Chapter 12: Variable Pay and Executive
Compensation Exam Questions and
Answers
Variable pay - -compensation that is tied to performance. Better
performance leads to greater rewards for employees.
- pay for performance - -often used interchangeably with the term variable
pay because this type of compensation moves pay from being a fixed cost to
one that varies with employee performance.
- Incentives - -Tangible rewards that encourage or motivate action.
- extrinsic rewards - -Rewards that are external to the individual.
- intrinsic rewards - -Rewards that are internal to the individual.
- Effective Variable Pay - -Employers adopt variable pay for many reasons,
including the following:
Link strategic business goals and employee performance
Enhance organizational results and reward employees financially for their
contributions
Recognize different levels of employee performance through different
rewards
Achieve HR objectives such as increasing retention, reducing turnover,
recognizing succession training, and rewarding safety
Reduce fixed costs
- Combating Variable Pay Complexity - -Incentive plans are more successful
if they follow these guidelines:
Develop clear, understandable plans that are continually communicated.
Use realistic performance measures.
Keep the plans current and linked to organizational objectives.
Clearly link performance results to payouts that recognize performance
differences.
, Identify variable pay incentives separately from base pay on paychecks.
- line of sight - -Idea that employees can clearly see how their actions and
decisions lead to desired outcomes.
- Critical success factors - -variables that have a strong influence on the
results of the organization. Examples of critical success factors might include
attracting and retaining profitable customers, generating profitable
revenues, and leveraging talent for optimum results.
- Key performance indicators (KPIs) - -Measures that tell managers how well
the organization is performing relative to critical success factors.
- Global Variable Pay - -global programs must accommodate cultural, legal,
and economic differences. Bonus programs are particularly important for
retaining key staffers after global mergers and acquisitions. For firms with
operations in multiple countries, it is important to train managers in how to
distribute rewards for maximum impact.
- Three Levels of Variable Pay - -Variable pay plans can be classified into
three levels or categories: individual, work unit/team, and organizational.
- Individual incentives - -given to reward the effort and performance of each
employee. Some common means of providing individual variable pay are
piece-rate systems, sales commissions, and individual bonuses.
- Organizational incentives - -reward people based on the performance
results of the entire organization. This approach assumes that all employees
working together can generate improved organizational outcomes that lead
to better financial performance. These programs often share some of the
financial gains made by the firm with employees through payments
calculated as a percentage of the employee's base pay. The most prevalent
forms of organization-wide incentives are profit sharing plans and employee
stock plans.
- work unit/team incentives - -gainsharing (or goalsharing) plans, whereby
the employees in a work unit or group that meets certain performance goals
share in the gains. Such programs often focus on quality improvement, cost
reduction, and other measurable results.
- Individual Incentives - -The conditions necessary to use individual
incentive plans are as follows:
Individual performance must be identifiable. The performance of each
individual must be such that it can be identified and measured. Each
Compensation Exam Questions and
Answers
Variable pay - -compensation that is tied to performance. Better
performance leads to greater rewards for employees.
- pay for performance - -often used interchangeably with the term variable
pay because this type of compensation moves pay from being a fixed cost to
one that varies with employee performance.
- Incentives - -Tangible rewards that encourage or motivate action.
- extrinsic rewards - -Rewards that are external to the individual.
- intrinsic rewards - -Rewards that are internal to the individual.
- Effective Variable Pay - -Employers adopt variable pay for many reasons,
including the following:
Link strategic business goals and employee performance
Enhance organizational results and reward employees financially for their
contributions
Recognize different levels of employee performance through different
rewards
Achieve HR objectives such as increasing retention, reducing turnover,
recognizing succession training, and rewarding safety
Reduce fixed costs
- Combating Variable Pay Complexity - -Incentive plans are more successful
if they follow these guidelines:
Develop clear, understandable plans that are continually communicated.
Use realistic performance measures.
Keep the plans current and linked to organizational objectives.
Clearly link performance results to payouts that recognize performance
differences.
, Identify variable pay incentives separately from base pay on paychecks.
- line of sight - -Idea that employees can clearly see how their actions and
decisions lead to desired outcomes.
- Critical success factors - -variables that have a strong influence on the
results of the organization. Examples of critical success factors might include
attracting and retaining profitable customers, generating profitable
revenues, and leveraging talent for optimum results.
- Key performance indicators (KPIs) - -Measures that tell managers how well
the organization is performing relative to critical success factors.
- Global Variable Pay - -global programs must accommodate cultural, legal,
and economic differences. Bonus programs are particularly important for
retaining key staffers after global mergers and acquisitions. For firms with
operations in multiple countries, it is important to train managers in how to
distribute rewards for maximum impact.
- Three Levels of Variable Pay - -Variable pay plans can be classified into
three levels or categories: individual, work unit/team, and organizational.
- Individual incentives - -given to reward the effort and performance of each
employee. Some common means of providing individual variable pay are
piece-rate systems, sales commissions, and individual bonuses.
- Organizational incentives - -reward people based on the performance
results of the entire organization. This approach assumes that all employees
working together can generate improved organizational outcomes that lead
to better financial performance. These programs often share some of the
financial gains made by the firm with employees through payments
calculated as a percentage of the employee's base pay. The most prevalent
forms of organization-wide incentives are profit sharing plans and employee
stock plans.
- work unit/team incentives - -gainsharing (or goalsharing) plans, whereby
the employees in a work unit or group that meets certain performance goals
share in the gains. Such programs often focus on quality improvement, cost
reduction, and other measurable results.
- Individual Incentives - -The conditions necessary to use individual
incentive plans are as follows:
Individual performance must be identifiable. The performance of each
individual must be such that it can be identified and measured. Each
