Compensation Chapter 10

risk sharing plan

base pay is reduced by some amount relative to the level that would be offered in a success-sharing plan

success sharing plan

employee base pay is constant; variable pay increases in successful years, no reduction in base pay and no variable pay in poorly-performing years

issues with merit pay

expensive, doesn't achieve the desired goal: improving employee and corporate performance

specific pay-for-performance plans: short term

merit pay, lump-sum bonuses, individual spot awards, individual incentive plans

Gantt plan (individual incentive plan)

in the Gantt plan, the standard time for a task is purposely set at a level requiring high effort to complete

disadvantanges of group incentive plans

1. line of sight may be lessened, that is employees may find it more difficult to see how their individual performance affects their incentive payouts 2. may lead to increased turnover among top individual performers who are discouraged because they must share with lesser contributors 3. increases compensation risk to employees because of lower income stability. May influence some applicants to apply for jobs in firms where base pay is a larger compensation component

Taylor plan (individual incentive plan)

Taylor plan establishes two piecework rates

merit pay

a merit pay system links increases in base pay to how highly employees are rated on a subjective performance evaluation

what two major components are vital to the implementation and success of a Rucker or Scanlon plan?

a productivity norm and effective worker committes

Rucker plan

a ratio is calculated that expresses the value of production required for each dollar of total wage bill

common feature of individual incentive plans

an established standard against which employee performance is compared to determine magnitude of incentive pay

cash profit sharing (variable pay plan)

award based on organizational profitability; shares a percentage of profits (typically above a target level of profitability); usually an annual payout; can be cash or deferred 401(k)

key elements in designing a gain-sharing plan

strength of reinforcement, productivity standards, sharing the gains, scope of the formula, perceived fairness of the formula, ease of administration, production variability

the two types of earnings-at-risk plans

success sharing plan, risk sharing plan

individual incentive plans

offer a promise of pay for some objective, pre-established level of performance

pay for performance

pay for performance plans signal a movement away from entitlements; pay will vary with some measure of individual, team, or organizational performance

what characteristics to look at when choosing between individual and group plans

performance measurement, organizational adaptability, organizational commitment, union status

profit-sharing plans

predetermined index of profitability; the trend in recent variable-pay design is to combine the best of gain-sharing and profit-sharing plans... plan must be self funding, along with having the financial incentive, employees feel they have a measure of control

what are the three gain-sharing formulas

scanlon plan (single ratio volume), rucker plan, improshare

Rowan plan (individual incentive plan)

similar to the Halsey plan; the major distinction in this plan is that a worker's bonus increases as the time required to complete the task decreases

few causes for failures of team incentive schemes

varieties in teams, level problem, complexity, control, communications

individual spot awards

viewed as highly or moderately effective; typically awarded for exceptional performance

productivity/gain sharing (variable pay plan)

awards that share economic benefits of improved productivity, quality, or other measurable results; focus on group, plant, department, or division results; designed to capitalize on untapped knowledge of employees

Halsey 50-50 method (individual incentive plan)

in the Halsey 50-50 method, the savings from completion of a task in less than the standard time are allocated 50-50 between the workers and the company

stock ownership or options (variable pay plan)

award of stock shares or options

team/group incentives (variable pay plan)

awards determined based on team/group performance goals or objectives; payout can be more frequent than annual and can also extend beyond the life of the team; payout may be uniform for team/group members

balanced score card (variable pay plan)

awards that combine financial and operating measures for organization, business unit, and/or individual performance; award pool based on achieving performance targets

scanlon plans

designed to lower labor costs without lowering the level of a firm's activity; incentives are derived as a function of the ratio between labor costs and sales value of production (SVOP); SVOP includes sales revenue and value of goods in inventory

disadvantages of individualized incentive plans

1. greater conflict may emerge between employees seeking to maximize output and managers concerned about deteriorating quality levels 2. attempts to introduce new technology may be resisted by employees concerned about the impact on production standards 3. reduced willingness of employees to suggest new production methods for fear of subsequent increases in production standards 4. increased complaints that equipment is poorly maintained, hindering employee efforts to earn larger incentives 5. increased turnover among new employees discouraged by the unwillingness of experienced workers to cooperate in on-the-job training 6. elevated levels of mistrust between workers and management

advantages of group incentive plans

1. positive impact on organization and individual performance of about 5 to 10 percent per year 2. easier to develop performance measures than it is for individual plans 3. signals that cooperation, both within and across groups, is a desired behavior 4. teamwork meets with enthusiastic support from most employees 5. may increase participation of employees in decision-making process

advantages of individualized incentive plans

1. substantial impact that raises productivity, lowers production costs, and increases earnings of workers 2. less direct supervision is required to maintain reasonable levels of output than under payment by time 3. in most cases, systems of payment by results, if accompanied by improved organizational and work measurement, enable labor costs to be estimated more accurately than under payment by time. This helps costing and budgetary control

Improshare (gain sharing plan)

(Improved productivity through sharing); standard is developed that identifies expected hours required to produce an acceptable level of output; any savings arising from production of agreed-upon output in few than expected hours is shared by firm and workers; easy to administer and to communicate

how to manage merit pay

improve accuracy of performance ratings, allocate enough money to truly reward performance, make sure size of merit increase differentiates across performance levels

Merrick system (individual incentive plan)

in the Merrick system, three piecework rates are set; high for production, medium for production, and low for production