Reward and compensation controls

Producer

In Producer changes in reward and compensation controls includes a shift from sales persons having only a fixed wage, to a progression based wage system, based on sales goals. In addition the top management has been included in a stock purchase program.

High-tech

Of new compensation and reward systems there has been implemented a stock purchase program for the top management, where they can co-invest with the PE firm. There are no other specific changes. As before buyout there exist some individual bonus agreements, and a yearly bonus for all employees based on company performance. It has been discussed internally to look for new ways to incentivize the salespeople and the engineering department, but so far there does not exist any programs for this.

Medium-Sized IT

Before buyout Medium-Sized IT was merged with another company. After the merger there was not performed a proper integration of the different reward and compensation systems of the two companies. At the time of the interview a new incentive structure for the whole company was on the agenda. So far a new management incentive program, offering top management and sales managers to invest in the company, has been established. Under the

former owner there existed a similar incentive program for top management but the design is new.

Small-Sized IT

Small-Sized IT is a small company with a flat organization structure. Before buyout the employees and management had few economic incentives. After buyout the organization has been incentivized with a slight increase in general salaries, a relative significantly increase in the bonus program, and three managers have been invited by the PE firm to invest in the company.

Service

In addition to the founder of Service, which continued as the CEO (chief executive officer) after buyout, three new persons in the management group have received an ownership share in the company. There also exists sales bonuses, which also was present before buyout

Online

The most significant change in the reward and compensation controls for Online is the establishment of a stock purchase program. Initially the program was offered to the top management, but subsequently the rest of the organization also received a similar offer. The existing sales bonus program for sales persons has only been slightly adjusted after buyout.

Table 4-5: Findings changes reward & compensation controls

Cross-case discussion

Of reported changes in reward and compensation controls there is a clear difference between management and employees, both regarding changes reported and objective of these. For both management and employees the changes are aimed at increasing the congruence of people´s and organization´s goals and objectives. Nevertheless, reward and compensation controls

aimed at management have a higher emphasis on directly aligning the interest of the managers to those of the owners, with both an upside and downside potential.

For employees there are reported about changes in the reward and compensation controls in four cases, and in one case there has been discussed new ways to incentivize the employees.

In the last case, Service, there was not reported about changes for employees. In general the changes undergone have increased the portion of compensation based on performance of the individual and/or organization. Where there did not exist performance-based compensation this was introduced as an addition to general salary, increasing the overall compensation. In Small-Sized IT there has been a slight increase in general salaries, and a significantly increase in the bonus program, increasing employees´ incentive to work for the overall company performance. In Medium-Sized IT the incentive structure was a patchwork of different systems, because of the recent merger, and changes were needed to get all employees working against a common goal.

On the management level an ownership program is offered in all cases, and in five out of six cases this is a new way of incentivizing the top management. Only in Medium-Sized IT the top management had a type of stock purchase program before buyout, but the design of the program has been changed after buyout. It appears that a form of stock purchase program is offered in all cases, offering managers to invest in the company at a relative low price. This type of compensation program for the top management is designed to align the interest of the top managers to those of the owners, as best as possible – as stated by one PE firm: “We give share ownership so that they will be in the same boat as us – the same development profile”.

Several of the PE firms note that the ownership in the company is not given as a “gift”, like expressed by the owner of Medium-Sized IT: “It is not some sort of gift, they have to invest their own personal funds”. By introducing new managerial incentives the management risks some of their own personal capital in the company, at the same time as their upside potential is substantial. This does not only make them work harder, but also on the right tasks, as expressed by the owner of Small-Sized IT: “It helps to straighten them up, to discipline them.

They do not run around with that many high-in-the-sky dreams anymore.“ The new managerial incentives work as a boundary system, as traditionally argued by Jensen (1989).

The findings of new compensation and reward controls are consistent with making the management and employees more committed to the plans, budgets and performance measures.

To categorize the reported changes they have a focus on extrinsic reward system, consistent with what is generally focused on in management accounting research (Malmi and Brown, 2008). The monetary incentives are thought to increase both effort and performance of employees and managers, by focusing on tasks.

How the reward and compensation controls changes can be summed up as a higher focus on linking compensation to performance, on both the individual and organizational level. This is evident for both employees and managers. New forms of compensation are introduced, or existing forms of compensation are altered. This can be seen as a method to achieve congruence between the goals and activities to employees and managers, to those of the organization (ibid), and also create boundaries (Bruining et al., 2004).