11 - Design and Communication Considerations Flashcards
The salary element is the most important in not-for-profits because of statutory limits on incentives. At the other end of the spectrum, for-profits with publicly traded stock tend to place the lowest emphasis on the salary element. It serves primarily to determine ______ for the other pay elements.
Market stage also influences the salary element. In the early or threshold stages, cash is _____ and, therefore, salaries are de-emphasized. However, they take on more importance in later stages. The specific characteristics of each organization will dictate how salary is important in attracting, retaining and motivating key employees. While salary is typically an important tool in attracting a person, in a threshold for-profit company, the shortage of cash and the availability of incentives cause salary to be _______.
Lacking meaningful incentives, not-for-profits place high importance on employee ______. A medical plan, time off with pay and some type of pension plan may be even more important than salary in the threshold stage. Nonetheless, the relative importance of employee bene ts in most companies is low with regard to attracting employees, is moderate with regard to retaining employees and is low with regard to motivating employees. These ratings make it more difficult for ______ to attract, retain and motivate executives.
eligibility
scarce
de-emphasized
benefits
not-for-profits
The perquisites essentially begin where employee ______ end. As defined earlier, there are two types of employee perquisites: ________ and _______.
The first restores something taken away by statutory limitations, typically pension payments.
The second is something that is in addition to the existing benefits.
Perquisites, like employee bene ts, are typically of higher importance in the not-for-pro t compensation program, especially business-related perks such as a very nice of ce or a car. A special supplemental pension plan would be very attractive to a _______ executive. As with employee bene ts, perquisites are not particularly effective in attracting, retaining or motivating key employees. In for-pro ts, perks are typically of low to moderate importance in the early stages of the market cycle.
Not-for-pro ts may have a dif cult time satisfying the Internal Revenue Service that a short- term incentive plan is consistent with a nonpro t tax status. Therefore, the short-term incentive is not simply of low importance, it is usually _______. Since these incentives are an important part of the package for many executives, not-for-pro ts have a distinct disadvantage in attracting, retaining and motivating executives. However, individuals may be attracted to nonpro ts for more altruistic motives, namely, giving back to a de ned community, than for the pay. Conversely, the for-pro ts line up much better with those executives interested in extrinsic compensation. However, companies in the early stages of market development have to overcome cash shortages and appeal in other ways. Privately held companies have somewhat higher emphasis on short-term incentives in the early stages of market development because of greater limits on long-term incentives, namely, no publicly traded stock.
benefits
restorative
additive
second-career
nonexistent
Long-term incentives are essentially nonexistent in _______ companies. Privately held companies are somewhat better off. They do have stock but lack the public trading forum, thereby restricting the use of ________ stock plans. With publicly traded for-profits, stock options are the major compensation device in the _____ stages of market development because of their accounting and tax treatment. Other forms of stock plans take on importance beginning with the later stages of the “growth” phase.
not-for-profit
tax-advantaged
early
The first step in developing a compensation philosophy begins with the market cycle. Examples of how the market cycle is converted into compensation design statements include:
- (a) ________. Given the importance of using cash to market the business and the desire to focus everyone on the possibility of significant success, the heavy emphasis is on long- term incentives and, more speci cally, stock options. The other four compensation elements will be increased only to the extent absolutely necessary.
- (b) _______. As the company is more established and enjoying increasing success, salaries and employee bene ts should be competitive to similar companies. Given that the long- term picture looks good, long-term incentives should continue to receive top attention. Stock options are still dominant, although various types of performance-based stock awards should be adopted where appropriate. Short-term incentives need to be structured to reward both individual and unit performance.
- (c) ________. Given that new products are essentially extensions of existing products, it is important that high emphasis is placed on short-term incentives, both individual and group, in order to maximize sales as well as reduce costs.
- (d) _______ . Shrinking revenue means it is essential to reduce xed payroll costs, which include salary, employee bene ts and perquisites, and increase the emphasis on short- term incentives with a primary focus on reducing costs. Long-term incentives should be shifted to internal measurements, since the company stock price will return little, if any, appreciation.
- (e) _______. The importance of returning the business to a growth stage makes it essential that high emphasis be placed on both short- and long-term incentives. The former will be focused on both individual and group success. The latter will be a combination of stock options and performance stock awards.
- Threshold
- Growth
- Maturity
- Decline
- Turnaround
Within the context of the market stage, one has to look next to the respective importance of the attracting, retaining and motivating objectives. Examples of how these items are converted into compensation design statements include:
(a) Attract. _________ will be featured in attracting the top talent needed. This will include bonuses to compensate for any unvested compensation from the current employer but with clawback features should the person leave within ve years. These will also calculate at least half of the bonus opportunity based on individual performance.
(b) Retain. Long-term incentive plan will consist of annual stock option grants with _____ vesting and annual grants of multiple-years performance-share plans.
(c) Motivate. In addition to annual incentives based on group performance and long-term incentives based on corporate performance, the annual incentive offers an opportunity to earn at least half of the award based on ______ performance.
Short-term incentives
cliff
individual
The normal rule is the higher the risk, the greater the reward for success. Examples of how degree of risk is converted into compensation design statements include:
- (a) Low risk. Total compensation will be in the _____ percentile of defined competition, as will annual cash compensation, but salaries will be at least equal to the 75th percentile. Long-term incentives will be at the 40th percentile or less.
- (b) Moderate Risk. Total compensation as well as each of the five compensation elements will be positioned at the ____ percentile of defined competition.
- (c) High Risk. Total compensation will be at the 60th percentile of defined competition. Salary, employee bene ts and perquisites will be at the ____ percentile, and both short- term and long-term incentives will be at the 75th percentile.
One would expect that an increase in risk would result in an increase in the use of _______. Certainly, this is desirable from the shareholders’ viewpoint. To the extent this is not true, it might suggest management has had a very strong say in _____.
- 60th
- 50th
- 40th
incentives
plan design
Does an organization really want incentives?
Designing short- and long-term incentive plans takes a lot of time and effort. A company must not only be willing to put in the time and effort, but also believe performance can be expressed quantitatively. This is easy for financial data. For qualitative goals it is more difficult. It is fairly easy to determine if timetables are set and deadlines met. It is more dif cult to assess how ____ it was done. Performance goals set at the beginning of the year need to be updated during the year and factored into the incentive plan. Goal setting will be more dif cult as individuals learn how to “_____” their targets, making it easier to receive incentive pay. The importance of factors outside the executive’s control need to be assessed and a determination made as to whether or not such factors should affect the incentive payout. Incentives must not only help the organization achieve its mission and vision, they must be consistent with the ______ of the organization. In addition, the relative importance of short- and long-term incentives must be consistent with the product lifecycle.
well
“low-ball”
culture
The overriding advantage of incentive pay is that it meets the objective of pay for ______. In other words, payment will be in direct relation to attainment of identi ed objectives. When these objectives are nancial, it lowers pay for poor nancial performance and raises it for good nancial performance. The absence of incentive pay is the most costly to the organization for poor performance and the least expensive for good performance.
Disadvantages of incentive pay are as follows:
- (a) Incentives discourage ______ and cooperation.
- (b) Incentives do not make high performers _____.
- (c) Incentives _____ those who do not meet their objectives/goals.
- (d) Incentives create a _____ mindset.
performance
- teamwork
- work harder
- punish
- risk-aversion
Each of these combinations has certain consequences.
- An organization with incentive plans only at the division level “1” has questionable ________ of corporate results.
- A short- term division plan and a long-term corporate plan “2” are probably the most _______ combination. It encourages short-term divisional success, while reinforcing corporate goals.
- A “3” is a _____ plan. It has a divisional short-term plan and combines a divisional long-term with a corporate long-term plan.
- A “4” is the ______ of “2” and will encourage long-term divisional decreases such as research and development investment, assuming other divisions can maximize revenues and minimize expenses.
- Having all plans at the corporate level “5” places all the emphasis on _______ results. The disadvantage is that there is no incentive to achieve divisional objectives.
- A “6” is like a “3” except the short-term weighting has shifted from division to corporate and suggests there are problems with measuring short-term _____ results.
- ‘A “7” is dominantly weighted with the division and might be found in a portfolio organization with self-standing businesses that provide little corporate ______.
- An “8” recognizes the importance of the ________ but also focuses signi cant attention on corporate performance, both short term and long term.
- Having short-term and long-term plans at both the divisional and corporate levels, which is “9”, is a balanced approach but also the most difficult to design and ______, since payout is based on four different plans.
- reinforcement
- common
- bridge
- reciprocal
- corporate
- divisional
- synergy
- standalone division
- communicate
many people think that they are communicating when in fact they are simply disclosing. Disclosure is a _____ message. Communication requires an indication by the receiver that the message is understood. if not understood, there is an interchange between sender and receiver until the message is understood. too many administrators are satisfied in simply sending what they believe either meets their obligations and/or is sufficiently clear to require no further effort. At the minimum, the sender should indicate to the receiver _____ to meet and discuss if there are any questions
one-way
willingness
Guidelines for developing a strong communication process are as follows:
(a) What _____ is being communicated? Is it past, present and/or future? Does it deal with plan changes or simply an update status report?
(b) Why is the information being _____? Is it legally required or a voluntary action? Is it to show results or possible outcomes?
(c) Who is to _____ this information? Is this going to executives, other employees, shareholders, customers, suppliers, the community or regulators?
(d) When is the information to be ____—automatically upon attainment of a date or event or in response to a request?
(e) How is the information to be ______? Will it be face-to-face; via image or voice response; or report format and/or interactive modeling?
(f) Where is the information ______? Is it at a meeting or a location (physical or website)?
- information
- provided
- receive
- given
- conveyed
- provided
Why do companies care about voluntary disclosure programs?
First and foremost, how can one expect the pay delivery system to channel and maximize individual effort without clearly disclosing what will be rewarded? Clearly communicating all relevant plans so that eligible candidates understand them usually involves greater detail than that required by SEC and other overseers. Having justi ed this level of disclosure, many companies find it insufficient, pointing out the need to ______ different performance levels and their payment amounts. Clearly, describing the pay delivery system is also essential when _____ is low. In this situation, it is not an end but a means to build it. Recipients will be watching carefully for consistency between words and actions. The ______ of reality is more important than reality itself.
calibrate
trust
perception
Having ensured that legal disclosure requirements are met, the company needs to determine what additional information it will provide, when, to whom and in what level of ______. the basic reason for additional disclosure is to make certain the executive understands the plan. this is especially important if the individual needs to make a _______ at some point.
detail
decision
