HRM textbook

406 PART 4 COMPENSATION
TABLE 12-2 Multiplier Approach to Determining Annual Bonus
Individual
Performance (Based
on Appraisal,
Weight * 0.50)
Company Performance (Based on
Sales Targets, Weight * 0.50)
Excellent Good Fair Poor
Excellent 1.00 0.90 0.80 0.70
Good 0.80 0.70 0.60 0.50
Fair 0.00 0.00 0.00 0.00
Poor 0.00 0.00 0.00 0.00
Note: To determine the dollar amount of a manager s award, multiply the maximum possible (target)
bonus by the appropriate factor in the matrix.
formula that includes several financial factors such as new rig contracts. Safety
accounts for 25% of the formula. After the Gulf explosion, senior Transocean executives
donated their safety bonuses to the victims families. 73
Strategic Long-Term Incentives
Employers use long-term incentives to inject a long-term strategic perspective into their
executives decisions. With only short-term criteria to shoot for, a manager could conceivably
boost profitability by reducing plant maintenance, for instance; this tactic
might catch up with the company 2 or 3 years later. Long-term incentives such as stock
options, if well-designed, should only pay off if the firm achieves its strategic goals, at
which point the owners and investors should also benefit from the executives efforts.
Long-term incentives may also be golden handcuffs, motivating executives to stay by
letting them accumulate capital (usually options to buy company stock) that they can
only cash in after a certain period. Popular long-term incentives include cash, stock,
stock options, stock appreciation rights, and phantom stock. We ll look at each.
STOCK OPTIONS A stock option is the right to purchase a specific number of shares
of company stock at a specific price during a specific period. The executive thus hopes
to profit by exercising his or her option to buy the shares in the future but at today s price.
The assumption is that the price of the stock will go up. Unfortunately, this depends
partly on considerations outside the manager s control, such as general economic
conditions. 74 When stock markets dropped a few years ago, many employers including
Intel and Google modified option plans to increase the likely payout. 75
STOCK OPTION PROBLEMS The chronic problem with stock options is that
they often reward even managers who have lackluster performance, but there are also
other issues. Many blame stock options for contributing to corporate scandals,
in which executives allegedly manipulated the dates they received their options
to maximize their returns. Options may also encourage executives to take perilous
risks in pursuit of higher (at least short-term) profits. 76 The stock options provide an
incentive to go for spectacular results, but since the managers haven t actually bought
the stock yet, they don t risk their own money. One solution is to draft the option plan
so that it forces recipients to convert their options to stock more quickly. 77
OTHER STOCK PLANS The trend is toward tying rewards more explicitly to
performance goals. Instead of stock options, more firms are granting various types of
performance shares such as performance-contingent restricted stock; the executive
receives his or her shares only if he or she meets the preset performance targets. 78 With
(time-based) restricted stock plans, the firm usually awards rights to the shares without
cost to the executive but the employee is restricted from acquiring (and selling) the
shares for, say, 5 years. The employer s aim is to retain the employee s services during
that time. 79 With indexed options, the option s exercise price fluctuates with the