Management Compensation ppt by Falguni sagar

1. 1
Presentation on
Management Compensation
Falguni Sagar

2. 2
Flow of presentation
• Introduction
• Characteristics of incentive compensation plan
• Short term and long incentives plan
• Compensation for Corporate officers
• Compensation for SUB officers
• Agency Theory

3. 3
Introduction
• Compensation is the total amount of the monetary and
non-monetary pay provided to an employee by an
employer in return for work performed as required.
• Compensation also includes payments such as bonuses,
profit sharing, overtime pay, recognition rewards and
checks, and sales commission.
• Compensation can also include non-monetary perks
such as a company-paid car, stock options in certain
instances, company-paid housing, and other non-
monetary, but taxable, income items.

4. 4
Compensation is based on:
• Market research about the worth of similar jobs in the
marketplace,
• Employee contributions and accomplishments,
• The availability of employees with like skills in the
marketplace,
• The desire of the employer to attract and retain a
particular employee for the value they are perceived to
add to the employment relationship, and
• The profitability of the company or the funds available in
a non-profit or public sector setting, and thus, the ability
of an employer to pay market-rate compensation.

5. 5
Characteristics of incentive
compensation plan
• Three components:-
1.Salary
2.Benefits
3.incentives
• Components are independent
• Approved by share holder
• Short term and long term

6. 6
Short term and long incentives
plan
• Short term
The total bonus pool
Carryovers
Differed Compensation
• Long term
Stock option
Phantom Shares
Stock Appreciation Plan
Performance Share
Performance Unit

7. 7
Incentives for corporate officers
• The total is how divide among the corptrate officers.
• Each Corporate officer expect the chief executive officer
is responsible in part for the company’s overall
performance.
• These C.O are motivated by bonus for good
performance.
• How the performance measured
• Issue related TOP CEO Salary

8. 8
Incentive for Boniness Unit
Managers
• Incentives Compensation design for BUM
a) Types of incentives
b) Size of bonus Relative to salary
c) Performance Criteria
d) Bonus Determination Approach
e) Form of bonus Payment

9. 9
a) Types of incentives
Financial Reward
 Salary increase
 Bonuses
 Benefits
 Perquisites
Non-Financial Reward
 Promotion possible
 Increase responsibilities
 Increase autonomy
 Better geographical location
 Recognition

10. 10
b) Size of Bonus Relative to salary
 Upper cutoffs
 Lower cutoffs
c) Bonus based on
 Business unit profits
 Company profits
 Combination of two

11. 11
d) Performance Criteria
Financial criteria
• Contribution margin
• Direct business unit profit
• Controllable business unit profit
• Income before Taxes
• Net income
• Return on investment
• Economic value added
Time period
• Annual financial performance
• Multiyear financial performance

12. 12
Non financial criteria
• Sales growth
• Market share
• Customer satisfaction
• Quality
• New product development
• Personnel development
• Public responsibility
Relative Weights Assigned to Financial and
Non financial

13. 13
e) Bonus Determination Approach
 Formula based
 Subjective
 Combination of the two
f) Form of Bonus payment
 Cash
 Stock
 Stock option
 Phantom shares
 performance

14. 14
Agency Theory
• A theory explaining the relationship between principals,
such as a shareholders, and agents, such as a
company's executives.
• Divergent objective of principles and agents
• Non absorbability of Agent's actions
• Control Mechanisms:-
• Agency theory states that two major ways of dealing with
the problems of divergent objective and information
asymmetry:-
Monitoring
incentives

15. 15
Monitoring
Oowners seek maximum effort from employees at minimal
cost while employees seek to minimise effort and
maximise remuneration (i.e. pay and benefits)
Monitoring mechanisms;
A) Contracts
• Principals can monitor agents by collecting information about their
behaviour (decisions and actions)
• behavioural contracts; specify the activities Agent should engage in
• e.g. institutional investors monitor the decisions of of senior
managers, board of directors monitor top management...

16. 16
• Principals can monitor consequences of (only partially
obseved) agent behaviour
• outcome based contracts; compensation, rewards,
piece rate production, commissions..
• When tasks are not highly programmable monitoring
performance (output) is more efficient
• Performance monitoring is problematic in relation to
teams, free rider problems.
B) Board of directors
• board is charged with fiduciary responsibility (i.e. legal
trustee) of safeguarding the stockholder’s investment
Iinside and outside board members.
• The outside board membersprovide objectivity as the
board ratifies and monitors the decisions of managers.

17. 17
Responsibilities of the board of
directors;
• Establish policies and objectives for the firm
• Elect, monitor, evaluate and compensate top manager
• Monitor, approve the financial condition of the firm
• Ensure that regulations are enforced

18. 18
Incentive contracting
• A principle may attempt to limit divergent preference by
establishing appropriate incentives contracts.
• The more agent rewards depends upon on a
performance measure by principal
• The agent's reward depends on a performance of her/his
• Contract given to the agent motivates the agent to work
in the principle’s interest
• The contract is consider as goal congruence

19. 19
Agency Problem in Indian
Business- Satyam & Maytas
• My Biz View Agency Problem in Indian Busine
Maytas.mht

20. 20
Bibliography
• http://humanresources.about.com/od/glossaryc/g/compensatio
13th march 2012
• http://www.irs.gov/newsroom/article/0,,id=200293,00.html
13th
march 2012
• http://www.investopedia.com/terms/a/agencytheory.asp
14th march 2012
• Book:- Management control system 10th ed Anthony
and Govindrajan
• mhtml:file://C:Documents and
SettingsctiDesktopMy Biz View Agency Problem in
Indian Business- Satyam & Maytas.mht