12 - management compensation.ppt

8/13/2019 12 - Management Compensation.ppt

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Chapter 12

MANAGEMENTCOMPENSATION


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Formal Control Process

Goals

and strategies

(Chp 2 & 13)

Strategic

Planning

(Chp 8)

Budgeting

(Chp 9)

Responsibilitycenter

Performance(Chp 10 & 11)

Report

actual vs plan

Wasperformancesatisfactory?(Chp 11 & 12)

Rules

(Chp 3)

Other

information

Reward (feedback)

Revise Revise Corrective

action

Measurement

Feedback

Communication

Yes

No


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The incentive compensation systemis a key management control

device.

Management Compensation


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Research Findings onOrganizational Incentives

Individuals tend to e more strongly motivated by the potential of

earning rewards than by the fear of punishment.

A personal reward is relative or situational.

If senior management signals by its action that it regards MCS as

important, operating mangers will also regards it as important.

Individuals are highly motivated when they received reports, or

feedback, about their performance.

Motivation is weakest t=when the person believes an incentive is

either unattainable or to easily attainable.


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Characteristics of IncentiveCompensation Plans

Compensation package:1. Salary2. Benefits

3. Incentive compensation Incentive compensation plans:

1. Those that relate compensation to profitscurrently earned by the company short term

incentive plans.2. Those that relate performance to long-term

performance long term incentive plans.


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Short-Term Incentive Plans

The Total Bonus Pool

The total amount that can be paid to a qualifiedgroup of employees in a given year.

Ways to establish bonus pool: Bonus equal to a set percentage of profit.

Base bonus on the percentage of earning per shareafter a predetermined level of earnings per share hasbeen attained.

Base bonus on increase in profitability over thepreceding year.

Base bonus on their profitability relative to that of theirindustry.


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Continued

Carryovers

Deferred Compensation


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Long-Term Incentive Plans

Growth in the value of the companys commonstock reflects the companys long-runperformance.

Stock Options, the right to buy a number ofshares of stock at, or after, a given date in thefuture (the exercise date).


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Incentives forBusiness Unit Managers

Types of incentives:

1. Financial Rewards:

Salary increases, bonuses, benefits, &prerequisite (automobiles, vacation trips, clubmemberships, etc)

2. Psychological &social rewards:

promotion possibilities, increasedresponsibilities, more autonomy, bettergeographical location & recognition.


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Continued

Size of Bonus Relative to Salary

Fixed pay system

Performance-based pay Cutoff Levels

Bonus Basis

Total corporate profit Differentiated between single firm-

industry & conglomerate firms.


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Performance Criteria

Financial Criteria

Profit center; investment center; cost center

Adjustment for Uncontrollable factors Removes expenses from corporate.

Eliminates the effects of losses cause by actsof nature.

Benchmark for comparison.


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Bonus DeterminationApproach

Formula-based

Subjective

When managers personal control overa units performance is low.

Combination of two


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Agency Theory

One party (the principal) hires another party(the agent) to perform some service &, in doingso, delegates decision making authority to the

agent. Divergent Objectives of Principals & Agents.

Work aversion

Risk preference

Nonobservability of Agents Actions Information asymetry


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Continued

Control Mechanism

Monitoring

Incentive Contracting

12 - management compensation.ppt

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