MIE330 Chapter Twelve

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differences between gainsharing and profit sharing plans

- gainsharing uses group or plant level performance rather than organization level performance - payouts in gainsharing plans are not deferred and are paid more frequently

considerations in contracts

- risk aversion - outcome uncertainty - job programmability - measurable job outcomes - ability to pay - tradition

balanced scorecard

allows companies to track financial results while monitoring progress in building the capabilities and acquiring the intangible assets they would need for future growth

stock options

an employee ownership plan that gives employees the opportunity to buy the company's stock at a previously fixed price

employee stock ownership plan

an employee ownership plan that provides employers certain tax and financial advantages when stock is granted to employees

As jobs become less programmable...

behavior oriented contracts become less likely

The Scanlon plan is an example of what plan?

gainsharing

What compensation program would best support an organizational culture of cooperation and problem solving?

gainsharing

agent

in agency theory, a person who is expected to act on behalf of a principal

principal

in agency theory, a person who seeks to direct another person's behavior

What compensation program uses a management style that gives importance to control?

incentive pay

In incentive pay, performance measures are primarily based on....

individual productivity

According to a merit increase grid, one of the factors that determine the size and frequency of pay increases is the

individual's performance rating

What makes ESOPs less attractive?

less diversification of investment risk

risk aversion

makes outcome oriented contracts less likely

merit bonus

merit pay paid in the form of a bonus, instead of a salary increase

What compensation program is suitable for an organization with a culture that promotes individual competition?

merit pay plan

ability to pay

outcome oriented contracts contribute to higher compensation costs because of the risk premium

agents prefer a behavior based contract when...

outcome uncertainty is high

instrumentality

perceived link between behaviors and pay

Group incentives tend to measure performance in terms of...

physical output

In merit pay programs, an individual's compa-ratio represents her

position in the pay range

What compensation program relates costs to the ability to pay?

profit sharing

what are contingencies that may influence whether each pay program fits a situation?

type of work and management style

measurable job outcomes

when outcomes are more measurable, outcome oriented contracts are more likely

reinforcement theory

In Thorndike's Law of Effect, a response followed by a reward is more likely to recur in the future. The importance of a person's actual experience in receiving the reward is critical. If high performance is followed by a reward, high performance is likely to be repeated.

profit sharing

a compensation plan in which payments are based on a measure of organization performance and do not become part of the employees' base salary

gainsharing

a form of group compensation based on group or plant performance that does not become part of the employee's base salary

merit increase grid

a grid that combines an employee's performance rating with his/her position in a pay range to determine the size and frequency of his or her pay increases

tradition

a tradition of using (or not using) outcome-oriented contracts will make such contracts more (or less) likely

outcome uncertainty

agents are less willing to have their pay linked to profits to the extent that there is a risk of low profits; would prefer behavior oriented contract ^ example

What must a principal do to reduce agency costs?

align the agent's interests with the principal's interests

According to research, when an organization changes from a pay strategy that has below average variability to one with above average variability, on average they will experience a ROI increase of approximately

2%

agency theory

This theory focuses on divergent interests and goals of the organization's stakeholders and the ways that compensation can be used to align these interests and goals. Today, most stockholders are removed from the day‑to‑day operation of companies. This separation has many advantages, but it also creates costs—the interests of the principals (owners) and their agents (managers) may no longer converge.

job programmability

as jobs become less programmable outcome oriented contracts more likely

procedural fairness

based on the processes that were used to decide the amount of compensation

pay plans are used to do what?

direct, control, and energize employee behavior

In skill based pay systems, performance measures are primarily based on

employees' competency acquisition

gainsharing plans differ from profit-sharing plans in that...

gainsharing plans distribute payouts more frequently

According to research, intrinsic motivation is _____ when extrinsic incentives are available.

higher

When designing either managerial or nonmanagerial compensation, the central issue is determining

how agency costs can be minimized

According to the expectancy theory, the main influence of compensation is on....

instrumentality

individual incentives

reward individual performance, but payments are not rolled into base pay, and performance is usually measured as physical output rather than by subjective ratings

drawback of profit sharing

runs risk of contributing to employee dissatisfaction

What process helps ensure that extrinsic incentives do not adversely effect intrinsic motivation?

sorting process

What plan gives employees the opportunity to buy the company's shares at a previously fixed price?

stock option

incentive effect

the effect a pay plan has on the behaviors of current employees

sorting effect

the effect a pay plan has on the composition of the current workforce

What is the difference between profit-sharing plans and employee ownership plans?

the link between pay and performance is less obvious under ownership than under profit sharing

merit pay program

the pay program that results in annual pay increases being linked to performance appraisal ratings

expectancy theory

the theory that says motivation is a function of valence, instrumentality, and expectancy

What makes ESOPs attractive to organizations?

their tax advantages their financing advantages the defense they offer against takeovers

merit pay

traditional form of pay in which base pay is increased permanently


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