Compensation: Pay-for-Performance Plans

Links increases in base pay to how highly employees are rated on a performance evaluation. Employee achievements are rewarded every year the employee remains on the job.

What is merit pay?

- incentives derived as a function of ratio between labor costs and sales value of production

What is the Scanlon plan?

Choose an individual plan when- good measures of individual performance exist. Task accomplishment not dependent on performance of others Choose a group plan when- Output is group collaborative effort. Individual contributions to output cannot be assessed

When should you choose a performance measurement?

Choose an individual plan when- Commitment strongest to individuals profession or superior. Supervisor viewed as unbiased and performance standards readily apparent. Choose a group plan when- High commitment to organization built upon sound communication of organizational objectives and performance standards

When should you choose organizational commitment?

Considered a less-expensive substitute for merit pay. Based on performance and received as an end-of-year bonus. Not built into base pay. Employees are not fond of merit bonuses: giving merit bonuses for several years, a company is essentially freezing base pay.

What are merit bonuses?

Some argue it does not actually improve employee and corporate performance. Thorough review of research demonstrates a small, but significant, impact on performance.

What are some arguments about merit pay?

Use operating measures to gauge performance - look at cost components of the income ledger, identifying areas where employees have an impact.

What are gain-sharing plans?

Shift part of the risk from company to the employee. Not a sperate category - any incentive plan could be an at-risk plan.

What are earnings-at-risk plans?

Teams come in many varieties - can't develop a consistent type of compensation plan. The level problem - too large of groups can lead to lack of incentive effect; too small of groups can lead to negative behaviors.

What are common problems with team performance standards?

Considerations for any/all team incentive plans: 1. The size of the group that participates in the plan 2. The standard against which performance is compared 3. The payout schedule

What are considerations for team incentive plans?

1. Gain-sharing plans 2. Profit-sharing plans 3. Earnings-at-risk plans

What are different team incentive plans?

Differences in plans occur over two dimensions: -method of rate determination -relationship between production and wages (There are four categories of individual incentive plans)

What two dimensions occur with differences in plans?

Choose an individual plan when- Individual performance standards are stable. Production methods and labor mix relatively constant Choose a group plan when- Performance standards for individuals change to meet environmental pressures on relatively constant organizational objectives. Production methods and labor mix must adapt to meet changing pressures

When should you choose organizational adaptability?

Choose an individual plan when- Nonunion; unions promote equal treatment. Competition between individuals inhibits "fraternal" spirit. Choose a group plan when- Union or nonunion; unions less opposed to plans that foster cohesiveness of bargaining unit and which distribute rewards evenly across group

When should you choose union status?

Offer a promise of pay for some objective, pre-established level of performance. Use an established standard for comparing worker performance to determine magnitude of the incentive pay.

What are individual incentive plans?

Payouts awarded for exceptional performance. Usually associated with special projects or with performance that exceeds expectations. About 35% of companies use them; 74% report them effective. Larger companies use formal mechanisms while smaller companies may be more casual.

What are individual spot awards?

Use financial measures - focus on predetermined index of profitability. However, most employees do not feel their jobs have a direct impact on profits. Trend: combine best of gain-sharing and profit-sharing plans.

What are profit sharing plans?

unattainable (or too easy) goals outdated or inaccurate metrics too many metrics

What are some problems with pay-for-performance?

Merit pay Merit bonuses (aka lump-sum bonuses) Individual spot awards Individual incentive plans

What are some short-term pay-for-performance plans?

Productivity improvements (38% of plans) Customer satisfaction measures (37% of plans) Financial performance (34% of plans) Quality of goods and services (28% of plans)

What are team performance standards based on?

Complexity: being too complex Control: factoring uncontrollable elements Communications: not well communicated

What are the three C's?

improved productivity through sharing: identifies hours required to produce an acceptable level of output and savings are shared by firm and workers.

What is improshare?

Focus on performance beyond one-year. Recent increase in interest spurred by a desire to motivate longer-term value creation.

What is long-term pay-for-performance plans?

Moving away from entitlement toward pay that varies with performance. Has a positive effect if designed well. But, PFP plans often have too small a payout for the work expected.

What is pay-for-performance?

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

What is risk sharing?

Success sharing: employee base wages are constant and variable pay adds on during successful years

What is success sharing?

Focus on goals from people working together.

What is team-based compensation?

ratio expressing the value of production for each dollar of total wage bill

What is the Rucker plan?

Accuracy in performance ratings Enough money to truly reward performance Differentials across performance levels

What must merit pay have?