Compensation and Rewards

1. Compensation and Rewards Business 158 Spring Semester 2007 Tim Brown

2. Agenda Submit project status update form Quiz (take, grade, review) Guest Speaker evaluation return Test return Lecture: short-term incentives BREAK Lecture: long-term incentives

3. Chapter Topics (Chapter 14) Compensation Strategy for Special Groups Supervisors Corporate Directors Executives Scientists and Engineers in High-Technology Industries Sales Forces Compensation for Contingent Workers

4. Characteristics of Special Groups Strategically important to the company Positions tend to have built-in conflict that arises because different factions place incompatible demands on members of group

5. Issues: Supervisory Pay Caught between demands of Upper management in terms of production and Employees in terms of rewards, reinforcements, and counseling Cash incentives can enticenonexempt employees to acceptchallenges of being a supervisor The differential varies any where from 10% to 35%.The differential varies any where from 10% to 35%.

6. Strategies: Supervisory Pay Pay strategies Base salaries of supervisors typically exceed highest paid employee Evaluate need for payment for scheduled overtime Increased use of variable pay More than half of companies have a variable pay component for supervisors

7. Issues: Professional Employees Conflict - May be torn between Goals, objectives, and ethicalstandards of their profession and Demands of an employerconcerned more with profit motive Problems in designing pay Salary plateaus due to knowledge obsolescence of mature professionals Questions of equity

8. Reward Components:Professional Employees Dual-career ladders Performance-based incentives Profit sharing Stock ownership Bonuses Completion of projects on or before deadlines Patents Publications Attainment of professional licenses Perks based on unique needs of professional employees

9. Conflicts Faced by Sales Staff Often go for extended periods in field with little supervision Challenges Staying motivated Continuing to make salescalls despite little supervision

10. Key Considerations in Sales Plan Design

11. Alternative Sales Pay Plans Guaranteed base salary Guaranteed base salary + commission Guaranteed base salary + bonus Guaranteed base salary + commission + bonus Commission only

12. Performance Measures: Sales Force Overall territory volume Market share Product placements in retail stores New accounts Gross profit Percentage of list-price attainment (ASP) Consistency of sales results Expense control Product per square foot Bad debt attribution

13. Break 15 minute break Then, recap short term incentive plan designs

14. General Types of Incentive Plans Recognition programs Short-term cash incentives Long-term cash incentives Long-term equity incentives

15. Short-Term Incentive Designs Profit Sharing Funded by company performance Distributed to members of the organization Amount earned based on percent of salary or percent of dollar-target Payment is not tied to personal performance Eligibility often based on date of hire Design clue: If we make x% net operating income, we�ll give every employee 5% bonus

16. Short-Term Incentive Designs Formal Bonus Typically funded by company performance Distributed to members of the group Target set as percent of salary or dollar-target Payment is tied to performance to objectives Eligibility established at start of bonus plan year Design clue: If we deliver enough we�ll get something; deliver to plan we get the target; deliver even more we can exceed the goal

17. Short-Term Incentive Designs Discretionary Bonus Typically given without expectation Independent of past history Distributed to individuals or groups based on extremely good (often unusual) performance Payment size may be based on guidelines Design Clue: I know you don�t expect it, but we couldn�t have done it without you, thanks.

18. Cash Incentive Design Terms Target: Expectation Goal: Amount you must deliver for full achievement Payment: Amount you get paid for meeting the goal First-dollar plan: plan pays at any performance Threshold: A plan that pays nothing until meeting a specified achievement level Cap/Maximum: The most the plan can pay Slope: The rate at which payments rise as performance improves

19. Cash Incentive Payout Examples

20. Plan Design Considerations Who is eligible to participate? What are the rules? Who sets them? What is a reasonable expectation? For performance, For rewards Where does the reward money come from? Are goals set annually or quarterly? How should rewards be paid out? At once or over time?

21. Why is Sales Comp Special? Impact of performance on the company Impact on other parts of the business Production swings Feast or famine Hockey stick Nature of sales work Length of time to close a sale Allowances, draws and quotas

22. Great Sales Comp Plans� Have a solid plan design, well articulated rules and expectations of performance Have upside reward and sufficient protection to allow the employee to be focused on sales Support the business model and plant capacity Provide incentive to the sales force but also supports the needs of the customer

23. Are Short-Term Incentives Best for All Special Groups? Supervisors Corporate directors Top management executives Professional employees Sales staff Contingent workers

24. Key Activities of Corporate Directors Review senior management actions to ensure congruency with organizational Mission, Vision, Strategies Review policies of key organizational operations to ensure effective use of resources Ensure senior management acts properly >>Decisions have long-term implications

25. Conflicts Faced by Corporate Directors Help set strategic plans affecting profits Steep regulatory compliance requirements Disgruntled stockholders may sue or try to take over the company Watson-Wyatt reports that 98% of the companies they survey compensate outside members, while 5% compensate inside directors. The larger the firm, the greater the likelihood of compensating outside directors. The reverse is true for inside directors. Compensation has not always kept up with this increased responsibility that directors face. There is a growing concern that board members are paid too much to perform rubber stamp duties, but too little to assume today�s risks, responsibilities, and pressures.Watson-Wyatt reports that 98% of the companies they survey compensate outside members, while 5% compensate inside directors. The larger the firm, the greater the likelihood of compensating outside directors. The reverse is true for inside directors. Compensation has not always kept up with this increased responsibility that directors face. There is a growing concern that board members are paid too much to perform rubber stamp duties, but too little to assume today�s risks, responsibilities, and pressures.

26. Board of Directors Compensation Annual retainer Meeting attendance fees Committee participation fees Rewards should link to company performance >>>Pay is both cash and stock-based (start ups may only pay directors with stock)

27. Conflicts Faced by Top Management Stockholders want healthy returns on investment Government wants compliance with laws Must decide between strategies Maximizing short-term gains versus Focusing on long-term

28. CEO Compensation Theories Social comparisons Executive salaries bear a relationship to pay of lower-level employees Economic approach Value of CEO should correspond to some measure of organizational success Agency theory CEO compensation should ensure that executives focus on best interests of firm and stockholders

29. Executive Compensation Packages Base salary Short-term (annual) incentives or bonuses Long-term incentives and capital appreciation plans Executive benefits Executive perquisites

30. Types of Long-Term Incentive Plans Incentive stock options Non-qualified stock options Phantom stock plans Stock appreciation rights Restricted stock plans Performance share/unit plans

31. Perquisites Offered to Executives Physical exam Company car Financial counseling Income tax preparation First-class aiar travel Company plane Country club membership Estate planning Personal liability insurance Spouse travel Chauffeur service Reserved parking Executive dining room Home security system Car phone Low cost loans See Exhibit 14.7, page 503See Exhibit 14.7, page 503

32. Issues in Executive Compensation Proxy disclosure requirements Perqs exchanged for cash (buy your own) Wealth theory Do you really need more? Golden handcuffs, golden parachutes Pay for failure? Average CEO tenure? About 4 years

33. Contingent Workers Types include a person who works Through a temporary help agency On an on-call basis As independent contractor Typical salary arrangements Temporary and part time workers often earn less than workers in traditional arrangements Independent contractors often earn more

34. Summary: Design for success Pay design should complement work time horizon Longer term focus for executives than others Pay design should complement risk tolerance Sales people typically like to take risks and be rewarded handsomely for success Assembly workers want a salary they can count on