Different Types Of Incentive Compensation By Andrea Cassells

Compensation systems can take on many forms, all of which have positives and negatives related to it. However, certain components are noted to be determinants of solid compensation plans. One agreement of a solid compensation system is the use of incentives. “Clearly a successful companies set objectives that will provide incentives to increase profitability” (Needles & Powers, 2011). Incentive bonuses should be measures that the company finds important to long-term growth. According to Needles & Powers (2011) the most successful companies long term focused on profitability measures. For large for-profit firms, compensation programs should offer stock options. The interweaving between the market value of a company’s stock and company’s performance both motivate and increase compensation to employees As the market value of the stock goes up, the difference between the option price and the market price grows, which increases the amount of compensation” (Needles & Powers, 2011). Conclusively, a compensation plan should serve all stakeholders, be simple, group employees properly, reflect company culture and values, and be flexible (Davis & Hardy, 1999; The Basics of a Compensation Program).

The right compensation program will depend on the organization’s business strategy and goals. To achieve these, an organization must recruit and select the best possible employees. To attract such employees, there must be an attractive compensation plan. Competitors will be offering different payment options, this may be based on pay rate or special perks, and a company’s stock options. Organizations must be aggressive yet reasonable to compete with competitors. Retaining and encouraging employees to perform at their best may be achieved through an immediate incentive award

A well-articulated compensation philosophy drives organizational success by aligning pay and other rewards with business strategy. It provides the foundation for plan design and administration and anchors current and future plans to the company's culture and values (Kaplan, 2006, p.32). Recognizing and rewarding achievement is the cornerstone of the company A’s compensation philosophy. The mission of the company is to attract, select, place and promote all individuals based on their qualifications. The company believes that performance-based compensation helps attract, develop and retain talented professionals. In addition to base pay which based upon local market conditions and targeted to be above market, the company provides the following types of potential compensation to reward performance:

Executive incentive plan has motivated the management to bring changes as the plan says that if the company achieves the target of net after tax profit, 11 senior executive officers will be given incentive compensation of 40% of annual salary.

Incentive pay, also known as "pay for performance" is generally given for specific performance results rather than simply for time worked. While incentives are not the answer to all personnel challenges, they can do much to increase worker performance. (Billikopf) Performance pay has various names: merit pay, pay for performance, knowledge-and-skill- based pay, or individual or group incentive pay. (Delisio)

The goal of compensation in our case, is to attract and encourage executives to diligently pursue the interest of the shareholders that have a stake within the firm. Richard Long (2010) discuses the steps of formulating a strategic compensation plan which involves; the defining the required behavior, role of compensation, determine the compensation mix, compensation level, and evaluating the proposed strategy. If we want to attract the best and most talented individual to work as the executive of a firm, the package must be attractive enough to pull the individual already making millions to work at another firm. Some typical compensation packages for executive pays include; cash/base salaries, bonuses, stock options, and stock ownership (Richard, 2010). The executive compensation proposal from the board of directors / shareholders consist of mainly stock options, restricted stock, and long term- contracts and retirement plans, which shareholders use to motivate the CEO to maximize the firm value (Martin, 2006). Most of the wealth comes from the stock options, in which the CEO is more inclined to raise the firm’s stock value over time to produce better value for shareholders which in return, better compensation for the CEO. Martin (2006) also noted it is important the stock options are more for long term

High executives and CEO’s have several ways to be compensated. Cash compensation can take the form of bonuses given by cash and the salary amount for the year. Compensation can be deferred until later for income tax purposes, these are known as deferred compensation. (1) However, tax code §409A - Deferred Compensation & SERPS imposes significant restrictions on the timing of deferrals with large penalties if broken (2). Long-Term Incentive Plan, LTIPs, give long-term incentive with several types of incentives designed to keep the excellent CEO in the company. Through the years LTI plans have become ever more complicated, often combined with clawback arrangements, net holding requirements and performance-based deferrals of cash bonuses in

It is the responsibility of management to identify performance problems, however it is uncommon for mangers to effectively determine why the problem exists. The ACHIEVE Model helps mangers identify why problems have occurred and then develops a strategy to solve the problem. There are seven factors related to effective problem solving in management, they are ability, clarity, help, incentive, evaluation, validity, and environment. I will identify each of these seven factors in a performance problem I have witnessed and have direct knowledge about.

Traditionally, most employers compensated their employees based on a set hourly wage or annual salary (Martocchio, 2013). Today, there are many companies that utilize incentive pay programs to replace part or all of the base pay to manage payroll expenses and to connect pay to performance. Incentive pay, also referred to as pay-for-performance or variable pay, rewards individuals for partly or completely achieving a predetermined goal (Martocchio, 2013). Basically, incentive pay is compensation, outside of the employee’s regular wages, which can vary depending on whether or not the employee achieves predetermined goals (Martocchio, 2013).

Traditionally, all incentive plans are “pay-for-performance” plans. They pay all employees based on the employee’s performance (Dessler). Compensation is a primary motivator for employees. People look for jobs that not only suit their creativity and talents, but compensate them both in terms of salary and other benefits accordingly. Compensation is also one of the fastest changing fields in Human Resources, as companies continue to investigate various ways of rewarding employees for performance. It is very important for organizations to make sure that the incentive plans are well structured to need the needs of the employee and in return make the organization profitable. Giving incentive pay to employees that has not earned them destroys

In examining the driving force in a corporation’s success, one of the key factors is to maximize on shareholder wealth while considering the motivations of the management team. Often times, these interests are maintained through executive compensation packages that engage managers and executives to perform with regard to the best interests of shareholders. These executives are being incentivized through bonuses in the form of huge bonuses, stock options and awards. Many believe these rewards have become obscene and are in no way reflective of executive level performance.

The purpose of this report is to research secondary resources to evaluate the effectiveness of compensation strategies for an organization. The report has been written in the light of peer-reviewed scholarly articles; each of which discusses the topic from a different perspective. The focus of the report is to evaluate all the factors which make a compensation package effective for the organization. The evaluation has been done under three major ideas or topics. The first topic is "Important components of compensation packages" explains what makes a compensation package acceptable by the employees. When compensation packages are decided, organizations keep in mind the skills, qualifications, and experiences required for the job, and then offer their compensation package accordingly. An attractive compensation package is vital in the effective achievement of organizational goals through its workforce. The second topic, "The impact of compensation strategies on employees' Performance" discusses

Making a good compensation plan will motivate the managers. Bad compensation plan could influence the company’s development and damage the shareholders’ value (Gordon&Kaswin, 2010,p2). The XXX Ltd want to design a compensation plan which can attract and retain the executives needed to achieve and its objective of establishing an industry-leading company with high operational performance and maintain shareholders’ value. The issues addressed in this compensation plan is how to protect shareholders’ value via the compensation contract and compensation plan components: Base salary, cash compensation& benefit,. Nevertheless, in order to determine the different portion of the each component, basic salary survey and performance associated with target accomplishment should be guided the payment model selection.

The term compensation refers to all forms of financial returns and tangible benefits that employees receive in exchange for their time, talents, efforts, performance, and results (Bernardin, 2013). Executive compensation is defined as the financial payments and non-monetary benefits provided to high level management in exchange for their work on behalf of an organization. The types of employees that are typically paid with executive compensation packages include corporate presidents, chief executive officers, chief financial officers, vice presidents, managing directors, and other senior executives (Business Dictionary.com, 2016). Executive compensation is an aspect of business that every major corporation, company, and organization has to manage. Although every major organization or company utilizes some form of executive compensation, it may differ greatly from one company to the next. Proper management of executive compensation is vital to the success and progress of companies, corporations and organizations because of the impact that disbursement of such high pay and benefits have on the financial status of any business and its shareholders.

An incentive pay program can reward employees who continue to produce superior work or encourage employees who already produce good work to best. Sometimes, use an incentive system when employees are lack of enthusiasm of getting down to work and improving things. If everyone in the same job classification gets the same pay, there is no real incentive to do an outstanding job (French, 1990). Various incentive plans used to motivate all employees such as production staff, sales staff, administrative staff and managerial and professional staff on an individual basis. To be improved employee work performance, the incentive pay programs need to be fairly matched with the employees’ expectation. Properly designed and maintained incentive pay program has the potential to increase employees’ productivity and work performance.