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
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
