Compensation and Benefits Chapter 4- Incentive and Variable Pay

The Scanlon plan:

- a Gainsharing plan include monetary awards to employees based on productivity improvements

parallel teams

- a group of employees assigned to work on a specific task in addition to other work duties - usually work together until their work culminates into a recommendation to management

Project teams

-group of people assigned to complete a one-time project -may work on the project either full time or in addition to other work responsibilities of the team

What is Improshare gainsharing plan based off of?

-labor hour ratio formula (how many labor hours it takes to create a product) -then compares standard labor hours to ACTUAL labor hours

Work (process) teams:

-organizational units that perform the work of the organization on an ongoing basis -permanent team -members work full time in the team Ex: Customer service teams, assembly teams on production lines.

2 advantages of profit sharing plans

1. Allow the employees to share some of the company's fortunes 2. Companies gain greater financial flexibility

What are the three way HR professionals allocate group incentive rewards to members?

1. Equal incentive awards to all members 2. Differential payments based on individual contribution to the team 3. Differential payments based on a ratio of each team member's base pay and the base pay of the group(those with higher base pay are awarded more)

3 formulas for calculating profit sharing awards

1. First dollar of profits 2. Graduated first dollar of profits 3. Profitably threshold

Effective inventive pay programs are based on three assumptions

1. Individual employees and work teams contribute differently to company's performance 2. The company's performance depends a lot on employee performance 3. To attract, retain, and motivate good employees and to be fair, companies need to reward employees relative performance

3 components of gainsharing plans:

1. Leadership philosophy 2. Employment involvement systems 3. Bonuses

2 disadvantages of profit sharing plans

1. May undermine employee's economic security 2. Employees may not see the pay for performance link

Difference between company stock, company stock shares, and stock options

1. Represents the total equity of a company 2. Equity segments of equal value 3. An employee's right to purchase company stock

The two types of group incentive pay plans are:

1. Team based/small groups 2. Gainsharing plans

5 considerations when designing incentive pay programs

1. Wether it should be group or individual performance 2. The level of risk employees will be able to accept in their compensation 3. Whether incentive pay should replace or complement traditional pay 4. How performance should be judged 5. The time horizon for goals

Group incentive pay plans should emphasize:

1. coordination between and within teams 2. reward employees for their extra effort they often have to assume because of their role in a team 3. encourage team members to attain predetermined work objectives for the team

2 advantages of using group incentives

1. easier to develop performance measures than individual incentive plans 2. group collaboration

3 components of Scanlon plan:

1. emphasis on teamwork to reduce costs 2. Suggestion systems that take cost-saving ideas from employees 3. monetary rewards based on increased productivity

Factors that lead to successful incentive pay plan:

1. employees are made aware of the performance measures before the performance period starts 2. employees should have full control over their performance in meeting the objectives

3 potential problems of INDIVIDUAL incentive pay plans

1. have to potential to promote inflexibility 2. poses problems with measuring performance when management implements new methods or equipment 3. may lead employees to disregard aspects of their work that are not reinforced by incentive pay

4 key advantages of INDIVIDUAL incentive pay

1. links performance to pay 2. promote equitable pay within companies 3. can instill ownership mentality in employees 4. compatible with individualistic cultures like the U.S.

Gainsharing plans

A group of employees, like a department, is rewarded for productivity gains

Incentive pay occurs as

A one time payment

Profit sharing plans pay what to employees

A portion of company profits separate from base pay, COLAs, or permanent increases

incentive effect

A worker's willingness to work diligently to produce more quality output than simply attending work without putting in the effort.

sorting effect

Addresses an employee's choice to stay versus leave his or her employer for another job, presumably one without an incentive pay program

Current profit-sharing plans

Award cash to employees typically on a quarterly or annual basis

Fist dollar of profits formula

Based on a specific percentage that is contingent of the company meeting the predetermined goals

Supervisors communicate the incentive awards amounts when?

Before the performance period starts

2 advantages of group incentives

Easier to develop (less groups in a company than people) Promote team cohesion

Work teams incentive pay plans are effective when

Employees are cross trained to perform others work in the group when they are gone

Individual Incentive plans are most appropriate when

Employees have sufficient control over work outcomes It does not create unhealthy competition between employees Employees performance can be measured objectively

referral plans

Individual incentive pay plans for rewarding the referral of new customers or recruiting successful job applicants

behavioral encouragement plans

Individual incentive pay plans that reward employees for specific behavioral accomplishments such as good attendance.

4 benefits of individual incentive pay plans

Link pay for performance Promote equitable pay Can instill ownership mentality in employees Compatible with individualistic cultures like the US

employee stock option

Long term company wide incentive Employers give employees the option to buy stock at a designated price after company chosen time lapses

deferred profit sharing plan

Place cash awards in trust accounts for employees usually until retirement, a long term incentive

Company wide incentive plans rewards employees when

The company beats some minimal acceptable performance standard

With the Rucker plan, higher ratio indicates

The value added is greater than employment costs

Group incentive plans are most effective when

When each member has some affect on achieving the goal even if individual contributions are not equal

A company awards gainsharing bonuses when:

actual productivity exceeds the target productivity

When MBO is used in incentive pay system superiors do this:

communicate to the manager the incentive pay reward that will be awarded for meeting the specific predetermined goals

piecework plans

compensation systems that base pay on the level of output employees get their base pay and then an extra award for each unit they produce per hour over the picework standard

The main disadvantage of group incentive plans

free rider effect

Profitability threshold

fund profit sharing pools only if profits exceed a predetermined minimum level but fall below some established maximum level

Gainsharing plan:

group incentive plan that awards employees an incentive pay based on improvements in company performance

Team based

incentive pay plans where each member of the team is awarded a monetary award for the achievement of a group goal

signing bonuses

individual incentive pay plans that promote recruitment and job offer acceptance useful for when the company cannot maintain a super high salary level for a long time

management incentive plans

individual incentive plan that awards bonuses to managers when they meet or exceed objectives based on sales, profit, production, or other measures for their division -usually contains many complex objectives

spot bonus

individual incentive plan that reward employees usually small monetary bonuses for exemplary performance throughout a short period of time

___________________ are shared with workers using the Scanlon plan

labor cost savings are shared with workers

Formula for Scanlon ratio:

labor cost/sales value of production (companies strive for smaller ratios)

A second type of piecework plan is:

one that includes objective and subjective criteria (such as units produced AND overall work quality)

Group Incentive Plans

pay plans that reward employees on GROUP performance rather than individual performance

Employees receive gainsharing bonuses using the Rucker plan when:

the ratio is higher than the standard

Graduated first dollar of profits formula

uses a different percentage based on level of attained profits

Rucker Ratio

value added/total employment costs