Chapter 4: Incentive Pay
Scanlon Plan
Emphasis on teamwork- employee involvement in teamwork to reduce costs - 2-tiered cost savings suggestion system 1. production-level committees 2. company-wide screening committees - Monetary rewards for productivity improvements...... **based on a ratio of labor costs and sales value of production (SVOP) SVOP= the sum of sales revenue + the value of goods in inventory **Smaller Scanlon Ratio= labor costs/SVOP** want ratio to be smaller
Rucker Plan
Emphasizes employee involvement and monetary incentives - Uses a value-added formula to measure productivity : difference between the value of the sales price and value of materials used to make the product - Larger Rucker ration indicates that the value added is greater than the total employment costs
Referral Plans (individual incentive plans)
Employees receive bonuses for recruitment of highly qualified employees
Behavior Encouragement Plans (individual incentive plans)
Employees receive payments for specific behavioral accomplishments - safety records - attendance
Distribution Methods
Equal Payments: - same for all employees Proportional payments based on annual salary: - presumes higher salaries equate to more contributions to the group and profits Proportional payments based on contribution to profits: - hard to quantify individual employee contribution - not widely used
Profit-Sharing Formulas
Fixed first-dollar-of profits - based on specific percentage or pre- or post- tax annual profits Graduated first-dollar-of profits - percentages increases as pre- or post- tax annual profits increase Profitability threshold formula - profits must exceed a minimum level
Gain Sharing
Group incentive systems that give employees a financial reward based on improved company performance in areas such as increased productivity, lowering costs, and improving safety ** emphasizes employee involvement and giving suggestions
Incentive Pay
Known as variable pay. Rewards employees for partially or completely attaining a predetermined work objective. - one-time rewards given to employees for completely or partially achieving a predetermined work objective
Incentive Pay Considerations
- Based on individual or group performance? - Acceptable level of risk? - Replace traditional pay? - Performance criteria evaluated? - Appropriate time horizon?
Components of Incentive Pay
- Compensation fluctuates according to a pre-established formula, individual or group goals, and company earnings - Augments base pay, appears as a one-time payment - Controls costs - Motivates employees
Deferred Compensation is suppose to...
- Create a sense of ownership - Align the interest of the executive with the interest of the owners or shareholders of the company long term
Company-Wide Performance Measures
- company profits - cost attainment - market share - sales revenue
Group Incentive Performance Measures
- customer satisfaction - labor cost savings - materials cost savings - reduction in accidents - services cost savings
Piecework Plans Disadvantages
- may promote inflexibility - unrealistic standards may hamper employee motivation - setting performance standards is time consuming - factors beyond employees control may affect outcomes - may promote undesirable behaviors
Piecework Plans Advantages
-Incentive Effect: workers willingness to work hard to produce more - Sorting Effect: workers choice to stay versus leave for another job
Incentive Pay Assumptions
1. Individual employees and work teams differ in how much they contribute to the company 2. The company overall performance depends to a large degree on the performance of individuals and groups within the company 3. A company needs to reward employees on the basis of their relative performance in order to attract, retain, and motivate high performers
3 Categories of Incentive Pay
1. Individual- Incentive Plans 2. Group- Incentive Plans 3. Company-incentive Plans
3 Components of Gain Sharing Programs
1. Leadership Philosophy: progressive, involving a cooperative organizational climate 2. Employee involvement through suggestions and problem solving ideas 3. Bonuses awarded when productivity exceeds productivity targets
Gain Sharing Plans (3)
1. Scanlon plan 2. Rucker plan 3. Improshare
Types of Teams for Team Incentive Plans (3)
1. Work (process) teams: refer to organizational units that perform the work of the organization on an ongoing basis ex.) customer service teams, assembly teams on production lines 2. Project teams: consist of a group of people assigned to complete a one-time project ex.) a team of engineers working on the construction of a bridge 3. Parallel teams (task forces): include employees assigned to work on a specific task in addition to normal work duties
Team-Based or Small-Group Based incentive Plans
A small group of employees shares a financial reward when a specific objective is met. Rewards allocated 3 ways.. 1. Equal Incentive payments to all team members 2. Different payments to team members based on their contributions to the goal 3. Different payments determined by a ratio of each team members base pay to the total base pay of the group
Advantages and Disadvantages of Proft-Sharing Plans
Advantages - enable employees to share in companies profits allow companies greater financial flexibility Disadvantages - can undermine the economic security of employees - may fail to motivate employees if they do not see a direct link between their efforts and corporate profits - may lead to turnover of productive employees, if rewards are small
Advantages and Disadvantages of Incentive Plans
Advantages: - Promotes link between pay and performance - Equitable pay enables companies to retain best performers Disadvantages: - Employee may not be able to control factors that affect performance - Loses motivational effect when goals are too high or too low
Advantages and Disadvantages of Group Incentives
Advantages: - companies can more easily develop performance measures for group plans than individual plans (fewer groups than individuals) - greater group cohesion (achieving common goal) Disadvantages: - May lead to higher employee turnover because of the free-rider effect: some employees may make fewer contributions to the group because they posses lower ability, skills, or experience than other group members - Members may feel uncomfortable with the fact that other members performance influences their compensation level
Management Incentive Plans (individual incentive plans)
Award bonuses to managers when they meet or exceed objectives based on sales, profit, production, or other measures for their division ex.) increasing market share - Management incentive plans focus on achieving complex, multiple objectives (MBO)
Employee Stock Option Plans
Company grants employees the right to purchase company stock - to own the stock, employees must exercise the stock option rights by purchasing stock at designated price after a specified period of time - incentivizes employees to be more productivity, with expectation that stock value will increase over time - employees make money by selling stock for more than purchase price
Profit Sharing Plans
Current profit-sharing plans - award cash to employees typically on a quarterly or annual basis as part of core compensation Deferred profit-sharing plans - place cash awards in trust accounts for employees retirement
Improshare
Defined as "Improved Productivity through Sharing" - measures productivity physically rather than on dollar savings - incentive to finish products with fewer labor hours **main focus is on labor-hour ratio - Unlike Scanlon and Rucker Plans, employee participation is not a feature- workers receive bonuses on a weekly basis - includes a buy-back provision
Employee Stock Ownership Plans (ESOPs)
Place company stock in trust account for employees - similar to deferred profit sharing
Stock Compensation Plans
Represent an important type of deferred compensation for executives
Company Stock Shares
Represents equity segments of equal value - equity interest increases positively with the number of stock shares
Company Stock
Represents total equity of a company
Group Incentive Plans
Reward employees for their collective performance, rather than for each employee's individual performance - emphasize importance between and within teams - encourage team members to have predetermined team objects
Individual Incentive Plans
Reward employees whose work is performed independently, and for meeting work-related standards - Piecework plans can be used here to, but typically are used for their production employees
Piecework Plans (individual incentive plans)
Reward workers for every item produced over a designated production standard - uses objective and subjective criteria - quantity and/or quality goals
Company-Wide Incentive Plans
Rewards employees when company meets performance standards - 2 types: profit sharing plans and employee stock options
Time Horizon
Short-term versus Long-term 1. "Rule-of-thumb" is that short-term is five years or fewer 2. Incentives for lower-level employees are: a)usually short-term b) goals are within the control of the employees 3. incentives for professionals and executives are generally long-term