Session 21 - Accounting 102 Session 21 Salary Management,...

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Accounting 102 Session 21
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Salary Management, Incentives Divisional Performance Evaluation
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Salary Management Employee Manager 140% $28,000 205% $205,000 Total 30% $6,000 30% $30,000 Benefits 0% 0 50% $50,000 Options/Long-Term Incentives (at Target) 10% $2,000 25% $25,000 Annual Incentive (at Target) 100% $20,000 100% $100,000 Base Salary % of Salary % of Salary Consider the total compensation packages below: Note that the total compensation paid to both the manager and to the employee is substantially greater than the base salary. Frequently, an increase in the base salary implicitly or explicitly causes an increase in many of the non-salary components of total compensation (such as annual incentives, stock option grants, and vacation, and retirement benefits). Thus, controlling salary costs is an important part of controlling total compensation costs.
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Traditionally, companies have controlled salary costs by using compensation schemes that assign employee positions to salary grades. Typically, each salary grade is assigned a salary range in which the midpoint is the average market wage, and the upper and lower bound are multiples of the mid-point (e.g., plus or minus 25%). For example: 125% 100% 75% % of Market Average $50,000 $40,000 $30,000 Salary Maximum Midpoint Minimum As a consequence, a company's salary structure is a series of overlapping salary grades. Salary cost control is achieved by assigning a merit increase budget to each salary grade. Typically, the budgeted average merit increase is based on the increase in the market wage for the position (e.g., 3%). And, an individual's pay increase is based on his/her relative performance evaluation and position in grade .
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Example : Presented below is an example of a merit increase matrix based on a budgeted average salary increase of 3%: Relative Performance Evaluation 7% 5% 2% Lower 1/3 5% 3% 1% Middle 1/3 3% 1% 0% Upper 1/3 Above Average Average Below Average Position in Grade Typically, the relative performance evaluation for an employee begins with an individual performance evaluation by her superior(s) of her performance with respect to each of the critical tasks associated with her position. From that evaluation, an overall (combined) rating is obtained.
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To derive a relative performance evaluation and to assure that the average increase in wages is equal to the budgeted merit increase, all employees (for a given position/salary grade) are ranked relative to one another on the basis of their individual performance evaluation score For example, all consultants within a group, as illustrated below: Warn / Terminate 1 5% Below average 2 25% Average 3 40% Above average 4 25% Promote 5 5% Evaluation Ranking % of Consultants
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Incentive Compensation Most short-term incentive compensation plans are either Pool Plans or Target/Formula Plans. Pool Plans
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Session 21 - Accounting 102 Session 21 Salary Management,...

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