HRM textbook

404 PART 4 COMPENSATION
Therefore, using multiple, strategy-based performance criteria is best. These
include financial performance, number of strategic goals met, performance assessment
by the board, employee productivity measures, customer satisfaction surveys, and
employee morale surveys. The bottom line is that the top executive s pay package should
direct his or her attention toward accomplishing the company s strategic goals. 63
Sarbanes-Oxley
The Sarbanes-Oxley Act of 2002 affects how employers formulate their executive
incentive programs. Congress passed Sarbanes-Oxley to inject a higher level of
responsibility into executives and board members decisions. It makes them
personally liable for violating their fiduciary responsibilities to their shareholders.
The act also requires CEOs and CFOs of a public company to repay any bonuses,
incentives, or equity-based compensation received from the company during the
12-month period following the issuance of a financial statement that the company
must restate due to material noncompliance with a financial reporting requirement
stemming from misconduct. 64
We ll now look at short- and long-term management incentives.
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Even in retail stores, it s not unusual
to compensate store managers partly
based on short-term sales and profits.
Short-Term Incentives and the Annual Bonus
For better or worse, surveys suggest that employers are shifting away from long term
incentives to put more emphasis on short term performance and incentives. 65 Most firms
have annual bonus plans for motivating managers short-term performance. Such
short-term incentives can easily produce plus or minus adjustments of 25% or more to
total pay. Four factors influence one s bonus: eligibility, fund size, individual performance,
and formula.
ELIGIBILITY Employers traditionally based annual bonus eligibility on job
level/title, base salary, and/or officer status. Some simply based eligibility on job level
or job title, or salary. 66 Recently, however, more employers are offering executives as
well as employees below the executive level single annual incentive plans . . . in which
both executives and other employees participate. 67 The change reflects the fact that
more employees not just top managers are now responsible for (and thus
rewarded for) measurable contributions. The annual bonus is one such reward.
That trend to broader short-term bonus eligibility is evident from recent
surveys of what factors determine bonus plan eligibility. Rather than job title or
officer status, salary grade or band is now the most common eligibility determinant,
reported by 42% of employers in a recent survey. This was followed by
title/reporting relationship (24%), officer status (13%), compensation committee
approval (11%), discretionary (6%), and base salary (2%). 68
The percentage size of the bonus is typically greater for top-level executives.
Thus, an executive earning $250,000 in salary may be able to earn another 80%
of his or her salary as a bonus, while a manager in the same firm earning
$100,000 can earn only another 30%. In 2010, Microsoft s CEO was eligible
for an annual bonus of up to 100% of his salary (but he collected only half).
A supervisor might be able to earn up to 15% of his or her base salary
in bonuses. A typical breakdown might be executives, 45% of base salary;
managers, 25%; and supervisory personnel, 12%.
FUND SIZE How does one determine how big the annual bonus fund should
be? Most employers (33% in a recent survey) traditionally use the Sum of
Targets approach. 69 Specifically, they estimate the likely bonus for each eligible
( target ) employee, and total these up to arrive at the bonus pool s size.
However, an increasing portion of employers (32%)are funding the shortterm
bonus fund based on financial results (32%). Here there are no fixed rules
about the proportion of profits to pay out. One alternative is to reserve a minimal