Page 390 - Bruce Ellig - The Complete Guide to Executive Compensation (2007)

376 The Complete Guide to Executive Compensation

Performance Basis, %
Corporate Own Unit

CEO/president and staff VPs 100 —
Support staff 67 33

Cost centers 50 50
Profit centers 33 67

Table 7-24. Corporate vs. unit performance allocations

The rationale behind this approach is that top executives are defined as those people who
cross divisional lines in their responsibilities and strive for optimization of corporate success.
The objectives of the support staff also cross divisional lines, and their success or failure
has a definite effect on corporate success (almost always in minimization of expenses or the
optimization of output for the same level of expenses). Cost centers can be quantitatively
judged on their failure or success in attaining assigned budgets. Profit centers can most
assuredly be judged against sales and profit attainment, but to remind them of their member-
ship on the corporate team, a portion of their normal bonus is predicated on corporate
success. Paying division heads strictly on the basis of their own accomplishments (such as
ROI, sales, and/or profits) is consistent when divisions are completely autonomous and the
transfer of top managers between divisions is not a factor.
Responsibility. A variation on this same theme would move the support staff in with top
executives, making both completely reliant on corporate profits, and keep profit centers
unchanged (two parts division and one part corporate), relating the cost centers on a prorated
basis to the profit centers they serve. An example of the latter would be the case where a
production division’s total output was split: 50 percent chemical business, 35 percent pharma-
ceutical business, and 15 percent agricultural business. These same percentages would make
up the total of its normal award (excluding the corporate one-third). Thus, if its normal award
were $1,500,000 with $1,000,000 being for division attainment, $500,000 would depend
on the chemical business meeting its profit objectives, $350,000 on the pharmaceutical,
and $150,000 on the agricultural. Obviously, these figures could be adjusted upward
or downward, depending on the degree of success or failure of each of the businesses in
meeting its profit objectives.
Organizational Level. Another variation on this approach is to separate the organization in
terms of level of unit (e.g., corporate, group, division, and individual) and determine the
effect that each will have on a particular job. As in Table 7-25, the CEO/president and staff
vice presidents would have their entire bonuses generated by corporate performance. A
group president, on the other hand, might have half of his or her bonus contingent on group
performance and the other half on corporate (to ensure corporate visibility). A division
president within the group might have half of his or her bonus at risk with division perform-
ance and the remainder split between corporate and group achievement. Finally, a division
vice president could have half of his or her bonus based on divisional performance and the
remainder on individual achievements.