Hr Pay for Performance: Incentives for Managers and Executives

Incentives for mangers and executives

Empire State College

Course: Pay for Performance

Fall 2014

Companies provide managers and executives with either short-term or long-term incentives.  Many companies, approximately 96% according to Dessler on page 403, are now turning towards short-term incentives which involve cash; whereas the long-term incentives for most C-level executives involve business stock. Using stocks is a way to motivate your C-level executives into a better performance to stimulate long-term growth in a company. As stated by Dessler (2013), “For those offering long-term incentives, about 48% of them offer them as stock options . . . A survey several years ago found that the average CEO pay mix was 16% salary, 22% bonus, and 62% long term incentives” (p. 403).

So what are some of the executive incentives or bonuses offered by companies in both the short-term and long-term incentives, as listed by Dessler (2013) on pages 404-407 of our text? Many of the following options are given in the long-term when executives achieve the strategic goals of the company resulting in owners and investors benefiting from the executives’ actions.

1.  Annual bonus: Used to motivate a manager for a short-term performance. There are four factors which can influence one’s bonus: eligibility, fund size, individual performance and formula.

1. Eligibility: determined by the company based on the employee’s title or level within the company.
2. Fund size: To arrive at an amount for the bonus pool’s size, some companies estimate per employee the bonus they could receive.
3. Individual performance: A company can have targets of achievement for each manager.  Based on the performance, the bonus can be adjusted.
4. Formula: Each company constructs a formula for basing the bonus pool on certain measures the employer wants to emphasize and develop.

1. Stock options:  A manager is given the option to purchase future stocks at current prices.  The hope is that through their actions the company becomes more profitable and the price of the stock will rise.  However, there have been instances of unethical behavior in order to maximize their profits or take unneeded business risks to increase the profits an executive can reap.
2. Stock plans: These plans are tied explicitly to long-term performance goals for the executive to achieve on behalf of the corporation.

Stock Appreciation rights (SAR): Can exercise the right to purchase the company                         stock or take the stock price in cash, stock or any combination.

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