Chapter 10 Pay for Performance: Incentive Rewards

Differential Piece Rate

a compensation rate under which employees whose production exceeds the standard amount of output receive a higher rate for all of their work than the rate paid to those who do not exceed the standard amount

Improshare

a gainsharing program under which bonuses are based on the overall productivity of the work team o Improved productivity through sharing o Based on number of output produced by a team in a given period

Problems of ESOPs

o Better in public than private companies o Potential inability to pay back the stock of employees when they retire o Not guaranteed

Executive Compensation Reform

o IRS make executive pay a part of corporate audit o SEC issued pay disclosure rules for companies on NY stock exchange and NASDAQ to disclose how much executives are being paid o FASB requires that stock options be recognized as an expense in the income statement

Characteristics of a successful incentive plan

o Identify important organizational metrics that encourage employee behavior o Involve employees o Find the right incentives payout o Establish clear link between performance and payout

Degree of Success of Incentive Plans Depend On:

o Identifying important organizational metrics by which to measure employee performance o A customized incentive plan which effectively measures employee output and rewards exceptional employee performance

Problems with team incentive plans

o Individuals may think their efforts were greater than others o Intergroup social problems o Complex pay formulas

Problems with Merit Raises

o May not achieve intended purpose o Perpetuated year after year even when performance declines o May have biased evaluations o Funds may not be available o Managers may not know how to define and measure performance o Employees may not believe that their compensation is tied to effort and performance o Employees and managers may have different views on factors that contribute to job success o May create feelings of inequality

Weaknesses of profit sharing

o Profits shared with employees may be the result of inventory speculation, climate factors, economic conditions, national emergencies or other factors that employees cannot control o Losses may occur when employee effort is at a maximum

Gainsharing Plans

programs under which both employees and the organization share financial gains according to a predetermined formula that reflects improved productivity and profitability

Perquisites:

special nonmonetary benefits given to executives, often called perks a. Tax savings b. Viewed as wasteful spending but can facilitate productivity and save executive time

Employee Stock Ownership Plans (ESOPs):

stock plans in which an organization contributes shares of its stock to an establishes trust for the purpose of stock purchases by its employees

Computing the Piece Rate

• 60 minutes per hour / Standard Time Per Hour = units per hour

Enterprise Incentive Plans

• All organizational members participate in the compensation layout • Reward employees on the basis of the success of the organization over an extended period o Normally one year but could be longer

Stock Options

• Allow employees to purchase stocks • Most sell for fair market value • Criticized by stockholder groups, government officials and the general public

Failures of Incentive Plans

Sometimes don't satisfy employee expectations for pay gains Confusion Employees may not have the ability to affect performance standards

The process of...

(1) choosing the right incentive plans based on organizational objectives, (2) setting up performance measures, and (3) administering those incentive plans

Three Most Important Points of Incentive Plans:

1. Allow incentive payments to become pay guarantees defeats the motivational intent of the incentives 2. Annual salary budgets must be large enough to reward and reinforce exceptional performance 3. The overhead costs associated with plan implementation and administration must be determined

Incentives for Professional Employees Should Provide:

1. Autonomy of the worker 2. Clear goals or objectives 3. Worker involvement in the goals set 4. The ability to develop new skills 5. Purpose

Justifications of big bonuses

1. large financial incentives are a way to reward superior performance 2. Business competition is pressure filled and demanding 3. Good executive talent is in great demand 4. Effective executives create shareholder value

Incentive Awards and Recognition

• Awards are used to recognize productivity gains, special contributions or achievements, and service to the organization • Noncash incentives include merchandise, personalized gifts, theater or sports tickets, vacations, dining out, gift cards or personalized clothing • Most effective when the award is combined with meaningful appreciation and recognition o Let them know they are valued and appreciated

Requirements for a Successful Incentive Plan

• Employees must believe in it for it to work o Influenced by managements introduction of the plan • Must be able to see a clear connection between performance and pay

Incentives for Professional Employees

• Engineers, scientists, attorneys • Extended salary ranges for professional positions to equal or nearly equal management positions • Double track wage system

Sales Incentives

• Financial incentives for salespeople • Important for employees who cannot be supervised closely

Steps of Team Incentive Plans

• First, performance measures are set, then, the size of the incentive bonus is determined and third, a payout formula is established and fully explained to employees

Incentive Plans as Links to Organizational Objectives

• Gives employees ownership • Encourages employees to exert more effort

Merit Pay

• Links an increase in base pay to how successfully an employee performs his or her job • Once given, does not depend on future performance

How are individual incentive plans determined?

• May be determined by the number of units produced, achievement of specific performance goals, or productivity improvements in the organization

Drawbacks of Piecework

• May not always be an effective motivator • "rate busting" = disapproval from coworkers • May be inappropriate when quality is more important than quantity • Frequent changes in technology • Standards difficult to develop

Straight Commission Plan:

A compensation plan based on a percentage of sales

Combined Salary and Commission Plan:

A compensation plan that includes a straight salary and a commission

Spot Bonus:

An unplanned bonus given for employee effort unrelated to an established performance measure

The Executive Pay Package

Consist of the five basic components: 1. Base salary 2. short term incentives or bonuses 3. long term incentives or stock options 4. benefits 5. Perks

Merit Guidance:

Guidelines for awarding merit raises that are tied to performance objectives

Standard Hour Plan:

Incentive plan that sets rates based on the completion of a job in a predetermined standard time

Salary Plus Bonus Plan:

a compensation plan that pays a salary plus a bonus achieved by reaching targeted sales goals

Straight Salary Plan

a compensation plan that permits salespeople to be paid for performing various duties that are not reflected immediately in their sales volume

Variable Pay

Tying pay to some measure of individual, group, or organizational performance • Bonuses, incentives, recognition • More flexible than fixed pay • Can be used to exercise fairness

The Scanlon Plan:

a bonus incentive plan using employee and management committees to gain cost-reduction improvements

Team Incentive Plans:

a compensation plan in which all members receive an incentive bonus payment when production or service standards are met or exceeded

Employee Stock Ownership Plans

an employer established trust that qualifies a tax-exempt employee trust under Section 401(A) of the Internal Revenue Code • Employees do not actually buy shares but rather the company contributes its own shares to the plan, contributes cash to buy its own stock, or most commonly, has the plan borrow money to buy stock, with the company loan • Tax benefits to the organization, the employees and the seller • Stock allocations based on employee wages or seniority

Bonus:

an incentive payment that is supplemental to the base wage

Straight piecework

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

Profit Sharing Plans

any procedure by which an employer pays, or makes available to all regular employees, special current or deferred sums based on the organization's profits • Cash payments made to eligible employees at designated time periods • 5-50% of net profit shared; usually 20 to 25%

• Flexibility

describes the design of individual incentive plans