Chapter 9 COMP study guide

COLA:

A cost-of-living adjustment is made to Social Security and Supplemental Security Income to counteract the effects of inflation. Cost-of-living adjustments not a bonus, based on how your location

Three Gain-Sharing Options:

Scanlon, Rucker, Improshare Cost Savings are distributed to: . Employees . Firm; and .Emergency fund (distributed to ees if not used by firm)

What are examples of Long Term incentives? Who typically gets them? What Financial Metrics can be used to base these upon?

Stock Option. Top level managers are the most likely candidate for these type of incentives. -Income Statement

Variable pay can affect who leaves: Pay based on individual performance

Tends to send employees walking

Base pay:

The base rate of pay for a job or activity, excluding additional payments such as overtime or bonuses.

Success Sharing Plans:

a generic category of pay add-on which is tied to some measure of group performance, not individual performance. A plan by which an employer distributes a set percentage of the company's profits to its employees. ... The idea behind profit sharing is to give employees an incentive to work for the company's profitability. The overriding goal of this Plan is to align employees with business goals and provide them with a better understanding of what contributes to operational excellence. The Employee Success Sharing Plan provides lump-sum financial awards to eligible participants.

How does variable pay affect turnover, when based on individual performance? ....on Group performance?

a. Pay based based on individual performance tends to send low performing employees walking. b. Group incentive plans can lead to higher performance leaving.

Gain Sharing

an incentive plan in which employees or customers receive benefits directly as a result of cost-saving measures that they initiate or participate inis a system of management used by a business to increase profitability by motivating employees to improve their performance through involvement and participation. As their performance improves, employees share financially in the gain (improvement).: Employees earn bonus based on saving costs (e.g., reduced scrap or re-work; lower utility or labor costs) - bonus is under employee'scontrol - the plan is "self-funded"

Individual Incentative bonus

commission pays specifically based on individual performance regardless of team performance. This provides more pay to higher-achieving employees and less pay to lower-achieving ones. It allows for competition among employees for prestige and pay which provides a strong incentive to perform.

merit of lump sum

increasingly used as alternative to %. It is less expensive for the firm. It is NOT built into base pay. It is viewed as less of an entitlement by the employee. merit increase is not really an increase at all, but rather something provided in lieu of a salary increase. Rather than being added to the fixed base salary, it is delivered in the form of a single cash payment, separate from base salary.

Variable pay improves

individual & organizational performance. Challenge: variable pay can lead employees to neglect other important tasks // var. pay in creative contexts??

A long-term incentive plan (LTIP)

is a reward system designed to improve employees' long-term performance by providing rewards that may not be tied to the company's share price. ... In some forms of LTIPs, recipients receive special capped options in addition to stock. OVER A YEAR

Profit sharing

is a system whereby a proportion of the company's profits is paid out to employees. . The amount awarded is based on the company's earnings over a set period of time, usually once a year. Unlike employee bonuses, is only applied when the company sees a profit. Net income/net sales=%

Variable pay can affect who leaves: Group incentive plans

Can lead to higher perf leaving...

Goal Setting Theory

refers to the effects of setting goals on subsequent performance. Better performance with harder goals.

Why are firms increasingly implementing variable pay plans?

It typically increases individual and organizational performance. How we pay > How much

Merit pay, also known as pay-for-performance

, is defined as a raise in pay based on a set of criteria set by the employer. This usually involves the employer conducting a review meeting with the employee to discuss the employee's work performance during a certain time period. There are generally two conditions required to make the system work. Merit pay involves giving employees a permanent pay raise based on past performance. Often the company's performance appraisal system is used to determine performance levels and the employees are awarded a raise

When is variable pay appropriate?

Consider stability of corp. performance and measurability of employee tasks.

What is on the third arrow?

Contributions -> Seniority Based -> Performance Based -> Merit Guidelines -> Incentive programs

What are the 3 C's of variable pay design? Explain them

Control: Employee in control of the outcomes. Communicate: Clearly communicate and define goals. Complexity: Low degree of complexity

Equity Theory

Employees are motivated when perceived outputs are equal to perceived inputs.

FLSA implications for nonexempt employees

Incentive-based pay for non-exempt workers must be included in their regular pay. Because the bonus increases employees' regular pay, the company has to re-calculate any overtime for the period when the bonus was earned. This creates additional payroll administration burdens, making firms reluctant to use gain-sharing plans.

Designing a Pay-For-Performance Plan

Objectives [clear, simple; communicated] Measure(s) [valid; clear to workers] "Line of sight" Controlled by __employees_______ Clear Valid measures Openly communicated to employees Yokes comp:Low complexity

What is pay for performance?

Pay varies with some measure of performance. It must be re-earned. It signals movement away from an entitlement mentality, a shift of risk to the employee. Competitive pressures to reduce labor costs. It is also the 3 C's: control, communication, and complexity.

What is the effect of variable pay (vs. pay level) on employee performance?

The challenge is that variable pay can lead employees to neglect other important task. They will focus exclusively on areas covered by the criteria and neglect other important tasks. b. People subject to variable pay for performance spend a lot of time and energy trying to manipulate the criteria in their favor (pleading customers to fill out customer satisfaction survey a certain way), helped by the fact that they often know the specifics of their work better than their superiors do.

Why are variable pay plans gaining in popularity?

The ee can dictate to an extent how much they earn and this leads to better results for the employer

Variable pay

Variable pay: is the portion of sales compensation determined by employee performance. When employees hit their goals (aka quota), is provided as a type of bonus, incentive pay, or commission. Base salary, on the other hand, is fixed and paid out regardless of employees meeting their goals.

Risk Sharing Plan

rare, when you temporarily reduce an employee's base pay until you see that they have meet their agreed upon goals. base pay is temporarily reduced. Shifts part of risk of doing business from company to employee. The base pay is no longer "given" - employees much achieve individual goals to get full base.

Agency Theory:

need to keep ees in line because they don't own the bus and they'll try to shirk duties; hence importance of variable pay for industry.

"Across the board"

not individual or success sharing, but everyone gets it. is a pay award which provides the same wage or salary increase (in money or percentage terms) to all employees affected by the award. Also called a General Increase.

What are the two types of Profit Sharing? Describe them.

o Annual incentive plan: A pay plan that rewards the accomplishment of specific results. Rewards usually are tied to expected results identified at the beginning of the performance cycle. Unlike bonuses, they are not primarily discretionary but may have a discretionary component. o Discretionary bonus plan: A plan in which management determines the size of the bonus pool and the amounts to be allocated to individuals after a performance period. This plan has no predetermined formula or promises and isn't guaranteed

Pay varies with some measure

of individual, team, or organiorganizational.... Must be re-earned

Expectancy Theory:

proposes an individual will behave or act in a certain way because they are motivated to select a specific behavior over other behaviors due to what they expect the result of that selected behavior will be.

Reinforcement Theory

proposes that you can change someone's behavior by using reinforcement, punishment, and extinction. Rewards are used to reinforce the behavior you want and punishments are used to prevent the behavior you do not want.

Short-Term Incentive Plans (STIP)

referred to as annual incentives, are intended to compensate executives for achieving the company's short-term business strategy based on achievement of goals by the board compensation committee. LESS THAN A YEAR

re-earned"

you have to keep working at it if you want to continue to be rewarded