• individuals tend to be more motivated by the potential of earning rewards than by fear of punishment.
• personal rewards are relative or situational. (Money is only good to a certain point)
• if senior management signals by action that the MCS is important, operating managers will regard it as important.
• Incentives are less effective as the period between action and feedback increases.
• motivation is weakest when the person believes an incentive is unattainable or too easily attainable.

• salary
• benefits (retirement and health care, but also perks)
• incentive compensation

• short-term
• long-term

• simplest is to make bonus equal to set percentage of profits
• base bonus on percentage of earnings / share after a predetermined level of earnings / share has been attained.
• define capital as shareholder equity plus long-term liabilities.
• few copmanies base bonus on increase in profitability of preceding year
• base bonus on profitability relative to that of their industry.

• instead of paying the total amount in the bonus pool, the plan may provide for an annual carryover of a part of the amount determined by the bonus formula
• doesn't relate to the year the bonus was issued
• also relates more to economy than performance

• more flexible; payment is not determined automatically by a formula and BOD can exercise judgment
• reduce magnitude of swings that occur when bonus payment is based strictly on the fomula amount calculated each year.

• although the amount of bonus is calculated annually, payments to recipients my be spread out over period of years, (usually 5).
• under the system, executives receive 1/5 of their bonus in the year it was earned.  Remaining 4/5 is paid out equally over the next four years.

• managers can estimate their cash income the following year
• deferred payments smooth the managers receipt of cash
• managers who retire will continue to receive payments for a number of years
• deferred time frame encourages decision makers to think long-term

• deferred amount may or may not vest (won't receive deferred bonus if they leave company) "golden handcuffs"

• basic premise is that growth in the value of the company's common stock reflects the company's long-run performance
• several types of plans and popularity is affected by changes in income tax law, changes in accounting treatment, state of stock market and various other factors

• stock options
• phantom shares
• stock appreciation rights
• performance shares
• performance units

• right ot buy number of shares of stock at or after a given date (exercise date) at ap rice agreed upon at the time of grant (usually current market price or 95% of market price)

• phantom stock plan awards managers a number of shares for bookkeeping purposes only
• at the end of a specified period (five years) executive is entitled to award equal to the appreciation in the market value of the stock since the date of award

• right to receive cash payments based on an increase in the stock's value from the time of the award until a specified future date.
• this and phantom shares are deferred cash bonuses in which bonus amount is function of the market price of the company's stock.

• award a specified number of shares of stock to a manager when specific long-term goals to a manager when specific long-term goals have been met.
• advantage is that ward is based on performance that executive can control paritally
• limitation of basing bonuses on accounting measures of performance.

• cash bonus is paid when specific long-term targets are attained (get money instead of shares)
• combines aspects of stock appreciation rights and performance shares.

• disucssed by BOD after CEO has presented recommendations for subordinates compensation
• committee applies same % to CEO's compensation but committee may signal a different appraisal by deciding on a higher or lower %.
• sign of how board regards CEO performance.

• prevent directors from selling stock for duration of their term to encourage them to ask "tough questions" of CEO's without fear of adversely impacting short-term stock price
• set mandatory limits on tenure of directors to avoid entrenchment with management
• hold annual performance reviews of directors
• avoid having CEO of corporation as chairman of board.

• about 75% of CEO and top managment compensation represent stock options and should be expensed the same way as other 25% (cash bonus)
• treating stock options as expense would result in more accurate earnings picture restorin investor confidence
• under current rules, companies feel that stock options are free and over rewards CEO's.
• treating options as expense would prevent top management from playing accounting game to pump up stock options.
• double standards at present because companies are allowed to expense difference between issue price and exercsie price.

• stock options don't involve outlay of cash, so expensing them would penalize earnings
• valuing stock options is far from easy, involves assumptions and estimates.
• treating options as an expense will dampen earnings and reduce stock prices.
• cash strapped startups use options to attract human talent.
• stock options are disclosed in the footnotes to the balance sheets.

• financial (salary increases, bonuses, benefits and perks - autombiles, vacatons, club memberships, etc)
• psychological and social (promotion possiblities, increased responsibilities, more autonomy, better geographical location, recognition - trophy, participation in executive program)

• fixed pay system
• performance based system

• recruit good people, pay them well, and then expect good performance
• emphasize salary, not incentive bonus

• recruit good people, expect them to perform well, and pay them if performance is actually good
• emphasize incentive bonus, not salary

• bonus plan may have upper and lower cutoff level

• when business unit managers recognize that either max bonus will be achieved or they won't meet minimum bonus, they might work against corporate goals.

• buisness unit manager's incentive bonus could be based solely on total corporate profits or on business unit profits or some mix of the two

• could impair interunit cooperation because in a single industry firm, where business units are highly interdependent the manager's bonus is tied to corporate performance  because ooperation between units is critical
• conglomerate situation, it would be counterproductive because units are autonomous and there would be free rider problems where one manager will relax and still get a bonus based on the performance of others

• in a profit center, financial criteria could include contribution margin, direct business unit profit, controllable business unit profit, income before taxes and net income.
• in an investment center, decisions need to be made in definition of profit, definition of investment, and choice between ROI and EVA.

• removes expenses that result from decisions made by executives above the business unit level
• other one eliminates the effects of losses caused by "acts of nature" (fires, earthquakes, floods) and accidents not caused by manager's negligence

• good idea to link bonus to achieving annual financial target (after making allowances for uncontrollable events)
• induces managers to search for different ways to perform exisitng operations and initiate new activities to meet financial targets

relying only on financial criteria could cause severeal dysfunctional effects:

• encourages short-term actions that aren't in a company's long-term interest (under maintenance of equipment)
• managers might not undertake promising long-term investments that hurt short-term financial results
• managers may be motivated to manipulate data to meet current period targets.

• supplement financial criteria with additional incentive mechanisms can overcome short-term orientation of annual financial goals

• managers have difficulty seeing the connection between efforts and rewards in a multi-year scheme, which lessens motivational effect of such awards
• if a manager retires or is transferred during the multiyear period, implementing a plan becomes more complex.
• likely that factors beyond the manager's control will influence the achievement of long-range targets.

• appraised by comparing actual results to profit budget, past performance, or competitors performance
• business unit manager participates in development of budget and budget is challenging but attainable is also important

• when business unit manager inherits problems created by a predecessor
• when busienss unit is highly interdependent with other units and therefore its performance is influenced by decisions and actions of outside individuals
• when strategy requires much greater attention to the longer-term concerns (as in case of business unit in a rapidly evolving industry)