...Using EVA to Align Management Incentives with Shareholders’ Interests Incentive Compensation: The Need and the Challenge The objective of most incentive compensation programs is to address the ‘agency’ problems that besiege public companies. Specifically, public firms that hire professional management experience a natural separation between those that own the firm (the “principals”, i.e., shareholders) and those that manage the firm (the “agent”). Once can conclude that, for the vast majority of public firms, the owners’ ultimate goal is to maximize their own wealth invested in that firm. In most cases, the board that shareholders have elected to represent the owners’ interests hires professional managers to accomplish this goal for them. However, as Jensen and Meckling observed in a paper they co-authored in the mid-1970’s, without the proper incentives, most managers will not gravitate towards decisions that maximize firm wealth. Instead, the authors claim that managers with limited investment in the firm they have been hired to manage are inherently selfish. They will divert firm resources away from investments that create the most firm value towards those that bring the most value to the individual, such as perks, notoriety and empire-building. Jensen and Meckling proposed that the solution to this problem is to make the managers into owners by giving them equity and ultimately suggested that “the best way out of America’s corporatestructural rut was through...
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...Module -4 Compensation Management Acknowledgement I would like to express my deepest gratitude to our lecturer Mr: Dilshard Perera whose contribution in stimulating suggestions and encouragement helped me to coordinate this report. I would also like to acknowledge my team members for the advices and support given to me. My thanks also go to my classmates, who always encouraged and supported me. Finally I would like to express my special gratitude to my loving parents for encouraging and supporting me throughout my life. PQHRM/KDY/12 Page i Module -4 Compensation Management Table of Contents 1 Question 1 ..................................................................................................................... 1 2 Question 2. .................................................................................................................... 4 3 References .................................................................................................................... 9 PQHRM/KDY/12 Page ii Module -4 Compensation Management 1 Question 1 WHAT ARE THE MANAGEMENT ISSUES FACED BY THIS COMPANY? Inability to achieve the 40% of production rate. The company’s initial target was to achieve 40% or above increase in production. At the first 3 months they gradually reached up to 32%. There after it was dropped up to 20% during the latter three months. Increase of the lower quality products during the 6 months. The lower quality and rejects rate was increased...
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...Compensation Proposal Lori Berens Human Capital Management 531 November 14, 2010 Memorandum TO: Executive Management Team FROM: Lori Berens SUBJECT: Compensation Proposal Attached the management team will find the new compensation proposal that will be used for all current employees and new hires. After the merger between InterClean and Enviro Tech the management team requested that a new compensation proposal be created. The new compensation proposal will be effective January 1, 2011 upon approval from the executive management team. The new compensation plan for employees will consist of the employee’s base salary that will be determined by experience and education of each employee, the sales team will also receive commissions on his or her sales per month. The employees on the sales team will also be part of a sales incentive bonus program; this program will be a quarterly and is determined by the sales for each member on the sales team. If the employee meets or exceeds his or her sales goals for the quarter he or she will be eligible for the sales incentive bonus. The compensation plan also includes vacation time, company paid holidays, and personal time. The company gives two weeks vacation to all full-time employees, at five years the employee will have three weeks vacation and at 15 years the employee will have four weeks vacation. The company has seven paid holidays (New Years Day, Memorial Day, 4th of July, Labor Day, Thanksgiving Day and the Day after...
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...currently assigned of the task of designing the store management systems and procedures for all the stores of Gintong Hiyas and the management of the company's two branches. The focus of the case are two the stores managed by Elizabeth so taking her point of view is the most appropriate since she has the knowledge and authority to these stores. The staff incentive system was also implemented under her supervision. II. Analysis of the Case Situation The original store opened in Quezon City in 1968 and sold a line of handmade gold and other jewelry. It expanded in the 1980s by opening four new outlets in different parts of Metro Manila. New lines of jewelry were added as sales expanded. Managing five stores became too difficult for the Santos Family; the original store in Quezon City was closed in 1989. Elizabeth Santos joined the management of Gintong Hiyas after completing her Bachelor's Degree in Commerce in 1992. She designed the store management systems and procedures for all stores while managing one of the Gintong Hiyas stores herself. In 1995, she was asked to manage a store previously ran by her father. In October 1995, Elizabeth introduced an incentive system to increase sales. Thirty percent of the daily wage of the salesgirl will be paid as bonus if the daily quota is exceeded. This resulted in increased sales and morale in the first few months. Employees in other stores were asking for the same incentive scheme. However, the Santos Family decided to wait before...
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...Nicole L. King Baker College HRM315: Evaluating Human Resources Tae Dawson June 13, 2012 Abstract This purpose of this research project was to find out how well BWI HR is meeting the needs of its employees. Fifty surveys were collected and reviewed. One each survey were eight HR services. The HR services are Performance Appraisal, Wage & Salary Administration, Incentive Pay Program, Internal Job Posting, Healthcare Insurance, Technical Training, Career Counseling/Development and Flexible Work Schedule. Each of the HR services had a rating scale to see how important and satisfied the Target employees would rate them. There were three HR services that showed the largest gap between importance and satisfaction. The incentive pay program, performance appraisal system and career counseling and development all showed large negative gaps. The incentive pay program should be changed from an individual-based program to a team/group-based program. The performance appraisal system should evolve into a “social network” type of performance management system. This type of social performance management system will bring many advantages, including empowerment. Finally, the career counseling/development programs should see a small expansion and reviews of the eligible degrees, adding certificates, increasing the tuition reimbursement amount and adding mentoring programs. These improvements should be implemented to improve the HR services, our people and our overall company...
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...To what extent does executive pay influence company performance? There has been widespread controversy in recent years about the amount of compensation CEO’s receive. CEO’s financial compensation packages were largely structured to incentivize risk taking in order to increase shareholder wealth (“Restraints on Executive Pay”, 2009). Yet, the 2008 financial crisis was mostly characterized by declining levels of company performance largely due to the increase of risk afforded to CEO’s by the attractiveness of lucrative executive incentives to perform. This essay argues that executive pay and its influence on company performance is both controversial and complex and concludes that executive pay has minimal influence on company performance and, when it does have influence, it tends to be negative. It is widely believed that companies and their shareholders suffer from poor performance unless the importance of incentives for executives – most notably through monetary and stock compensation – is realized (Jensen and Murphy 1990). The notion that the level and performance sensitivity of pay affects the quality of managers an organization can attract in a competitive labor market for executives seems, on the surface, uncontroversial. However, whether compensation policy is truly “one of the most important factors in an organization’s success” (p.139), as Jensen and Murphy (1990) assert needs further examination A series of empirical studies from a variety of industry, national...
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...Importance of alignment [300 words]: The role of incentives in securing execution Employees are the agents of the firm’s owners since they take actions or make decisions that impact the payoff to the owners. The difficulties in the agent-principal relationships arise when the objectives of principal and agent are different and the actions taken by the agent or the information possessed by the agent are hard to observe. Employees care about the job in terms of the value the job generates for themselves. Thus providing the right incentives to employees would secure execution of the firm’s plans to meet the firm’s objectives. There are financial and non-financial incentives. Non- financial incentives are social and moral incentives. Which incentives are appropriate depends on the objective of the company. Since motivation comes from within the employees, the personality, needs and interest of each employee determine the right incentives that will influence employees to self motivate and produce the best work possible that will contribute to the firm meeting its objectives. Reward and recognition is concerned with the range of practices an organisation undertakes (financial and non-financial) to compensate employees, maximise employee engagement and encourage behaviours that lead to organisational success. A good reward and recognition system should motivate employees while aligning their goals with those of the organisation. Such a system involves balancing employee remuneration...
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...focused on how best to compensate employees for their performance in recent years. Moreover, because employee performance and productivity is inextricably related to organizational profitability, these issues have assumed new relevance and importance in the current economic environment. There have been some mixed reviews concerning pay-for-performance approaches to enhancing employee performance, though, that suggest there is more involved than simply throwing money at top performers. Despite these constraints, many authorities suggest that pay-for-performance programs have a lot to offer organizations seeking to identify better ways to improve employee performance. In this regard, Miller, Hildreth and Rabin (2012) note that, “Individual incentives have a central role to play in the success of most conceptual schemes related to performance. Such plans, while very difficult, have large possibilities; seemingly insurmountable obstacles can be overcome if the emphasis moves to the employee's relative needs for power, affiliation, and achievement” (p. 230). These are tall orders for any human resource manager and an organization’s leadership, though, and the fact remains that measuring individual performance is a complicated affair in many types of organizational settings, particularly the nation’s schools where the controversy over pay-for-performance has been especially pronounced. When the need to take into account individual employee’s relative needs for “power, affiliation, and...
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...Introduction An organization’s behavior determines by culture, structure, leadership, internal and external factors of organization; therefore, the manager must be able to recognize and react to the factors in order to achieve the organization’s goals. Human behavior in the organization is complex and it differs from every individual to another. Organizations face challenges to match the task, manager and subordinate in an efficient and effective way. Manager or Management in the organization should analyze the tasks, required skills and assemble a team that match each other skills; therefore the management can create an enrich and conflict free team which need to perform the job well. This report is based on XYZ Company’s challenges such as declining of Sales, low level of employee morale and low level of motivation. Also other behavioral issues observations such as conflicts in the work place, absenteeism, lack of trust and integrity between the superior and the subordinates, occasional sabotage, high temper people with severe stress. This report is primarily based on the study of the MARS model, type of individual behavior in organizations and ethics and values in the workplace. Also this report contains the solution for the above problem. Literature Review a. MARS Model MARS model is a model explain individual behavior as a result of internal and external factors or influences acting together. The name of the model is an acronym for individual...
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... The spectacular corporate scandals and bankruptcies of the past decade have served as a powerful reminder of the risks that are involved in the ownership of enterprise. Unlike other patrons of the firm, owners are residual claimants on its earnings.1 As a result, they have no explicit contract to protect their interests, but rely instead upon formal control of the decision-making apparatus of the firm in order to ensure that their interests are properly respected by managers. In a standard business corporation, it is the shareholders who stand in this relationship to the firm. Yet as the recent wave of corporate scandals has demonstrated once again, it can be extraordinarily difficult for shareholders to exercise effective control of management, or more generally, for the firm to achieve the appropriate alignment of interests between managers and owners. After all, it is shareholders who were the ones most hurt by the scandals at Enron, Tyco, Worldcom, Parmalat, Hollinger, and elsewhere. For every employee at Enron who lost a job, shareholders lost at least US$4 million.2 Furthermore, employees escaped with their human capital largely intact. Creditors and suppliers continue to pick over the bones of the corporation (which still exists, under Chapter 11 bankruptcy protection, and continues to liquidate assets in order to pay off its debts).3 But as far as shareholders are concerned, their investments have simply evaporated, beyond any realistic hope of retrieval. (In fact, one...
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...determining the overall amount the physician receives for the year. While this type of compensation model discourages overutilization and allocates risk among all physicians, it negatively affects productivity and does not reward efforts to improve quality. Such a system can only work on the basis that all physicians have the same skill and productivity levels and are equally motivated to contribute to the practice. In Bangor Physician’s situation, each physician believes they are working more than the other and thus should receive greater compensation. Bangor Family Physicians Goals The goal of the case study is to elect the most suitable compensation model that meets all five criteria set by Bangor family Physicians and creates an incentive for all physicians to be as...
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...Danshui Plant No.2 Charles Fiorentino, Elaine Shuyi Li, Sophie Browne, Travis Cole Problem 1. Breakeven Volume: Price/Unit = Sales/# units = 41,240,000/200,000 = 206.2 Variable Costs/Unit = 40,411,000/200,000 = 202.055 Contribution Margin/Unit = 206.2 - 202.055 = 4.145 Break-even = Fixed Costs/ (CM/unit) = 729,000/4.145 = 175,875 units Problem 2. Planned shipping cost per unit: 41,140,000/200000= $205.7 Actual shipping cost per unit: 38,148,000/ 180,000= $211.93 Problem 3: Exhibit 1 Static Budget Actual 200,000 Number of Units Flexible Budget 180,000 180,000 $41,240,00 0 $37,116,000 $37,476,0 00 Variance Per Unit Sales Revenue $206.2 37,577,000 33,820,200 $360,000 F Variable Manuf. Costs 187.89 308,800 U Labor 13.11 2,622,000 2,359,800 3,092,000 732,200 U Variable G, S & A 1.06 212,000 190,800 191,000 200 U Contribution Margin 829,000 745,200 64,000 681,200 U Fixed Costs 729,000 729,000 736,000 7,000 U Net Income 100,000 16,200 -672,000 688,200 U 34,129,00 0 Problem 4. Exhibit 2 Standard Actual Price Variance Flash Memories Price $27.00 $29.16 $388,800 U Flash Memories Usage 200,000 180,000 540,000 F Labor Rate $13.11 $17.18 $732,600 U Labor Usage 200,000 180,000 $262,200 F Overhead $729,000 $736,000 $7,000 U ...
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...bonuses will be awarded, all employees will receive the bonus regardless of their performance for that year. Although bonuses are awarded based on the company’s profit margin, most employees tend to feel obligated to receive a year-end bonus and are hardly ever satisfied with the amount given. Pay for performance is not the same as a bonus. Pay for performance is usually an incentive plan that is based on the performance of each individual as well as the performance of the company. The incentive plan supports the pay-for-performance philosophy by aligning a percentage of total compensation with the attainment of annual business goals and individual performance objectives. The plan is also designed to increase awareness, understanding, and commitment to the business goals, as well as promote employee retention. Moving from a bonus plan to a pay for performance plan will require a lot of work for any organization and union. An effective pay for performance plan will need to be reviewed and negotiated periodically to ensure that the plan works for the organization and for the employees. The incentive plan will need to meet the company’s core objectives while retaining employees. “Too often I have seen organizations lose key people...
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...producing office supplies with plans to expand the business to Central America. The global aspect of the organization stands on its foundation of providing excellent customer service, which does not always come easy. Providing excellent customer service as an organization entails excellent customer service skills at the individual level of all personnel, senior and new employees alike. To continue building on the factor of providing excellent customer service, this memorandum will outline certain key aspects including key qualifications for personnel and a proposed recruitment strategy. In addition, this memorandum reviews how candidates will be attracted to join the Harrison Corporation, how the selection process will be handled, and any incentives offered to promote excellent productivity and customer service. Key Qualifications In any organization, hiring the proper personnel ensures common goals are carried out to full potential and prevents many unnecessary problems. Staffing an organization involves more than simply hiring any applicant. When selecting the right personnel, there are key qualifications that must be present. The following will discuss key qualifications for a person filling the Customer Service Specialist (CSS) position. Customer service is an integral part of Harrison Corporation. Harrison Corporation is headed down a revolutionary track with excellent services and a high standard of customer service. For this reason, it is crucial that Harrison provides...
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...Incentive plans are plentiful and are used by companies to help promote a more productive environment. Incentive plans are offered to encourage employees to do the best they can as well as exceed the goals set for them. Most employees are eager to reach and exceed their goals to reach the incentive set for them. However, the company does need to be mindful that some incentive plans can give the reverse effect they are going for and bring the moral down and the employee productivity too. Some examples of incentive plans are profit sharing, casual rewards, and stock options. Incentive plans can be created based on the creativity of the creator. These few exampled are the more common incentive plans offered to employees. Profit sharing is extended to employees when the company profits increase, and the money is available for bonuses. The larger the profits for the company the larger the bonuses are for the employees. One of the drawbacks to profit sharing is when the company is not doing well then the company is not able to offer profit sharing ("What Are The Different Types Of Incentive Plans?", 2011). Casual rewards incentive plans are the rewards or acknowledgement for a job well done. These rewards could be something simple as a pat on the back, a sincere thank-you, or a gift card to dinner and a movie (“Incentive Pay (pay for performance),” 2006). This type of incentive is a way of letting an employee know that the company notice their efforts and appreciate...
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