CURRENT TRENDS IN COMPENSATION

AND REWARD MANAGEMENT

 Learning Objectives
After you have read this chapter, you should be able to:
Define variable pay and identify three elements of successful
pay-for-performance plans.
Discuss three types of individual incentives.
Explain three ways that sales employees are typically
compensated.
Identify key concerns that must be addressed when designing
group/team variable pay plans.
Discuss why profit sharing and employee stock ownership are
common organizational incentive plans.
Identify the components of executive compensation and discuss
criticisms of executive compensation levels.
 holistic approach: The Total Rewards
approach
Business Strategy

Organizational Work Design Desired Culture Systems

Structure

Human Capital Strategy

The Employment Deal

TOTAL REWARDS STRATEGY

MONETARY NON-MONETARY

Annual
Growth & Communication
Incentives & Long Term Performance Work
Base Pay Benefits Career & Nonmonetary
Cash Incentives Management Environment
Development Recognition
Recognition
 Variable Pay: Incentives for Performance
Variable Pay
Compensation linked to individual, group/team, and/or
organizational performance.
Basic assumptions:
Some jobs contribute more to organizational success
than others.
Some people perform better and are more productive
than others.
Employees who perform better should receive more
compensation.
Some of employees total compensation should be
tied directly to performance.
Developing Successful Pay-for-Performance
Plans
Reasons for Adopting Pay or Incentive Plans:
Link more directly strategic business goals and
employee performance.
Enhance organizational results and reward
employees financially for their contributions.
Reward employees to recognize different levels of
employee performance.
Achieve HR objectives, such as increasing retention,
reducing turnover, recognizing training, or rewarding
safety and attendance.
Effective Incentive Plans
Metrics for Variable Pay Plans
 Successes and Failures of
Variable Pay Plans
Successful incentive plans require:
The development of clear, understandable plans that
are continually communicated.
The use of realistic performance measures.
Keeping plans current and linked to organizational
objectives.
Strong links among performance results and payouts
that truly recognize performance differences.
Clear identification of variable pay incentives
separately from base pay.
Types of Variable Pay Plans
 Individual Incentives

Identification of
Independent
Individual
Work
Performance

Individual
Incentive
Systems
Individualism
Individual
Stressed in
Competitiveness
Organizational
Desired
Culture
 Piece-Rate 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.
 Individual Incentives: Bonuses
Bonus
A one-time payment that does not become part
of the employees base pay.
Spot Bonus
A special type of bonus used is a spot bonus,
so called because it can be awarded at any
time.
 Special Incentive Programs
Performance 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.
Purposes of Special Incentives
 Types of Sales Compensation 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.
The draw system make advance payments against future
commissions to salesperson.
Salary-Plus-Commission or Bonuses
Compensation is part salary for income stability and part
commission for incentive.
Determining Sales Effectiveness
Why Organizations Establish Variable Pay Plans
for Groups/Teams
 Group/Team Incentives

Distribution of
Group/Team
Incentives

Timing of Design of
Group/Team Group/Team
Incentives Incentive Plans

Decision Making
About Group/Team
Amounts
 Group/Team Incentives (contd)
Distributing Rewards
Same-size reward for each member
Different-size reward for each member
Problems with Group/Team Incentives
Rewards in equal amounts may be perceived as
unfair by employees who work harder, have more
capabilities, or perform more difficult jobs.
Group/team members may be unwilling to handle
incentive decisions for co-workers.
Many employees still expect to be paid according to
individual performance.
Conditions for Successful Group/Team Incentives
 Types of Group/Team Incentives
Group/Team Results
Self-funding pay plans for groups/teams that reward
through improved organizational results on the basis
of group output, cost savings, or quality improvement.
Gainsharing (Teamsharing or Goal Sharing)
The sharing with employees of greater-than-expected
gains in productivity through increased discretionary
efforts.
Improshare
Scanlon Plan
 Organizational Incentives
Profit Sharing
A system to distribute a portion of the profits of the
organization to employees.
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

Framework Choices for a Profit-Sharing Plan
 Employee Stock Plans
Stock Option Plan
A plan that gives employees the right to purchase a
fixed number of shares of company stock at a
specified price for a limited period of time.
If market price of the stock is above the specified option
price, employees can purchase the stock and sell it for a
profit.
If the market price of the stock is below the specified option
price, the stock option is underwater and is worthless to
employees.
 Employee Stock Plans
Employee Stock Ownership Plan (ESOP)
A plan whereby employees gain significant stock
ownership in the organization for which they work.
Advantages
Favorable tax treatment for ESOP earnings
Employees motivated by their ownership stake in the firm
Disadvantages
Retirement benefit is tied to the firms future performance
Management tool to fend off hostile takeover attempts.
Components of Executive
Compensation Packages
 Executive Compensation
Reasonableness of Executive Compensation
Would another company hire this person as an
executive?
How does the executives compensation compare
with that for executives in similar companies in the
industry
Is the executives pay consistent with pay for other
employees within the company?
What would an investor pay for the level of
performance of the executive?
Common Executive Compensation Issues