HRM textbook

CHAPTER 12 PAY FOR PERFORMANCE AND FINANCIAL INCENTIVES 407
performance of, say, a market index. Then, if the company s stock does no better than
the index, the manager s options are worthless. With premium priced options, the
exercise price is higher than the stock s closing price on the date of the grant, so
the executive can t profit from the options until the stock makes significant gains. 80
Stock appreciation rights (SARs) permit the recipient to exercise the stock option
(by buying the stock) or to take any appreciation in the stock price in cash, stock, or
some combination of these. Under phantom stock plans, executives receive not shares
but units that are similar to shares of company stock. Then at some future time, they
receive value (usually in cash) equal to the appreciation of the phantom stock they
own. Both SARs and phantom stock essentially are bonus plans that grant not stock
but rather the right to receive an award based on the value of the company s stock. 81
A performance achievement plan awards shares of stock for the achievement of predetermined
financial targets, such as profit or growth in earnings per share.
ETHICS AND INCENTIVES People put their efforts where they know they ll
be rewarded is a management truism with implications for long-term incentive
plans. Simplistic, financial performance-oriented incentives, in the absence
of strong ethical standards, may breed unethical behavior. As one article notes,
in today s cash focused culture, where new research suggests that money may have
similar influences on individual actions as drugs or sex, the unexpected impact
of plans that reward certain behaviors with cash is perhaps more than first
thought. 82 For example, in describing one financial firm known for its high ethical
standards, Forbes recently alleged that the firm s culture now rewards hard-nosed
aggressiveness and doesn t put the client s interests before those of the firm. 83
The solutions are to foster an ethical culture (see Chapter 14), and to include a
sufficient array of bonus-able criteria in the incentive plan.
Other Executive Incentives
Companies also provide various incentives to persuade executives not to leave the firm.
This is especially important when there is reason to believe another company is stalking
the firm and wants to buy it. Golden parachutes are extraordinary payments companies
make to executives in connection with a change in ownership or control of a company.
For example, a company s golden parachute clause might state that, with a change in
ownership of the firm, the executive would receive a one-time payment of $2 million. 84
Other firms, perhaps more dubiously, guarantee large loans as incentives to directors
and officers, for instance, to buy company stock. Thus, directors and officers of Conseco
owed the company more than $500 million for such loans when shares of the company
stock dropped precipitously. 85
5 Name and define the most
popular organization-wide
variable pay plans.
TEAM AND ORGANIZATIONWIDE INCENTIVE PLANS
We ve focused to this point on individual employee incentives such as piecework, commissions,
and executive bonuses. Let s look now at incentives for teams, and for all
employees company-wide.
How to Design Team Incentives
Firms increasingly rely on teams to manage their work. They therefore need incentive
plans that encourage teamwork and focus team members attention on performance.
Team (or group) incentive plans pay incentives to the team based on the team s
performance.
stock option
The right to purchase a stated number of
shares of a company stock at today s price at
some time in the future.
golden parachute
A payment companies make in connection
with a change in ownership or control of a
company.
team (or group) incentive plan
A plan in which a production standard is set
for a specific work group, and its members
are paid incentives if the group exceeds the
production standard.