Académique Documents
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Management
Compensation
Paramita Sari
Rachma Dilla Fauzan
Roberto Fernando Siahaan
Chapter 12
Management Compensation
v Agency Theory
vI Case Study
Research Findings on
Organizational Incentives
• Individual tend to be more strongly motivated by rewards than
punishment
• Personal reward is relative or situational
• Senior management action to management control system will
influence the operating manager action toward it
• Individuals are highly motivated when they receive reports or
feedback of their performance
• Incentive become less effective as the period between an
action and feedback on it increases
• Motivation is weakest when the person believes an incentive is
either unattainable or too easily attainable
Compensation Package
Benefits
Incentive
Salary Compensation
Manager’s
Compensation
Package
Characteristics of
Incentive Compensation Plans
• Short-Term Incentive Plans
• Long Term Incentive Plans
Short-Term Incentive Plans
The Total Bonus • The total amount of bonus that can be paid to a
Pool qualified group of employees in a given year
Stock Options
Phantom Shares
Performance Shares
Performance Units
Stock Options
Phantom Shares
Award managers a number of shares for bookkeeping
purposes only. At the end of a specified period (for example
five years) the executive is entitled to receive an award equal
to the appreciation in the market value of the stock since the
date of award.
Stock Appreciation Rights
A right to receive cash payments based on the increase in the
stock’s value from the time of the award until a specified
future date.
Performance Shares
Award specified number of shares of stock to a manager when
specific long-term goals have been met.
Performance Units
A cash bonus is paid when specific long-term targets are
attained.
Incentives for Corporate Officers
CEO Compensation
- Discussed by the board of
directors compensation
committee after the CEO has
presented recommendation
for subordinates’
compensation
Incentive for Business Unit Managers
Types of Incentives
Psychological and
Financial Rewards
Social Rewards
Increased responsibilities
Bonuses
Increased autonomy
Benefits
Better geographical location
Perquisites Recognition
Size of Bonus Relatives to Salary
Incentive for Business Unit Managers
Upper Cutoffs
Size of
Bonus
Relative to Lower Cutoffs
Salary
Formula-Based
Bonus
Determination Subjective
Approach
Combination
Cash
Stock
Form of Stock Options
Bonus
Payment Phantom Shares
Performance Shares
Combination of the Two
Agency Theory
The Concepts
• Divergent Objectives of Principals and Agents
• Nonobservability of Agent’s Actions
Control Mechanisms
• Monitoring
• Incentive Contracting
Worthington Industries
Company’s Background