C h a p t e rC h a p t e r

PART FOUR - COMPENSATING EMPLOYEES

IncentivePay

Systems

1515

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Chapter 15 Overview

Requirements of Incentive Plans

Individual Incentives

Group Incentives

Variable Pay

Making Incentive Plans Work

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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

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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

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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

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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

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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

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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

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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.

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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

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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

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