Cost Accounting Traditions and Innovations Barfield, Raiborn, Kinney

1. Chapter 21
Rewarding Performance
Cost Accounting
Traditions and Innovations
Barfield, Raiborn, Kinney

2. Learning Objectives (1 of 2)
• Explain the relationship between compensation
and maximization of stockholder wealth
• List the different ways of rewarding
performance
• Describe the movement toward rewarding
group, as well as individual, performance
• List the positive and negative consequences of
incentive pay programs

3. Learning Objectives (2 of 2)
• Explain why incentive programs may involve
shares of, or options for, common stock
• Describe the importance of nonmonetary rewards
in motivating managers
• Clarify how taxes affect compensation plan
design
• Describe the role of ethics when designing a
compensation package
• Identify expatriate compensation issues

4. Rewarding Performance

5. Compensation Strategy
• Unites goals and strategies, performance
measurements, and rewards
• Board of directors and top management
determine compensation strategy
• Compensation committee
– Establishes compensation strategy
– Sets compensation policies/guidelines
Is this a
conflict
of
interest?

6. Set strategic goals
Identify critical success factors, set
operational targets and compensation strategy
Identify performance measures
Set performance rewards
Employee or employee group performs tasks
Measure/monitor performance
Determine rewards
Plan-Performance-Reward Model

7. Traditional Compensation Strategy
• Top managers
– salary and significant financial incentives
• Middle managers
– salary and raises based on performance
• Workers
– wages and small bonuses

8. Contemporary Strategy
• Incentive-based compensation to all
employees
• Based on group or individual performance
• Encourages
– higher level of employee performance and
loyalty
– lower overall costs

9. Pay-for-Performance Plans
• Correlation with organization goals
– Maximization of shareholder wealth
• Appropriate time horizon
– Long-run perspective
– Reward with stock or stock options
• Subunit mission
• Age of employee
• Balance of group and individual benefits
• Management ownership

10. Setting Performance Measures
• Degree of control over performance output
Minimize risk to worker of random effects
worker specific, short-run measures
upper less specific, longer-time horizon,
management organization longevity measures

11. Setting Performance Measures
• Incentives relative to organization level
worker weighted toward monetary and
short-term measures
upper weighted toward nonmonetary
management and long-term measures

12. Worker Compensation
• Choice of plan affected by:
– Competitive focus
– Organizational culture
– Local laws
– Union affiliation
– Political consideration

13. Pay Plan
• Periodic compensation
– function of time at work, not tasks accomplished
– affected by seniority, skill, education level
– no link between performance and reward

14. Performance-Based Pay Plans
• Merit pay
• Contingent pay
• Piece rate
These do not consider overall organizational success

15. Profit Sharing
• Contingent on organizational success
• Current and/or deferred incentives in form
of cash or stock
• Allocated among employees based on
– personal performance measures
– seniority
– team performance
– managerial judgment
– specified formulas
Profit Sharing

16. Stock Options
• Employee can purchase shares of company
stock at a set price during a specific time
period
• More valuable as company stock price
increases

17. Stock Appreciation Rights
• Employee may receive cash, stock, or a
combination of cash and stock
• Amount based on company stock price at a
future date
• More valuable as company stock price
increases

18. Employee Stock Ownership Plan
(ESOP)
• Profit-sharing compensation invested in
company stock
• More valuable as company stock price
increases

19. Nonfinancial Incentives
• Recognition of efforts
• Participation in decision making
Good
Job

20. Managerial Compensation
• Monetary
• Perquisites - Perks
– vacations
– free child care
– free parking
– personal assistants or private secretaries
– health care
– recreational club memberships
– office with a view
– flexible work hours

21. Not-for-Profit and Governmental
• Time-based pay plans; not a strong link
between pay and performance
• 90% of government workers support plans
that would link pay and performance
• Only 20% of not-for-profits provide bonus
plans for top executives

22. Possible Tax Treatments of
Compensation Elements
• Full and immediate taxation
• Tax deferral - pay tax at a future date
• Tax exempt - pay no tax

23. Taxation of Fringe Benefits
• Employer-provided accident and health
insurance
– deductible by employer
– not taxable to employee
• Cafeteria benefit plans
– both nontaxable and taxable benefits
Benefits

24. Deferred Compensation
• Profit-sharing, pension, and various
stock-based plans including ESOPs
• Company receives an immediate
deduction
• Employee is not taxed until distributions
made (tax deferred)

25. Ethical Considerations
• Organizational governance
• Role of capital markets
– Takeover, raiders, and golden parachutes
• Compensation differentials

26. Global Compensation
• Expatriate compensation
• Domestic base salary and fringe benefits
plus adjustments for
– cost of living - housing, education, security
– currency fluctuations
– tax implications
– retirement benefits in home currency

27. Questions
• What are some different ways of rewarding
performance?
• Why do many incentive programs involve
shares of, or options for, common stock?
• What are some ethical issues to consider
when designing a compensation package?