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JACKSON
Chapter 13
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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.
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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.
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Achieve HR objectives, such as increasing retention, reducing turnover, recognizing training, or rewarding safety and attendance.
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Figure 131 Copyright 2005 Thomson Business & Professional Publishing. All rights reserved. 135
Figure 132 Copyright 2005 Thomson Business & Professional Publishing. All rights reserved. 136
Figure 133 Copyright 2005 Thomson Business & Professional Publishing. All rights reserved. 138
Individual Incentives
Independent Work
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Piece-Rate Systems
Straight Piece-Rate Systems
Wages are determined by multiplying the number of pieces produced by the piece rate for one unit.
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Spot Bonus
A special type of bonus used is a spot bonus, so called because it can be awarded at any time.
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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.
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Figure 134 Copyright 2005 Thomson Business & Professional Publishing. All rights reserved. 1313
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.
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Figure 135 Copyright 2005 Thomson Business & Professional Publishing. All rights reserved. 1315
Figure 136 Copyright 2005 Thomson Business & Professional Publishing. All rights reserved. 1316
Group/Team Incentives
Distribution of Group/Team Incentives Timing of Group/Team Incentives Decision Making About Group/Team Amounts Design of Group/Team Incentive Plans
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Figure 137 Copyright 2005 Thomson Business & Professional Publishing. All rights reserved. 1319
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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
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Figure 138 Copyright 2005 Thomson Business & Professional Publishing. All rights reserved. 1322
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.
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Disadvantages
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Figure 139 Copyright 2005 Thomson Business & Professional Publishing. All rights reserved. 1325
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?
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Figure 1310 Copyright 2005 Thomson Business & Professional Publishing. All rights reserved. 1327