CHAPTER 12
Variable Pay
and Executive
Compensation
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Variable Pay:
Incentive for Performance
 Basic
assumptions:

Some people or groups contribute more to
organizational success than do others

Some people perform better and are more
productive than are others

Employees or groups who perform better or
contribute more should receive greater
compensation
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Figure 12-1:
A Variety of Possible Incentives
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Effective Variable Pay
Link strategic goals and
employee performance
Enhance results and reward
employees financially
Reward and recognize
employee performance
Reasons for
Variable Pay
Plans
Promote achievement of
HR objectives
Reduce fixed costs
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Combating Variable Pay
Complexity
Develop clear plans that are
continually communicated
Use realistic performance
measures
Keep plans current and linked
to organizational objectives
Successful
Incentive
Plans
Link results to payouts that
recognize differences
Identify variable pay incentives
separately from base pay
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Figure 12-2: Factors for Effective
Variable Pay Plans
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Effective Variable Pay
 Combating
variable pay complexity:

Develop clear plans

Use realistic performance measures

Keep plans current and linked to objectives

Link results to payouts

Identify incentives separately from base pay
 Fit
the plan to the organization
 Reward
appropriate actions
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Figure 12-4:
Levels of Variable Pay
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Individual Incentives
Individual performance
must be identified
Individual competitiveness
must be desirable
Effective
Individual
Incentive Plans
Individualism must be
stressed in the
organizational culture
Individuals must be in
control of the place of
production
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Figure 12-5:
Purposes of Nonmonetary Incentives
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Figure 12-6: Possible Reasons for Using
Work Unit or Team Variable Pay
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Design of Work Unit/Team
Variable Pay
Work Unit/Team
Variable Pay Issues
Distribution of
Work Unit/Team
Incentives
Timing of
Work Unit/Team
Incentives
Determining
Work Unit/Team
Incentive Amounts
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Work Unit/Team Incentives
 Challenges
with work unit/team incentives:

Rewards distributed in equal amounts to all
members may be perceived as unfair

Free rider: Member of the group who contributes
little

Group size: Individual efforts of employees have
little effect on the total performance of the group in
large groups
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Figure 12-7: Conditions for Effective
Work Unit or Team Incentives
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Types of Work Unit/Team
Incentives
 Work
Unit/Team Results:

Group Production

Cost Savings

Customer Satisfaction

Quality Improvement
 Gainsharing:
Sharing with employees greater
than expected gains in profits and/or
productivity
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Organizational Incentives
Profit Sharing
Primary Objectives
• Improve organizational results
Drawbacks
• Attract or retain employees
• Disclosure of financial
information
• Improve product/service
quality
• Variability of profits from
year to year
• Enhance employee morale
• Rewards not obviously linked
to employee efforts
• Focus employees on goals
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Figure 12-9: Plan Design Choices for
Profit Sharing Programs
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Employee Stock Plans
 Stock
option plan: Gives employees the right
to purchase a 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
their organizations
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Figure 12-10: Possible Metrics
for Variable Pay Plans
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Types of Sales Compensation
Plans
 Salary

Only
All compensation is paid as a base wage
 Commission

Plans
Commission: Percentage of the revenue generated by
sales that is given to an agent or salesperson
 Straight
Commission

Compensation is computed as a percentage of sales in
units or dollars

Draw: Amount advanced against, and repaid from, future
commissions earned
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Types of Sales Compensation
Plans
 Salary
Plus Commission
 Salary
plus commission: Combines the stability of a salary
with a commission based on sales generated
 Bonuses

Percentage of base pay tied to how well employee
meets targets
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Figure 12-11:
Possible Metrics
for Sales
Compensation
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Executive Compensation
 Handled
 CEO
differently from employee pay
responsibilities:

Establish strategic direction for the organization

Create shareholder value

Ensure the sustainability of the enterprise
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Reigning in Executive
Compensation
 Say

on Pay
Public corporations must allow shareholders to vote
on the presumed fairness of executive pay
packages
 Clawbacks

Allows for the recovery of incentive-based pay that
was provided to executives and later determined
to have been paid under false pretenses
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
Figure 12-13: Point/Counterpoint
Regarding Executive Compensation
© 2017 Cengage Learning®. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.