Chapter 12 & 13 - Incentives & Benefits

Individual level incentives - Other Managers & Professionals

Merit Pay: salary increase awarded to an employee. Based on individual performance, effectiveness based on validity or performance appraisal system. Sometimes paid as a lump sum without changing base salary.

Financial Compensation

- Base Pay - Variable Pay: plan that links pay to productivity/profitability - Benefits

Incentive Plans

(1) individual level: (2) group level: Collective incentive plan. ENCOURAGES TEAM WORK! Also used in highly interdependent task environment - hard to see individual performance so its better to use team level incentives! Employers might encourage teamwork through incentive plans! Department/Unit incentives - use organizational level (3) organization level: e.g. profit sharing plans, gainsharing plans Problem 1: only offer individual level - employees become too competitive! Problem 2: only offer group/organizational - 'free rider' problem where an employee doesn't put in any work or effort

Why incentive plans don't work

(1) performance pay can't replace good managers (2) firms get what they pay for (3) pay is not a motivator (4) rewards can rupture relationships (5) rewards may undermine responsiveness

Individual level incentives - Salespeople

- Salary Plan: fixed - Commission Plan: pay in direct proportion to sales. Pure Commission - most effective in motivation but also leads to highest turnover rate in employees - Combination Plan: salary + commission. Most widely used

Flexible benefits programs - advantages

- choose benefits to suit individual needs - meet changing needs of workforce - increased employee involvement improves understanding - introduction of new benefits less costly (merely a new option) - cost containment: firm sets a dollar maximum Problems with keeping non-flexible programs - Offer standardized benefit to employees - Look at what competitors are offering and do the same

Employee Services - personal services

- credit unions - counseling services - employee assistance programs (EAPs) - other (social and recreational)

Flexible benefits programs -disadvantages

- employees make bad choices (not covered for predictable emergencies) - increased administrative cost - adverse selection: employees pick only benefits they will use (subsequent high benefit utilization increases cost)

Why employee recognition programs?

- lack of recognition and praise is the #1 cause of employee turnover - cost effective: praise and modest gifts - improves employee attitudes and productivity

Organization-Wide Incentive Plans

- profit sharing plans - gainsharing plans - employee share purchase/stock ownership plans - scanlon plans (early version of gainsharing plans) Profit Sharing and Gainsharing Plans (how they differ) 1. Use different performance measures - profit measures company financial measures of company , gainsharing looks are operational measures 2. Different in terms of payout - profit sharing plan is paid on an annually basis, gainsharing pays employees more frequently Gainsharing is usually short term incentive plan, whereas profit sharing is usually long term

Employee Services - job related services

- subsidized childcare - eldercare - subsided employee transportation - food services - educational subsidies - family-friendly benefits

The changing role of employee benefits

- traditionally used to reward loyalty and tenure - employee services more important today in post job security era - benefits administration increasingly specialized For first two months of disability, can use: • Unused sick leave and vacations • Short term disability • Workers compensation After six months of disability, can use: • Long term disability • Canada pension plan • Workers compensation

Why use stock options/plans as long term incentives?

1) They tie executives pay to the value they create for shareholders 2) Retain executives: Rational : if CEO is hard working then the stock price would increase! Typically a CEO can only cash out their stock ownership after a specified investing period (a couple of years) Problems with Stock Plans 1) No real risk for executives 2) Short-term focus, without taking care of long term performance (motivate CEO's to be preoccupied with short term - only care about how company is doing in stock market. If CEO plays tricks they can drive up stock price, and as a result make more $$. Not thinking long term & thinking selfishly) 3) Additional options awarded when performance is poor -- missing link between pay and performance. Potential Solutions 1) Performance Plans : performance units given, not necessarily stocks (units could represent $$$) 2) Long-term performance measures : customer loyalty; product or service leadership; ability to innovate

Individual & group level incentives - Operations Employees

Piecework plans: 1) straight - a set payment for each piece produced/processed. Can't use this one under employment standard legislation. 2) guaranteed - offer minimum hourly wage + a certain amount for each additional unit above specified output 3) differential - calculate by % - similar to 2 Team/group incentive plan: production standard is set for a specific work group and its members are paid incentives if the group exceeds the production standard

Variable Pay

Plan that links pay to productivity/profitability. An incentive pay employees will only receive after a certain level of performance. Employers like variable pay for two reasons 1) More effective at motivating employees - clearer link with pay and performance 2) Variable pay is not part of the base pay so if employees do not continue performing well, then they won't get that extra money (payroll cost not as hight)

Individual level incentives - Managers and Executives

Short term incentives: annual bonus, decision based on eligibility, find size, and determining individual awards (for higher up managers, how well is the company doing?) Long term incentives: capital accumulation plans. More for senior executives. stock options, book value plan, stock appreciation rights, performance achievement plan, restricted stock plans, phantom stock plans, performance plans

Individual level incentives - Professional Employees

bonus = small portion of pay. Incentives based on results longer than one year. Up-to-date equipment and facilities. Support management style. Support for research publications these positions are generally well paid & don't need monetary incentives

Insurance Benefits - Long term disability

disability management assists disabled employees with return to work: - reduced work hours - reduced work duties - workstation modification mental health benefits: depression is a clear and present danger - 50% of disabilities are mental health disabilities Huge financial burden on employers - therefore disability management has become increasingly popular!!

Types of employee benefits - required by law

employment insurance, Canada/Quebec pension plans, workers compensation, vacation & holidays, paid breaks, leaves of absence, pay on termination of employment

Types of employee benefits - discretionary

most common are life insurance, long term disability, and supplementary health care/medical insurance. others: short term disability/sick leave, sabbaticals, retirement benefits