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C h a p t e rC h a p t e r
PART FOUR - COMPENSATING EMPLOYEES
IncentivePay
Systems
1515
McGraw-Hill/Irwin© 2004 The McGraw-Hill Companies, Inc. All
rights reserved. 15 - 2
Chapter 15 Overview
Requirements of Incentive Plans
Individual Incentives
Group Incentives
Variable Pay
Making Incentive Plans Work
McGraw-Hill/Irwin© 2004 The McGraw-Hill Companies, Inc. All
rights reserved. 15 - 3
Requirements of Incentive Plans
Individual Incentives Piece Rate Plans
Plans Based on Time Saved
Plans Based on Commissions
Individual Bonuses
Suggestion Systems
Incentives for Managerial Personnel Annual Bonus Long-Term Performance Plans Stock Options for Managerial Personnel The Status of Executive Pay
Requirements of Incentive Plans
Individual Incentives Piece Rate Plans
Plans Based on Time Saved
Plans Based on Commissions
Individual Bonuses
Suggestion Systems
Incentives for Managerial Personnel Annual Bonus Long-Term Performance Plans Stock Options for Managerial Personnel The Status of Executive Pay
Requirements of Incentive Plans
Individual Incentives Piece Rate Plans
Plans Based on Time Saved
Plans Based on Commissions
Individual Bonuses
Suggestion Systems
Incentives for Managerial Personnel Annual Bonus Long-Term Performance Plans Stock Options for Managerial Personnel The Status of Executive Pay
Requirements of Incentive Plans
Individual Incentives Piece Rate Plans
Plans Based on Time Saved
Plans Based on Commissions
Individual Bonuses
Suggestion Systems
Incentives for Managerial Personnel Annual Bonus Long-Term Performance Plans Stock Options for Managerial Personnel The Status of Executive Pay
Requirements of Incentive Plans
Individual Incentives Piece Rate Plans
Plans Based on Time Saved
Plans Based on Commissions
Individual Bonuses
Suggestion Systems
Incentives for Managerial Personnel Annual Bonus Long-Term Performance Plans Stock Options for Managerial Personnel The Status of Executive Pay
Requirements of Incentive Plans
Individual Incentives Piece Rate Plans
Plans Based on Time Saved
Plans Based on Commissions
Individual Bonuses
Suggestion Systems
Incentives for Managerial Personnel Annual Bonus Long-Term Performance Plans Stock Options for Managerial Personnel The Status of Executive Pay
Requirements of Incentive Plans
Individual Incentives Piece Rate Plans
Plans Based on Time Saved
Plans Based on Commissions
Individual Bonuses
Suggestion Systems
Incentives for Managerial Personnel Annual Bonus Long-Term Performance Plans Stock Options for Managerial Personnel The Status of Executive Pay
McGraw-Hill/Irwin© 2004 The McGraw-Hill Companies, Inc. All
rights reserved. 15 - 4
Table 15.1
Source: The 2002/2003 Geographic Report on Top Management Compensation, Vol 2 (Rochelle Park, N. J.: Watson Wyatt Data Services, 2002) p. 1828.
Position Number of Executives Eligible for Award
Chief Executive Officer 646 83.6%
Chief Operating Officer 333 85.0%
CEO/President-Subsidiary 256 91.8%
Top Division Executive 430 92.8%
Executive Vice President 253 84.2%
Top Human Resource Executive 409 83.4%
Top Executives Eligible for Bonus and/orOther Cash Compensation Payments
McGraw-Hill/Irwin© 2004 The McGraw-Hill Companies, Inc. All
rights reserved. 15 - 5
Requirements of Incentive Plans
Individual Incentives Piece Rate Plans
Plans Based on Time Saved
Plans Based on Commissions
Individual Bonuses
Suggestion Systems
Incentives for Managerial Personnel Annual Bonus Long-Term Performance Plans Stock Options for Managerial Personnel The Status of Executive Pay
McGraw-Hill/Irwin© 2004 The McGraw-Hill Companies, Inc. All
rights reserved. 15 - 6
Table 15.2
Source: Adapted from Business Week Online, April 15, 2002, www.businessweek.com/magazine/content/02_15/b3778014.htm, accessed October 21, 2002.
2001 Salary and Bonus Long-Term Total (in millions of dollars) Compensation Pay
1. Lawrence Ellison,Oracle $ 0 $706.1 $706.1
2. Jozef Straus,JDS Uniphase 0.5 150.3 150.8
3. Howard Solomon,Forest Laboratories 1.2 147.3 148.5
4. Richard Fairbank,Capital One Financial 0 142.2 142.2
5. Louis Gerstner,IBM 10.1 117.3 127.4
6. Charles Wang,Computer Associates Intl. 1.0 118.1 119.1
7. Richard Fuld, Jr.,Lehman Brothers 4.8 100.4 105.2
8. James McDonald,Scientific-Atlanta 2.1 84.7 86.8
9. Steve Jobs,Apple Computer 43.5 40.5 84.0
10. Timothy Koogle,Yahoo! 0.2 64.4 64.6
The Top-Paid Chief Executives: In Millions of Dollars
McGraw-Hill/Irwin© 2004 The McGraw-Hill Companies, Inc. All
rights reserved. 15 - 7
Requirements of Incentive Plans
Individual Incentives Piece Rate Plans
Plans Based on Time Saved
Plans Based on Commissions
Individual Bonuses
Suggestion Systems
Incentives for Managerial Personnel Annual Bonus Long-Term Performance Plans Stock Options for Managerial Personnel The Status of Executive Pay
McGraw-Hill/Irwin© 2004 The McGraw-Hill Companies, Inc. All
rights reserved. 15 - 8
Group Incentives Gain-Sharing or Profit-Sharing Plans
Scanlon-Type Plans
Employee Stock Ownership Plans (ESOPs)
Variable Pay
Making Incentive Plans Work
Group Incentives Gain-Sharing or Profit-Sharing Plans
Scanlon-Type Plans
Employee Stock Ownership Plans (ESOPs)
Variable Pay
Making Incentive Plans Work
Group Incentives Gain-Sharing or Profit-Sharing Plans
Scanlon-Type Plans
Employee Stock Ownership Plans (ESOPs)
Variable Pay
Making Incentive Plans Work
McGraw-Hill/Irwin© 2004 The McGraw-Hill Companies, Inc. All
rights reserved. 15 - 9
Table 15.3
To Organization
Allows use of pretax dollars to finance debt.
Increases cash flow.
Provides a ready buyer for stock.
Provides protection against unwanted tender offers.
Protects the company from estate problems.
Can result in substantial tax savings.
Can motivate employees by giving them a piece of the action.
To Employees
Favorable tax treatment of lump-sum distribution, deferment of tax until distribution, and gift and estate tax exemptions.
Allows employees to share in the success of the company.
Provides a source of capital gains income for employees.
Can allow employees some voice in running the company.
Major Benefits of Employee Stock Ownership Plans
To Stockholders
Provides ready market to sell stock.
Establishes definite worth of shares for estate purposes.
Maintains voting control of company.
Protects the company from having to come up with large sums of money to settle an estate.
Can result in preferential consideration for a government-guaranteed loan.
McGraw-Hill/Irwin© 2004 The McGraw-Hill Companies, Inc. All
rights reserved. 15 - 10
Table 15.4
Personnel
Nonmanagers
Managers
Individual
Piece rate plansPlans based on time savedCommission plansBonuses based on individual performanceSuggestion systems
Bonuses based on organi- zational performance (annual and long-term)Stock option plans:
Stock appreciation rights (SARs)
Phantom stock plansRestricted stock plans
Suggestion systems
Summary of Most Commonly Used Incentive Plans
Group
Bonuses based on group performance
Bonuses based on group performance
Organizational
Lincoln electric planGain-sharing/profit- sharing plansScanlon-type plansEmployee stock owner- ship plans (ESOPs)
Lincoln electric planGain-sharing/profit- sharing plansScanlon-type plansEmployee stock owner- ship plans (ESOPs)
Type of Plan
McGraw-Hill/Irwin© 2004 The McGraw-Hill Companies, Inc. All
rights reserved. 15 - 11
Group Incentives Gain-Sharing or Profit-Sharing Plans
Scanlon-Type Plans
Employee Stock Ownership Plans (ESOPs)
Variable Pay
Making Incentive Plans Work
Group Incentives Gain-Sharing or Profit-Sharing Plans
Scanlon-Type Plans
Employee Stock Ownership Plans (ESOPs)
Variable Pay
Making Incentive Plans Work
McGraw-Hill/Irwin© 2004 The McGraw-Hill Companies, Inc. All
rights reserved. 15 - 12
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