Human Resource Management
Chapter 10 – Pay-for-Performance: Incentive Rewards
Case Study 1 – United States Auto Industry Back on TOP...of CEO Pay
Executive compensation has been at the forefront of discussion for a long period of time. Analyzed by academics, highlighted by the media, questioned by Congress, and scrutinized by the general public, the topic warrants much debate. In the 1990’s, total executive compensation increased substantially as companies began offering stock option programs; CEO’s of S&P 500 saw an average increase of 150%.1
While many top U.S. executives continued to receive enormous compensation options throughout the economic downturns of 2001 and 2008, none was more apparent than those in the Automotive Industry. While the Big Three, comprising of General Motors, Ford, and Chrysler, were facing insurmountable debt and possibly bankruptcy, top executives were receiving some of the highest reparations ever experienced by directors of the companies.
The case study as presented in Managing Human Resources, Sixteenth Edition by Snell and Bohlander brings to mind the fact that during 2011, Ford CEO, Alan Mulally, received $53.5 million in stock awards.2 Many discussions can be derived from this statement. However, a basic understanding of modern corporate compensation structures must first be realized. Along with understanding these compensation structures, knowledge of the views on economic rent and optimal contracting must also be developed.
2.0 Corporate Compensation Structures
Corporate compensation structures have changed drastically within the past several decades. With an ever increasing gap between top executive and average production worker compensation payouts, controversy envelops this issue from every angle. In 1965 the average CEO earned 24.2 times the average production worker. In 2008, this ratio was 277.3 times more.3 Compensation to executives comes in five different forms: 1. Salary
2. Short Term Incentives (bonuses)
3. Long Term Incentive Plans (LTIP)
4. Paid Expenses (Perquisites)
5. Insurance (Golden Parachute)
A salary is a structure of payment paid by an employer to an employee. This can be in various forms or amounts. When talking about executive salaries, it is generally stated in a contract for a given period of time. The common measure of salary is based on one fiscal year and measured as the base salary, or the minimum payment made to an employee. 2.2 Short Term Incentives (bonuses)
Short term incentives and bonuses are compensations tied to short run performance indicators.4 Short term incentives are generally formula-driven while the term bonus oftentimes is a discretionary payout. These can come in many forms of payment ranging from cash payouts to company stocks. During flourishing economic times, bonuses can be a large part of an employee’s compensation structure. Conversely, when companies face economic hardships, bonus payouts should reflect this trend. It has been noted when employees receive bonuses on a consistent basis, they begin to view them as another portion of their salary and develop a sense of entitlement.4 2.3 Long Term Incentive Plans (LTIP)
Long term incentive plans are similar to short term payouts in the form of payment. Specifically cash payouts or company shares. The distinct difference in the two is the vesting requirements. Vesting refers to the period of time in which a person must be employed by a company before they realize value of a given payout. Vesting restrictions can come in various forms ranging from percentage increases over time to 100% realization at a given date. 2.4 Paid Expenses (Perquisites)
Paid expenses are often referred to as fringe benefits or perquisites. The IRS defines legal fringe benefits that are tax deductible. This may include items such as the following:
a. Athletic Skyboxes/Suites
References: 2. Snell, Scott, and Bohlander George. Managing Human Resources, 16th Edition. Mason: South-Western, 2013.
5. Executive Compensation - Fringe Benefits Audit Techniques Guide (02-2005). 04/03/12 Internal Revenue Service. 04/20/12 <http://www.irs.gov/businesses/corporations/article/0,,id=134943,00.html>.
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