HRM textbook

CHAPTER 12 PAY FOR PERFORMANCE AND FINANCIAL INCENTIVES 403
Source: Used with permission
of Computer Solutions & Software
International, Inc.
4 Describe the main incentives
for managers and executives.
INCENTIVES FOR MANAGERS AND EXECUTIVES
Managers play a crucial role in divisional and company-wide profitability, and most
firms therefore put considerable thought into how to reward them. Most managers get
short-term and long-term incentives in addition to salary. 60 For firms offering shortterm
incentive plans, virtually all 96% provide those incentives in cash. For those
offering long-term incentives, about 48% offer them as stock options. The latter are to
motivate and reward management for long-term corporate growth, prosperity, and
shareholder value. A survey several years ago found that the average CEO pay mix was
16% salary, 22% bonus, and 62% long-term incentives. 61 Today, more employers are
emphasizing short-term rather than long-term performance.
Strategy and the Executive s Long-Term
and Total Rewards Package
Few human resource practices have as profound an impact on strategic success as the
executive s long-term incentives. Whether building joint ventures abroad, consolidating
operations, or pursuing growth, firms can t fully implement strategies in just
1 or 2 years. Therefore, the long-term signals you send managers and executives
regarding what you will (or won t) reward can have a big effect on whether the firm s
strategy succeeds.
In turn, the executives total reward package base salary, short- and long-term
incentives, and perks must align with each other and with the goal of achieving the
company s strategic aims. Compensation experts suggest first defining the strategic
context for the executive compensation plan. In other words, What is our strategy
and what are our strategic goals? Then decide what long-term behaviors (boosting
sales, cutting costs, and so on) the executives must exhibit to achieve the firm s strategic
goals. Then shape each component of the executive total compensation package
(base salary, short- and long-term incentives, and perks) and group them into a
balanced plan that makes sense in terms of motivating the executive to achieve these
aims. The rule is this: Each pay component should help focus the manager s attention
on the behaviors required to achieve the company s strategic goals. 62