KV INSTITUTE OF MANAGEMENT AND INFORMATION STUDIES

BA4102 MANAGEMENT CONCEPTS AND ORGANIZATIONAL BEHAVIOR

EXECUTIVE AND SALES COMPENSATION PLAN

Executive Compensation – Components, Theories, Design- Relationship between Fixed and

variable pay-Executive Incentive Programmes. Sale Compensation plan- design and
administration- sales incentives and motivations. Compensation Management in Multi-National
organisations.

TABLE OF CONTENTS

5.1 Executive Compensation....................................................................................................2

5.2 Components, Theories, Design.............................................................................................2

5.3 Relationship between Fixed and variable pay .……………………….….……………....5

5.4 Executive Incentive Programmes.......................................................................................6

5.5 Sale Compensation plan......................................................................................................11

5.6 design and administration.....................................................................................................

5.7 sales incentives and motivations......................................................................................

5.8 Compensation Management in Multi-National organisations............................................19

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BA4102 MANAGEMENT CONCEPTS AND ORGANIZATIONAL BEHAVIOR
5.1 Executive compensation

Executive compensation, also known as executive pay, is a plan that combines the
salary, benefits and bonuses a company offers to executives or other top management
positions at a company in return for their work. These compensation elements may be
financial, like stocks or bonuses, or nonfinancial, like insurance plans or paid time off.
Executive compensation plans often help drive performance and may be contingent on
meeting certain objectives.

5.2 Components of executive compensation

Executive compensation plans may include financial elements and nonfinancial perks,
which employers categorize in different ways. For instance, a salary is a part of what
employers call fixed compensation because it doesn't change.Packages might also
include variable compensation like incentives and bonuses, which are only paid if the
company reaches a certain goal. Some of the common components in these plans are:

 Salary: Most executive compensation plans include a fixed yearly salary, also known as a base
salary. Companies often pay this throughout the year in monthly or bimonthly amounts.

 Benefits: Executives may receive benefits like health insurance, life insurance and severance
pay

 . Benefits may also include a variety of paid time off (PTO), including vacation
time, holidays, sick days or bereavement days.

 Bonuses: Also known as performance-based annual incentives or simply incentives,

bonuses are extra, nonfixed sums of money added to the salary in a year.

 Stock options: Stock options, or ESOs, are compensation in which a staff member

 has the option to purchase company stock at a reduced price within a period.

 Stock: Executive compensation plans may also include stocks, which represent
shares of company ownership.

 Performance shares: Performance shares are stocks that are available to executives
only if the company reaches a specific benchmark of success. These can help motivate
executives to do their jobs well.

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outside of KV. Violators will face infringement proceedings of copyright laws.
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BA4102 MANAGEMENT CONCEPTS AND ORGANIZATIONAL BEHAVIOR
 Perquisites: These are special rights and privileges an executive may receive as part
of their compensation plan. Examples include club memberships or access to a private
jet.

Types of executive compensation

The compensation an executive receives often involves incentives for various time
frames, which are short-term, medium-term and long-term incentives. Short-term
incentives contribute immediately to the compensation plan, such as fringe benefits,
paid expenses or performance bonuses. Medium-term incentives often rely on how well
the company accomplishes its goals, meaning this figure often depends on company
performance instead of the individual's performance. Long-term incentives often take
the form of stock options or performance shares, which gain value over time as the
company does.

Benefits of executive compensation

An executive compensation package may encourage executives to work hard and make
the best strategic decisions for the company's future. They may feel motivated to do this
because to continue receiving compensation, the company needs to function at
maximum efficiency.Company success may mean it's making more money than the
previous year or it's performing better than its competitors. Successful executive
packages may increase the long-term company success, profitable growth and other
specific company goals with executive compensation.An executive compensation plan
also often includes elements that directly reflect the company's long-term success, like
stocks or bonuses. This means if the company's performing well, an executive
compensation package may be worth more. In this way, the executive compensation
model connects company success and the compensation of the company executives,
which may help motivate these individuals to do all they can to help the company
improve.

Theories of Executive Compensation:

1. Marginal Productivity Theory

Marginal productivity theory is mainly concerned with predicting the pay levels of
executives. Many of its propositions about executive compensation are made with a context of
analysing the firm’s ability to generate profits and maximise productive output.

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Two main conclusions regarding the magnitude of executive compensation are drawn from MP theory.
(i) The size of the executive pay package reflects the firm’s net profits. In a firm where the
entrepreneur is the sole owner and functions as chief executive officer, the entrepreneur desires to
achieve the highest returns on his investments and this will occur where the marginal cost of
production is equal to the market price of the product. At this point the firm maximises its profits and
the executive maximises his compensation which is equivalent to the profits of the firm.
In practice, there are no such pure situations. Most entrepreneurs borrow capital from outside investors
and decision must be made about what share of profits goes to whom. The marginal productivity
theory is not a framework for determining the allocation of profits between an executive and others
who invest their money.
(ii) The size of the executive pay package is proportional to the executive’s marginal revenue product.
It is assumed that the executive is hired by the firm and is paid commensurate with his economic
contribution. The amount of compensation equals the executive’s marginal revenue net product.
The practical implication of marginal productivity theory is that both the firm’s profitability and the
executive’s relative economic contribution are pay-level determinants. To some extent, this theory can
explain the “star” system that has developed in the hiring of certain chief executive officers and other
key executives.
These are executives with demonstrated track records of creating shareholder value through their
management skills. Such individuals may demand and receive outsized compensation levels compared
to others doing the same job because of their potential to influence a firm’s future profitability and
value.
2. Governance Theory
It is held that executives should pursue strategies that will create long- term shareholder value and that
they should receive closely related rewards. Executives may feel free to pursue interests that do not
coincide with those of the firm’s owners, knowing that the owners have a limited ability to influence
the executive’s rewards.
As a result, the executive compensation package may not be effectively linked to performance that
creates or maximizes shareholder value.
Marginalise and agency theories are subsets of governance theory that deal with issues arising when
the firm’s owners are removed from the decision-making processes of the executive.
Advocates of this theory believe that a hired executive will act in the best interests of the owners if he
has a personal ownership stake. Many contemporary executive compensation programmes are
structured to reflect this theory by paying substantial amounts of compensation in the form of stock
options.
3. Managerialism
The separation of ownership and control in organisations can lead to executive pay decisions that
benefit the executive regardless of what the organisational outcomes and effects might be on
shareholders.
One researcher has found that when firms are management controlled (i.e. no shareholder owns 5% or
more of the company’s stock) opposed to owner controlled, there is little uncertainty in executive
compensation amounts.
In other words, an executive in such a firm is more likely to have a pay package that will increase
when firm performance is good and remain at the same level even when the firm performance is poor.

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4. Agency Theory
Agency theory may be considered as a theoretical extension of managerialism. A firm’s owners are
called the principals and the hired executives are called the agents. Owing to widely dispersed
ownership, the agent may pursue activities that benefit him rather than the firm’s owners.
This represents an “agency cost” to firm owners which is the difference between net profits of the firm
had the owners been the managers and the net profits under the agent’s stewardship. Agency theorists
hold that agency costs are a necessary evil that comes with the advantages of modern corporations.
5. Structural Theory
Structural theory examines executive compensation at the firm level. Structural theory focuses on the
“social standards” of pay at different hierarchical levels. According to this theory, organisations
attempt to maintain particular salary differentials between the management and subordinate levels to
comply with cultural norms of proportionality.
Executives can expect to receive a relatively large amount of compensation in a firm that is of a
considerable size and where there might be a large number of hierarchical levels. Conversely executive
compensation levels would decline in response to the trend towards corporate ‘downsizing.’
6. Human Capital Theory
Human capital theorists examine the individual characteristics of the executive in attempting to predict
pay levels. These characteristics include factors that are intrinsic to the executive such as his
knowledge base. It is possible to calculate a rate of return on investments made in human capital.
The amount of human capital acquired by the executive at any given point determines how valuable he
is to the firm. This in turn, predicts how much the firm will pay for his services.
7. Symbolism Theories
The symbolism theories of executive compensation held that the executive’s power and political
influence are the primary determinants of his pay level. Power and politics are of more direct
importance to those who make executive pay decisions than the economic elements of firm
performance and executive productivity. Two symbolism theories are discussed below:
a) Tournament Theory:
Tournament theory holds that the amount of compensation received by executives of an organisation is
similar to tournament winnings. Tournament participants are members of the organisation who could
ultimately reach the top most post-the chief executive officer.
b) Political Strategist:
Theory The political strategist theory tends to ignore the rational justifications of executive
compensation. Instead, attention is paid to the executive’s ability to cater to the needs of the multiple
constituents of the firm such as board members, shareholders, customers, Government and the general
public.
This theory proposes that the level of executive compensation can best be understood by examining
how well the executive appeases these various constituent groups. The amount of skill the executive
has in serving as political strategist determines his level of compensation

Designing a Executive Compensation Plan

Identify Your Objectives

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The specific objectives of any executive compensation plan will vary on a case-by-case basis;
however, there are four objectives that typically remain the same when designing executive
compensation plans.
 Attract executives
 Incentivize executives
 Retain executives
 Minimize employer’s after-tax cost
When you set concrete objectives like these, the process of designing a compensation plan that aligns
with your company and its goals becomes much simpler.
Designing a Compensation Plan: The Elements
When it comes to compensation design and packaging, there are a variety of benefits that can be
bundled together—all with varying attractiveness and effectiveness. Most commonly, however,
executive compensation plans, at the least, consist of four elements:
 Base salary
 Short-term incentive (typically an annual bonus)
 Long-term incentive
 Additional benefits and perquisites
A lot of behind-the-scenes work goes into determining which elements should be included in an
executive’s compensation plan. For example, organizations typically conduct competitive pay analyses
and research company culture, industry practices, and compensation philosophy to propose an
executive compensation package.
The beauty of compensation plans, however, is that no two compensation plans are exactly the same.
Compensation plans are designed to boost an executive’s performance or efficiency in their role,
through the use of compensation components—which can be modified occasionally or on an annual
basis.
Executive Compensation to Improve Performance
According to the Center on Executive Compensation, “Executive pay packages differ substantially
from… typical employee pay [because] the vast majority of an executive’s pay is contingent
compensation and structured only to reward the executive for actual, positive company performance
and growth in shareholder value.” In other words, many executive benefits are conditional.
For this reason, executive compensation plans strategically require employees to perform at a certain
level. Aside from non-financial measures, an employee’s performance can be measured through
project completion, quality control measures, and customer or employee satisfaction surveys.
When designing your executive compensation plans, be sure to cater the metrics to your company’s
unique goals and specifically, areas that the executive has a direct influence on.
Seek out a Professional Opinion
The cost of turnover is extremely high. Built In estimates that losing an employee can cost an
employer 1.5-2 times the employee’s salary, so retention through executive compensation is key.
When it comes to executive compensation design, however, there are many details to consider, and it
is often best to seek the advice of a professional.
Sales Compensation Plan
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A sales compensation plan is the combination of base salary, commission, and incentives that
constitute a sales representative’s earnings. They are designed in such a way as to drive performance
and increase revenue. There are many different ways to structure a sales compensation plan to suit
different organizational and employee needs. They should be designed and tailored based on a rep’s
role within the sales team, the length of the sales cycle, the types of sales engagements and the rep’s
level of seniority.
Sales compensation plans are important. They are key to encouraging the positive behaviours in your
staff that are necessary to achieve your overall organizational goals and results.
How to design a sales compensation plan
Below are steps you can follow to design a compensation plan for your sales team:
1. Understand business goals
The best compensation plans align with the objectives of your company. For instance, the structure of
your sales compensation plan might change if the company you work for wants to shift from scaling
the business to reducing operational costs. Work with executives or senior managers to understand the
strategic goals of the company so you can design a plan that incentivizes performance to support these
objectives.
2. Identify the sales roles
Identify the roles within your sales team for your commission plan. Some of the common sales roles
you might include are the sales development representative, account manager, account executive or
customer success manager. You may want to create junior and senior positions within these roles to
compensate based on seniority.
3. Determine the structure
Figure out how to structure your compensation plan. This typically involves determining the
following:
 Target pay: The target pay is everything the company provides to an employee, including
salary, commission, bonuses and any additional perks.
 Pay mix: The pay mix is the ratio of base salary to the employee's target incentives that make
up the total target pay. For example, if a pay mix was 60:40, that means that 60% of the
compensation package is from a fixed salary and 40% is from incentives.
 Upside potential: The upside potential is the amount of pay given to sales reps who exceed
quotas.
How you balance the pay mix and the upside potential typically depends on the objectives you're
trying to reach and the sales roles. In general, sales supervisors make their pay mix more aggressive
for people in sales roles that have greater influence over the final purchasing decision. Similarly, the
upside potential is typically higher for sales reps who have significant influence over a customer's final
decision.
Tips for creating a sales compensation plan
Here are tips to help you plan your compensation plan and achieve the goals of the organization where
you work:
 Communicate your strategy. Be open with your team about the business strategy and how it
aligns with the corporate strategy. By being clear about the business strategy, your sales team
may be better able to match their behaviors with the organization's strategy and goals.

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 Reward the entire sales force. Remember to include supporting sales roles in your
compensation plan. Consider including bonuses or shared commission options.
 Budget for extras. Budget for smaller competitions and prizes to give sales managers the
freedom and flexibility to award additional compensation when the team could benefit from a
morale boo
SALES INCENTIVE
A sales incentive is a reward that employers offer to their sales professionals for successfully selling a
specific amount of products, dollar amount or service hours. Sales incentives can be monetary, or they
can be physical rewards, experience-based rewards or other types of incentives that reflect employee
interests and motivations. These added motivators are rewards meant to provide recognition for
exceeding expectations, meeting objectives and adding to the overall success of an organization.
sales incentives important
There are several reasons why introducing sales incentives is important for teams:
 Increased team productivity: A reward system for continuously meeting or exceeding team
sales goals or expectations can be highly effective for increasing productivity
 . As sales teams work towards these goals, they'll also develop new and valuable skills.

 Higher levels of engagement: Motivating employees through incentives can also increase your
team's engagement in their work. For instance, setting team objectives that result in recognition
and rewards for the entire sales team can boost engagement for collaboration, strategizing and
implementing sales techniques.

 Higher job satisfaction: Incentives that recognize team effort and success will naturally lead to
your team's overall satisfaction with their jobs. This job satisfaction also leads to greater
productivity and performance because employees will value their work as they know their
managers recognize their contributions.

 Increased team morale: When teams improve their collaboration efforts, increase their
productivity and feel recognized for their work, they can be more likely to have an upbeat and
positive attitude in the workplace. This boost in team morale is highly crucial for completing
meaningful work, meeting objectives and adding value to the entire organization.
Benefits of sales motivation
Here are some of the benefits of remaining motivated when you're working in sales:
 Increases profits: Motivated salespeople might close more sales, which increases the company's
profits and brings in commission payments.
 Improves team morale: A team that knows how to motivate one another to meet goals and
improve their metrics may work better together and approach work more enthusiastically.
 Helps overcome adversity: Sales can fluctuate due to market conditions, customer needs and
unexpected circumstances, and knowing how to stay engaged can help salespeople remain
confident during slower months.

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outside of KV. Violators will face infringement proceedings of copyright laws.
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