An Incentive Plan
Introduction
An incentive plan can be described as a formal scheme that is used to encourage or promote the behavior or the actions of a specific group of people or an individual during a given period of time. These plans are mostly used by business managements in order to motivate the employees, retain customers and also to attract more sales. For incentive plan programs to be effective, all the aspects that influence behavior must first be identified which would include skills, motivation, an understanding of the goals, recognition, and also the ability of progress measurement.
Performance bonus
Performance bonus can be defined as a mode of payment by an organization to the employees and is addition to the usual salary or wage that is offered. Several methods of payments to performance bonus just like there are different reasons for performance bonus payments. The normal bonus payments in Coca-Cola usually take place at the ending of a financial year. They come as reward for the employee’s group or individual effort for the organization that exceeds the expectations. Apart from the set end of financial year bonuses, the executives are usually given some additional payment in form of employee stocking options or a profitable retirement plan and also called golden parachute. Those types of bonuses are in a category of bonuses called camouflage compensation usually made by organizations to hide from the government and investors the actual amount of monetary reward that is given to the senior staff.
Performance bonus at the end of the year has become the most common method of compensating the company at the many stages of management due to its statistical justification in its advantages over the other compensation methods. In the year 2006, research indicated that an increase by 1% in the employees’ bonuses improved the work quality in an organization by 2%. It was also very surprising that instead of the compensation increasing job performance in an equal rate, the same 1% increase in the bonuses increased job performance by 20%. The challenging factor to increasing employee contribution in Coca-Cola is the determination of the performance ranks at which the bonus payment should be set. If the rank is easily achieved, then the bonuses will not have great meaning because most of the employees will not achieve it and in the condition that it is difficult to achieve, then the employees will not work to obtain it as they will view it as unrealistic to attain such goals.
In situations where performance bonuses are unable to materialize for the reasons of invalid setting of goals, organizations usually give discretionary bonuses in order to avoid feedback that negative due to the system that has failed in the basis of performance. The actual effect of performance bonus is very hard to track in the situations that camouflage compensation is in play for the reasons that such types of compensation fluctuate on the basis of market conditions like the stock appreciation rights that are tied to bonus of increasing value of organization’s stock in certain duration of time that is arbitrary. Executive retirement plan is another type of bonus which is an idea from golden parachute that offers benefits of retirement that are far beyond the bonuses given to usual employees in the Company through the standard retirement accounts.
The design of performance bonuses has been brought under scrutiny and there are attempts in new laws to limit its exercise by the government of United States due to the financial catastrophe that arose in the year 2008. In the year 2009, the amount of performance bonuses that were given to bankers and to the executives that are wall street-based exceeded the many other past records in spite of the truth that the organizations paying those performance bonuses either had gone out of trade or lost money or had acquired huge amounts bailout funds that had been provided by the taxpayers so that they can stay floating. Many billions inform of bonuses was given out to staff of failed organizations that had posted records of losses for example the Merrill Lynch and as a result, a total of 18,400,000,000 USD had been paid as bonuses in the year 2009 alone by the United Stated firms.
Executive compensation
This is a financial compensation that is by an executive officer in the Coca-Cola Company. Typically it is a mixture of bonuses, salaries, perquisites and benefits and is configured so as to take into account the government regulation in tax laws, the desires of the executive and the organization and the reward for performance. In the United States, executive compensation has been on a dramatic rise over the past decades relative to what an average worker is paid and to some extent it has also crept into other countries.
Observers argue as to whether the rise in executive compensation is a beneficial and natural result of competition for the scarce talents in business that can greatly add to the value of stakeholder in the large organizations or it is a harmful social phenomenon that has been brought about by the political and the social changes that have allowed executives a bigger control over their pay. Executive’s compensation is a crucial part in the governance of corporate and is mostly determined by the company’s board of directors. In the modern corporations, top executives and the chief executive officers are mostly paid salaries and in addition they get short term bonuses and incentives and the combination is called the total cash compensation. The short term incentives are usually based on performance criteria and are also formula driven depending on the executive’s role. The bonuses are not formula driven and they are often optional. The executives may also be paid using a mixture of shares and cash from the organization which are always subjected to restriction vesting.
For an incentive to be considered as a long term incentive, its period of time must be more than one year with most common being three to five years. The term vesting usually refers to the duration of time with which the recipient acquires the rights of transferring shares and realizing its value. Other elements of executive compensation include such benefits as health insurance, generous retirement plans, loans that have free interests, limousines that are chauffeured and even executive jets.
Restricted stock is another form of compensating executives that cannot be sold before certain stipulations are met and it usually has same value with the market price at the time it is granted. Due to the reduction in the size of stock options, the number of organizations that grant restricted stock has been on the rise. There has been a controversy with the explosion of compensation to executives and this has been criticized not only by the leftists but also by conservative establishers such as George W. Bush and Ben Bernanke. There also have been questions on the idea that pay for performance to executive is economics driven. Those who defend the high compensation to executives argue that the global war for private equity organization and the war of talents is an explanation the increased pay for the executives. Defenders argue that the increase in executive compensation is byproduct of demand and supply for the talent of executives. Executive in the Coca-Cola Company make a lot more than their counterparts in Asian and Europe. There are several strategies that can be used to respond to the increase of executive compensation which include:
The salaries of the executives should be disclosed so that the stakeholders of the organization know and are able to decide whether or not the compensation is fair. This strategy had been included in Companies Act 2006.
Another strategy that can be used is the system of bonus-malus where the executives bear the down side risk and the potential to the up side reward.
The strategy of progressive taxation is a general strategy which affects the compensation of executive as well as compensation for other people who are highly paid. In this strategy, the highest earner is most heavily taxed.
The use of maximum wages is a strategy that was in the United Stated in 2009 which limits the maximum wage of executive to $500,000 in one year for organizations that acquire funds from the taxpayers. This strategy puts a limit to the highest amount that an executive can legally make.
Commission compensation
Sales people are mostly remunerated through commission payments for products sold or services rendered by the Company. This type of compensation is calculated on the basis of percentage of the work done. The compensation formula has been a way for Coca-Cola Company to solve the problem of principal agent by trying to align the employee’s objectives with those of the organization. The most common type of commission is called the On Target Earnings in which the rates of commission are based on achievement of certain targets that are agreed upon between the sales person and the management of Coca-Cola.
The intention of commissions is to develop strong incentives for the employees so that they can put maximum effort in their jobs. In most cases, the organizations that utilize commission structures establish themselves through independent contractors and do not involve employees. Straight commissioning is a type of compensation where commission is the only mode of compensation and has no basic salary. Compensation for salespeople can also be in the form of commission and a fixed salary at the same time. Commission compensation can have some side effects in that it may result to the sales people using fraudulent and dishonest practices so as to make high sales. Commission compensation can take the following forms:
Inside sales: This is where the sales representative is issued with a list of customers they should contact and this form usually offers a high salary but low commissions.
Compensation for individual sales: This type of commission compensation best suits sales representatives who are focused on individual transactions and direct relationship with the customers. It is characterized by low base salary and highest commission possible.
Share of the profit margin: In this form, organizations compensate their sales representatives a percentage of the profits they make in selling their services.
Compensation for hitting targets: Some organizations set the sales target and it increases the commission as the sales representative sells more and more. This mode of compensation is the best if the sales representative is motivated by challenges but it can be the worst if the lowest objective is unattainable because of the wrong pricing or the cycle of sales takes longer than the cycle of commission.
Base pay compensation
Base payment is a type of compensation where a fixed amount of money is given to an employee from an employer for work that they have performed. Base payment does not include bonuses, benefits or any other type of compensation from the employer. Employee’s base payment is the standard amount of money or the annual minimum amount of money that is received for doing a certain job. The base pay is used in calculating the allowances such as employee benefits and incentive compensation.
The cost of benefits like the premiums of health insurance or life insurance are payable from the amount of base pay that an employee receives. Employees that are compensated through base pay, they are first required to complete the whole work in order that they are compensated. Employees who get paid through base pay are not expected to track the hours they have worked and do not get paid for the overtimes. The base pay is mostly determined by rates of market pay for those people who do similar types of work in the same region. It is also determined by the rates of payment and the ranges of base salary that are established by an employer. Base pay is influenced by the number of people who are available to carry out the specific work in the employer’s locale.
Employee stock option
This is a type of compensation can be described as a call option in the stock of an organization that is issued in form of cash compensation. The restrictions in this option try to align the interest of the holder with the interests of the organizations shareholders. When the stock of the organization rises, the holders of the stock options experience a financial benefit. This motivates the employees to behave in a manner that boosts the organization’s price of stock. Stock options of employees are usually given to the management as a portion of their compensation to the executive’s package. They also may be offered to the non executive staff mostly by the organizations that have not yet started making profits as they may be having few means of compensation.
In other alternatives, the employee stock options may be offered to the non employees such as the consultants, suppliers, promoters and lawyers for the services they have rendered to the organization. Employee stock options are very similar to the warrants which are also call options that are issued by the Company with regards to its own stock. Employee stock options can also be described as calls that are not standardized and given as private contract between the employee and the employer. During the period of employment, the Company issues employee stock options to the employee and is exercised at a certain price that is set on the grant day which is the organization’s current price of the stock. Depending on the maturity of the stock options and the vesting program, the employee may decide to exercise the stock options and that would obligate the organization to sell the stock options at any stock price that was used as exercise price. At such a point the employer may sell or hold on the stock with hope that the price will appreciate or get around the position of stock with listed puts and calls.
In the world’s biggest beverage producing company the Coca-Cola Company uses a reward system that is based on grades. The rewards differ following the employers grade. The grades are determined by experience, education and competencies of the individuals. The company operates incentive plans for all its managers. The basis of these incentive plans is the annual performance of the business against the volume and also the accomplishments of individuals against their annual objectives and these objectives are set by the senior management. The managers of the Coca-Cola Company are entitled for participation in Coca-Cola plans of stock options. The Stock options are considered as an important part of the compensation package of senior managers.
In the year 2010, the company made revenues that amounted to $35 billion and had a net income of $11 billion and its worldwide sale of products increased by a factor of 5%. The Coca-Cola Company has a total of 70,000 employees all around the United States. The employees’ dependants and spouses are entitled to a wellness and health benefits from the dates they are hired. There exist no conditions for exclusion in the health plan so long as the employees are hired by the company. The Coca-Cola Company agreed not to give severance payments that exceed 2.9 times the executives’ annual bonus and salary without having the permission of the shareholders. The pay system of Coca Cola Company is greatly linked with the performance of the workers. The company carries out a research to determine the five top companies and a decision is made on their rewards based on the grades of management. In the payment of its workers, the company considers the inflation rate every year regardless of the increase or decrease of individuals’ performance.
The aim of the Coca-Cola Company is to sell more products that are of high quality and also to get better satisfaction of its customers. For that reason, the management of the company creates opportunities for the sales persons to sell more products and in return the get more remuneration in form of sale dangle, sales commissions and this motivates the sales persons to make more sales. All those rewards offered by the Coca-Cola Company form the Coca-cola reward system that has a role of maintaining a proper motivation for all its workers. This makes the employees competent and disciplined and this helps the company to generate more products in order to compete with its rivals.
References
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World's leading beverage company. (n.d.). Retrieved March 16, 2011, from Coca-Cola: http://nyjobsource.com/cocacola.html
