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Unit 11: Management Compensation

5. Performance units: In a performance unit plan, a cash bonus is paid on the attainment of Notes
specific long-term targets. This plan, thus, combines aspects of stock appreciation rights
and performance shares. This plan is useful in companies with little or no publicly traded
stock.

11.3.1 Incentive for Corporate Officers

Each corporate officer, except the CEO, is responsible in part, for the company’s overall
performance. These corporate offices are entitled to and are motivated by a bonus for good
performance. However, the part of the performance each one of them generated cannot be
measured.

Example: Chief financial officer, human resources vice-president etc. To induce the
desired motivation, the CEO recommends to the compensation committee of the board of
directors, on the basis of each person’s performance and is necessarily subjective. In some
companies, it is aided by a management by objectives system (MBO) in which specific objectives
is agreed upon at the beginning of the year and attainment of these objectives is assessed by the
CEO.

11.3.2 CEO’s Compensation

The CEO’s compensation usually is discussed by the compensation committee of the Board of
Directors after CEO has presented recommendations for compensation for his subordinates.
From this presentation, the CEO’s general attitude towards the appropriate percentage of incentive
compensation in a given year is fairly obvious. In ordinary circumstances, the committee may
apply the same percentage of the CEO’s compensation. However, the committee may signal a
different appraisal of the CEO’s performance by deciding on a higher or lower percentage and
a frank explanation of the reasons for the choice.

Self Assessment

Fill in the blanks:

1. ……………is the weakest when the person perceives an incentive as being either
unattainable or too easily attainable.
2. …………..equal to a set percentage of profits.

3. ……………………….plan has the disadvantage of not making the amount available to the
executives in the year when earned.
4. A ………………..right is a right to receive cash payments based on the increase in the value
of shares from the time of the award until a specified future date.

11.4 Incentives for Business Unit Managers

A wide range of options exist in developing an incentive compensation package for business-
unit managers. These are provided below:
1. Types of incentives:
(i) Financial rewards
(a) Salary increase

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