Chapter 10 Pay for performance incentive rewards

Profit sharing advantages

* Gives employees the opportunity to increase their earnings by contributing to the growth of the organization's profits * Stimulates employees to think and feel like partners in the enterprise - Garners total commitment from employees rather than specific areas

The executive base salaries

* Represents 30 or 40 percent of total annual compensation * Largest portion is received in long-term incentive rewards and bonuses * Influenced by levels of competitive salaries in the job market

Benefits of piecework

* Wage payment for each employee is simple to compute * Permits organizations to predict its labor costs with accuracy - Since the costs are the same for each unit of output

The executive short term incentive

1. Annual bonuses form the main element 2. Bonus payment in form of cash or stock and may be paid immediately, deferred for a short time, or deferred until retirement 3. Paid in cash, keeping with their pay-for-performance strategy 4. Based on: Percentage of company's total profits *Percentage of profits in excess of a specific return on stockholders' investments *Annual profit plan where the amount is determined by the extent to which an agreed-upon profit level is exceeded

Executive benefits

1. Benefits package offered to executives can be parallel to other groups of employees 2. Include programs for health insurance, life insurance, retirement plans, and vacations 3. Are broader in coverage and free of charge 4. Gives financial assistance in the form of trusts for estate planning, payment of mortgage interest, and legal help

Problems with incentive plans

1. Can be traced to the choice of performance measures * Overly quantitative, complex measures should be avoided * Selection of performance measure need to evaluate the extent to which employees involved can influence the measurement * Avoid intensifying performance goals continuously trying to exceed previous results * Leads to employee frustration and perception that the standards are unattainable

The executive pay package

1. Components -Base salary -Short-term incentives or bonuses -Long-term incentives or stock plans -Benefits -Perks

Purpose of incentive plans

1. Encourages employees to assume ownership of their jobs, thereby improving effort and job performance 2. Motivates employees to expend more effort than under hourly and/or seniority-based compensation systems 3. Supports a compensation strategy to attract and retain top-performing employees

Incentive pay plans

1. Establish a performance threshold for employees to qualify for incentive payments 2. Emphasize a shared focus on organizational objectives * By broadening the opportunities for incentives to employees 3. Creates an operating environment supporting shared commitment * Through belief that every individual contributes to organizational performance and success

Advantage of incentive pay programs

1. Focus employees on specific Performance targets 2. Incentive payouts are variable costs linked to the achievement of results * Base salaries are fixed costs unrelated to output 3. Directly related to operating performance 4. Encourage teamwork when payments are related to team results 5. Distribute success among those related to producing that success 6. Increase equity and justice 7. Means to reward or top performers when salary budgets are low

Incentive for professional employees

1. For many professions, the primary incentive system is based on an up or out model - Junior professionals are hired and are given a set amount of time to make valuable contributions to become a partner 2. Motivation is influenced by their increased mobility across companies 3. Can receive compensation beyond base pay

Requirements for a successful incentive plan

1. Identify important organizational metrics encouraging employee behavior 2. Involve employees * Incentive programs should seem fair to employees 3. Find the right incentive payout * Payout formulas should be simple and understandable 4. Establish a clear link between performance and payout

stock option advantages

1. Implemented as part of an employee benefit plan or as part of a corporate culture - Links employee effort to stock performance 2. Boosts morale of disenfranchised employees in budget cuts and downsizing

Problems with compensation

1. Individual team members may perceive that their efforts contribute little to team success or to the attainment of the incentive reward 2. Intergroup social problems 3. Complex payout formulas or insufficient payout reward

Executive compensation reform

1. Internal Revenue Service (IRS) makes executive pay a part of every corporate audit 2. Securities and Exchange Commission issued pay disclosure rules requiring companies listed on the New York Stock Exchange and NASDAQ to disclose the true size of their top executive pay packages 3. Financial Accounting Standards Board (FASB) requires stock options to be recognized as an expense on income statements 4. Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub. L. 111-203) was signed into effect giving share holders say on pay - Voting shareholders of a company must ultimately approve of its executive salaries

Ethics and accountability

1. Justification of bonuses * Large financial incentives are a way to reward superior performance * Business competition is pressure-filled and demanding * Good executive talent is in great demand * Effective executives create shareholder value * Fact of business life, reflecting market compensation trends

Individual incentive plans merit pay

1. Links an increase in base pay to how successfully an employee performs his or her job * Becomes part of base pay once issued regardless of future performance 2. Serves as motivator to employees perceiving a raise to be related to the performance required to earn it

Problems with merit raises

1. Money available for merit increases may be inadequate to satisfactorily raise all employees' base pay 2. Managers may have no guidance in how to define and measure performance 3. Employees may not believe that compensation is tied to effort and performance * Unable to differentiate between merit pay and other types of pay increases 4. Employees and managers may hold different views of the factors contributing to job success 5. Creates feelings of pay inequity

Disadvantage of piecework

1. Not an effective motivator 2. Desire for peer approval outweighs the desire for more money 3. Difficult to distinguish or measure individual contributions 4. Not applicable to highly mechanized work where employee has little control over output 5. Works against organizational culture as it can infringe on employee's time, productivity, and total pay earned

Executive long term incentive

1. Offered in the form of stock options 2. Stock options serves to retain key executive personnel 3. Objected for the magnitude of rewards 4. Pay for performance option can be undermined when executives are granted additional options * Though company stock prices fall or performance indexes decline

Employee stock ownership plans disadvantage

1. Privately held companies are incapable to pay back the stock of employees when they retire 2. Pensioner becomes dependent on the price of company stock 3. Future retirees are vulnerable to stock market fluctuations and management mistakes 4. Not guaranteed by federally established Pension Benefit Guaranty Corporation

Profit sharing

1. Procedure by which an employer pays, or makes available to all regular employees, special current or deferred sums based on the organization's profits

Profit sharing disadvantages

1. Profits shared with employees may be the result of factors over which employees have no control 2. Decreased motivational value as profit sharing payments are made once a year or deferred until retirement may reduce their motivational value 3. If failed to pay off for several years in a row, has an adverse effect on productivity and employee morale

Gainsharing incentive plan

1. Programs under which both employees and the organization share financial gains by a predetermined formula * Reflects improved productivity and profitability 2. Increase in productivity is gained when: * Greater output is obtained with less or equal input * Equal production output is obtained with less input

Individual incentive plan standard hour plan

1. Sets rates based on the completion of a job in a predetermined standard time * Popular in service departments in automobile dealerships 2. Equipment maintenance and product quality can be at risk as employees strive to work faster to earn additional income

Setting performance measures

1. Should distinguish between individual and group contributions 2. Should avoid biases based on likes and dislikes, different personalities, and political agendas 3. Should distinguish between one group's contribution over another

Employee stock ownership plans [ESOPs]

1. Stock plans in which an organization contributes shares of its stock to an established trust for the purpose of stock purchases by its employees * Employer establishes an ESOP trust that qualifies as a tax-exempt employee trust under Section 401(a) of the Internal Revenue Code * Stock allocations are based on employee wages or seniority 2. Employees leaving or retiring can sell their stock back to the organization, or sell it on the open market if traded publicly

Individual incentive plan Bonus

1. Supplemental to the base wage * Provides employees with more pay for exerting greater effort along with having the security of basic wage * Acts as tool to increase future performance

Administering incentive plans

1. Thorough planning must be combined with a cautious approach 2. Effective administration of incentive plans requires: * To motivate performance implying that poor performance must go unrewarded * Annual salary budgets to be large enough to reward and reinforce exceptional performance * Determination of overhead costs associated with plan implementation and administration

Sales incentives

1. Unique needs of sales incentive plans * Performance standards for sales employees are difficult to develop because performance is affected by external factors * Sales volume may not be an accurate indicator of the effort salespeople have expended, hence salespeople are entitled to a degree of stability in their income

Employee stock ownership advantage

1. Usage is encouraged by favorable federal income tax provisions - Provides retirement benefits for the employees 2. Employers can provide retirement benefits to the employees at relatively low cost 3. Increases employees' pride of ownership in the organization

Awards

1. Used to recognize productivity gains, special contributions or achievements, and service to the organization 2. Tangible awards presented with the right message and style can make employees feel appreciated * Simultaneously underscoring a company

Team incentive plans

All team members receive an incentive bonus payment when production or service standards are met or exceeded Advantages * Establishes a psychological climate that fosters cooperation and a collective desire to fulfill organizational goals and objectives * Promotes a pay-for-performance philosophy * Approaches in establishing team incentive payments - Set performance measures upon which incentive payments are based - Determine the size of the incentive bonus - Create a payout formula and should be explained to employees in detail

Computing the piece rate

Based on hourly wage rates that would otherwise be paid for the type of work being performed

Straight commission plan

Based on percentage of sales

Scanlon plan

Bonus incentive plan using employee and management committees to gain cost-reduction improvements.

Recognition

Conduit that shows employees that the company appreciates their efforts, their unique gifts, and their contributions

Differential piece rate

Employees whose production exceeds the standard amount of output receive a higher rate for their work than the rate paid to those who do not exceed the standard amount

stock option disadvantage

Extravagance of executive stock option plans and dubious corporate accounting procedures

Improshare

Gainsharing program where bonuses are based on the overall productivity of the work team.

Combination salary and commission plan

Includes a straight salary and commission

Stock option

Method of motivating and compensating hourly employees, salaried and executive personnel

Sales plus bonus plan

Pays a salary plus bonus achieved by reaching targeted sales goals.

Straight salary plan

Permits salespeople to be paid for performing various duties that are not reflected immediately in their sales volume.

Perks or perquisites

Special nonmonetary benefits given to executives 1. Means of demonstrating the executive's importance to the organization 2. Cost is weighed against the added efficiency and managerial effectiveness generated as facilitates in company's productivity

Variable pay

Tying pay to some measure of individual, group or organizational performance. * Attached to fixed costs allowing flexibility to increase, decrease, or maintain future payments to employees as business conditions warrant * Allows the organization to align its employees' interests and outcomes with the organization

Spot Bonus

Unplanned bonus given for employee effort unrelated to an established performance measure * Useful for retention and motivation of overburdened employees, during lean financial times

Straight piecework

incentive plan under which employees receive a certain rate for each unit produced.

Merit guidelines

used for awarding merit raises that are tied to performance objectives.