enhance employee morale
Drawbacks
• Disclosure of financial information
• Variability of profits from year to year
• Profit results not strongly tied to employee efforts
Profit Sharing
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Framework Choices for a Profit-Sharing Plan
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Employee Stock Plans• Stock option plan• Employees can buy fixed number of shares of company stock
• At a specified price for a limited period of time
• Employee stock ownership plan (ESOP)• Gives employees significant stock ownership in the organization
they work
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Advantages and Disadvantages of ESOP
• Advantages• Favorable tax treatment for ESOP earnings• Employees motivated by their ownership stake in the firm
• Disadvantages• Retirement benefit tied to the firm’s future performance
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Metric Options for Variable Pay Plans
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Types of Sales Compensation Plans
• Salary-only• All compensation is paid as a base wage with no incentives
• Straight commission• Compensation is computed as a percentage of sales in units or
dollars• Draw system makes advance payments against future
commissions to the salesperson• Salary-plus-commission or bonuses• Compensation is part salary for income stability and part
commission for incentive
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Sales Metric Possibilities
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Executive Compensation • Handled differently than other employees’ pay, why:
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Legal Aspects of Executive Compensation
• Say on Pay• Publically listed companies must allow share holders to vote on
executive compensation• Clawbacks• Allows a company to recover any incentive based pay that was
paid out during the prior 3 years if it would not have been paid under restated financial statements
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Executive Compensation Packages
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Executive Compensation Consideration
sand
Concerns
Would another company hire this
person as an executive?
How does the executive’s
compensation compare with that for
executives in similar companies?
What would an investor pay for the level of performance
of the executive?
Is the executive’s pay consistent with pay for other employees within the company?
Reasonableness of Executive Compensation
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Common Executive Compensation Criticisms
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Executive Compensation and Boards of Directors
• In most organizations the board of directors is the major policy-setting entity• Must approve executive compensation packages
• Compensation committee : Subgroup of the board of directors that is composed of directors who are not officers of the firm