Assignment 1 Flashcards
(34 cards)
Six Methods used to determine executive status in an organization
1) Salary
2) Job Grade
3) Key Position
4) Job Title
5) Reporting Relationship
6) Combination
Salary used to determine executive status
A simple, direct way of establishing as an executive. Problems include its reliance on specific definable limits or cutoff points on the eligigbility; considerable pressure exerted to move people above the eligible salary level; and adjustments of salary cutoff points required annually to prevent an increasing number of employees from qualfiying as executives.
Job grade used to determine executive status
Rationale is simple: the value of the job to the organization was already determined when each job was placed in a job grade. May be superior to the use of salary because it relates to the content of the individual’s job, but it can be misleading because it places similar pressure to upgrade positions into the eligible group
Key position used to determine executive status
Look at the posistion and determine whether its job content is appropriate. 2 problems with this approach: jobs in the same job group may be treated differently, and this approach needs to have frequent job reviews for additions and deletions for eligibilty purposes. More popular with smaller organizations
Job title used to determine executive status
Problem with determining who is an executive by job title is that a lower-level vice president may have fewer responsibilities than the highest-level director
Reporting relationship used to determine executive status
While reporting relationships can be used to determine executive status, there is a problem with the inclusion of “executive assistants” and “assistant to” whose degree of importance to the organizaiton might be better represented by their job grade than their organizational level
Combinations used to determine executive status
Some organizations use a combination of the previously described approaches to determine executive status. Because each of the previous 5 approaches have advantages and disadvantages or shortcomings, often combinations of 2 or more of them are used to determine executive status.
How many employees in an organization are considered to be executives?
2 rough guidelines:
those individuals in the highest paid 2% or 3% or a company’s total workforce or those in the highest paid 5% of the exempt portion of that workforce.
These percentages need to be adjusted down in centralized organizaitons and up in decentralized, becase in decentralized the ability to decide is pushed down in the organization.
% of executives in a capital-intensive organization versus a people-intensive
Might expect a higher % of executives in a capital intensive org than a people-intensive org because equipment rather than people dominate the lower levels of a capital-intensive org. In people-intensive, decision making has to be pushed farther down in the org, to prevent the company from becoming an inefficient bureaucracy.
The fewest number of executives can be found in
centralized, people-intensive organizations where all major decisions are made by a small numbner of top executives.
Extrinsic versus intrinsic compensation
Pay if a form of extrincic compensation.
Work environment, type of work, learning developmentasl opportunities, autonomy and power and the extent of recogintion are intrisic or “psychic” compensation
Successful organization provide both. Intrinsic comp adds to the retention capability of direct pay.
5 Basic Compensation Elements in an Organizaiton
1) Salary
3) Employee Benefits
3) Short-term incentives
4) Long term incentives
5) Perquisites
For most employees only salary and employee benefits are a factor, but all 5 are present at the cheif executive officer leverl. they are phased in at different levels of employment in the organization
Salary
Salary should reflect an individual’s expierence and level of job performance. Basically, salary is a no-risk form of pay to the executive because it is rarely, if ever, reduced. An executive’s base pay allows them to meet some of his or her lifestyle objectives.
Employee Benefits
Employee benefits meet many needs that employees would otherwise have to pay for from their own disposable income such as retirement and health care coverage.
Years of service and/or level of pay typically determine the extent of coverage, and a group basic employee benefit package generally is provided to all employees in an organization.
Perequisites
A key component of executive compensation. These are special priviliges tailored exclusively for executive employees rather than rank-and-file ees
Short Term Incentives
Designed to include both the downside risk and upside potential, short term incentives reward achievement of a short-term target, normally occuring within one year. Typically the amount of pay varies in relation to performance, thereby lowering cost to the organization when performance is low. These can be group or individual in nature and should be clearly tied to annual business target
Long Term Incentives
Cover a performance period beyond one year. Normally, there is no individual performance component in long-term incentives, only group or unit. The executive has a portion of pay placed at risk with degree to attainement of business objective.
Failure to meet the expected traget results in no payment or low payment for long-tem incentives. the multi-year nature of long-term incentives provides some holding power over the executive if the payout will be signifigantly later on.
typically, pay is based on shareholder value and/or financial performance of the defined unit. ( entire company, or sector)
Some form of stock compensation is often used with long-term incentives
At higher levels of compensation
decreasing emphasis is applied to salary and benefits, whereas an increasing emphasis is given to short-term incentives, long term incentives and perquisites. The reason is that it is more advantagous to the company to relate reward to performance.
Factors that impact the design of an executive pay program
1) Stakeholders and rulemakers
2) Board of Directors
3) Compensation Elements
4) Performance Measurements and Standards
5) Strategic Thinking
6) Market lifecycle
7) Structural organization change
8) Type of company
Not-for profit company
Receive favorable tax treatment after qualifying under the Internal Revenue Code. Because of their nonprofit status they must be sure to avoid any signifigant residue after paying all their expenses or risk careful scrunity by the IRS. Lacking a profit incentive removes many of the short and long term incentive opportunities
Publicly held companies
Those that are required by the Securities Exchange Act of 1934 to register their securities becuase of an offering to the public.
Threshold Stage in the market lifecycle
1) Company has a limited range of closly related products, and distribution may be primarily in a regional area
2) The company may have attained a posistion of dominance in a small industry, and managers are exploring new markets for products
3) Decisions are made by individuals, and there are few, if any, policies and procedures
4) Relative duties and responsibilities of individuals are not clearly identified, and there is a high degree of overlap in apparent responsibilities among a number of jobs
5) The tone is casual with everyone on a first name basis, and the dress code emphasizes comfort rather than apperance
6) Survival of the products has the full attention of everyone
7) Cash is scare, and cash-fllow problems periodically occur, with management often deferring its own salary payments to ease the crunch
8) It is a time of high risk in order to survive, increased sales and suffiencent cash flow to meet the needs are key factors
Growth Stage in the market lifecycle
1) This is a time of tremendous growth as the threshhold company emerges with strong success in new venture areas as well as becoming a national influence by challenging established leaders in market share
2) An expansion of product lines has incresed diversity and complexity of related management processes
3) The number of employees increases along with sales, and management may shift from original owners into the hands of professional managers, as the company must cope with different problems brough on by apparent success
4) Coordination needs are greater and communication more formalized to ensure consistnet interpretation
5) Relative priorities need major review
6) Return on shareholder equity is very strong and incresing signifignatly during this phase
7) The company is likely to state its nature of business too broadly, venturing into product lines for which it lacks expierence
8) Written policies and procedures start to ermerge. Decision making has become more formalized and alternatives are viewed in light of precedents set during the threshhold stage
Maturity Stage in the market lifecycle
1) There is little change in market position
2) Emphasis is probably on maintaining current market penetration and servicing exisisting customers rather than adding new customers
3) Market share is likely to be gained by lowering prices then increasing investment
4) Administrative expenses become an increasing % of total costs as productivty improvements chip away at direct expenses
5) Staff functions are increasing faaster than the reduction in direct labor
6) Reducing costs is important, especially if sales revenues have flattened out
7) Corporate policies and position descriptions have been written to cover the full gambit of business issues, and an extensive finacial recordkeeping system has been developed.
8) Companies often undergo a consolidation whereby they trim their managment ranks and narrow their marketing focus- usually focused on their high-profit product lines in a more concentrated area
