Human
Resource
Management
Variable Pay
and Executive
Compensation
Chapter 12
Robert L. Mathis | John H. Jackson | Sean
R. Valentine
14e
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Web site, in whole or in part.
Why Use Variable Pay?
Some people
perform better and
are more productive
than others
Better performing
employees should
receive more
compensation
Variable
Pay
Assumptions
Total compensation
should be tied
directly to
performance and
results
Some jobs
contribute more to
organizational
success than others
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Web site, in whole or in part.
Figure12.1 - A Variety of Possible
Incentives
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Web site, in whole or in part.
Developing Successful Pay-forPerformance Plans
Link strategic goals
and employee
performance
Enhance results and
reward employees
financially
Reasons for
Pay-for-Performance
Plans
Reward and
recognize employee
performance
Promote
achievement of
HR objectives
© 2014 Cengage Learning. All rights reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible
Web site, in whole or in part.
Combating Variable Pay Complexity
Develop clear, understandable
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
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Web site, in whole or in part.
Figure12.2 - Factors for Successful
Variable Pay Plans
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Web site, in whole or in part.
Combating Variable Pay
Complexity
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Web site, in whole or in part.
Figure12.3 - Categories of Variable Pay
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Web site, in whole or in part.
Individual Incentives
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Web site, in whole or in part.
Figure12.4 - Purposes of Nonmonetary
Incentives
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Web site, in whole or in part.
Figure12.5 - Possible Reasons for Using
Group/Team Variable Pay
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Web site, in whole or in part.
Design of Group/Team Incentive Plans
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Web site, in whole or in part.
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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Web site, in whole or in part.
Figure12.6 - Conditions for Successful
Group/Team Incentives
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Web site, in whole or in part.
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

Improshare

Scanlon plan
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Web site, in whole or in part.
Organizational Incentives
Profit Sharing
Primary Objectives
Drawbacks
• Increase productivity and
organizational performance
• Disclosure of financial
information
• Attract or retain employees
• Variability of profits from
year to year
• Improve product/service
quality
• Enhance employee morale
• Profit results not strongly
tied to employee efforts
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Web site, in whole or in part.
Figure12.7 - Framework Choices for a
Profit-Sharing Plan
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Web site, in whole or in part.
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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Web site, in whole or in part.
Figure12.8 - Metric Options for Variable
Pay Plans
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Web site, in whole or in part.
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
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Web site, in whole or in part.
Types of Sales Compensation Plans
 Salary-plus-commission

or bonuses
Compensation is part salary for income stability and
part commission for incentive
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Web site, in whole or in part.
Types of Commission
 Straight
commission system - Percentage
of the value of the sales is given to the
sales person

Advantage - Requires the sales representative to
sell in order to earn

Disadvantage - Offers no security for the sales staff

Draw: Amount advanced against, and repaid from,
future commissions earned
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Web site, in whole or in part.
Types of Commission
 Salary-plus-commission

or bonuses
Compensation is part salary for income stability and
part commission for incentive
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Web site, in whole or in part.
Figure12.9 - Sales Metric Possibilities
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Web site, in whole or in part.
Executive Compensation
 Handled
pay
differently than other employees’
 Usually
more than business unit heads with
similar responsibilities
 Is
a measure of the power that a CEO brings
to the organizational relationship
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Web site, in whole or in part.
Figure 12.10 - Difficult CEO
Responsibilities
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Web site, in whole or in part.
Changes in the Context 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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Web site, in whole or in part.
Reasonableness of Executive
Compensation
Would another company
hire this person as an
executive?
How does the executive’s
compensation compare with
that for executives in similar
companies?
Executive
Compensation
Considerations
and
Concerns
Is the executive’s pay
consistent with pay for
other employees within
the company?
What would an investor
pay for the level of
performance of the
executive?
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Web site, in whole or in part.
Figure12.12 - Common Executive
Compensation Criticisms
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Web site, in whole or in part.