MADM 425 - Chapter 04
variable
Another name for incentive pay is ________ pay.
variable pay
Another term for incentive pay
Piecework Plans
Awards based on individual production versus objective standards; Awards based on individual performance standards using objective and subjective criteria; Quantity and/or quality goals
Disadvantages of profit-sharing plans
Can undermine the economic security of employees; May fail to motivate employees if they do not see a direct link between their efforts and profits
Scanlon, Rucker, and Improshare
Common forms of gainsharing plans
incentive
Companies can control costs by replacing annual merit or seniority increases or fixed salaries with which type of plans?
Advantages of Group Incentives
Companies can more easily develop performance measures for group incentive plans than for individual incentive plans; Greater group cohesion
cyclical
Companies in such ________ industries as retail sales could benefit by including an incentive component in the core compensation programs they offer to employees.
Scanlon Plan
Emphasis on teamwork; Two-tiered cost savings suggestion system; Production-level committees; and Screening committees
Rucker Plan
Emphasizes employee involvement; Uses a value-added formula to measure productivity (value added/total employment costs); and Larger ratios show that value added is greater than total employment costs
conditions under which individual incentive plans are most appropriate
Employees' performance can be measured objectively; when employees have sufficient control over work outcomes; when they do not create a level of unhealthy competition among workers that ultimately leads to poor quality
Advantages of profit-sharing plans
Enable employees to share in companies' profits; Allow companies greater financial flexibility
Rewards Allocation Methods
Equal incentive payments; Differential payments based on contribution to goals; Differential payments according to base pay
traditional pay
Generally includes an annual salary or hourly wage increased periodically on a seniority or merit basis with permanent increase to base pay
incentive pay
Generally increases base pay on goal attainment with pay increase nonrecurring
incentive pay
Generally used to reward individual employees, teams of employees, or whole companies based on their performance
gainsharing plan
Gunther Rohn was rewarded for making a suggestion that saved Ewe and Eye Electronics thousands of dollars. Which type of incentive compensation approach might have worked best?
Individual Incentive Pay Program Advantages
Helps relate pay to performance; Promotes equitable distribution of compensation; Instills an ownership mentality; Compatible with America's individualistic culture
piecework plans
In addition to the guaranteed hourly pay rate, John receives incentives for every item produced over the designated production standard. Which kind of incentive plan is used in this situation?
the level of risk employees will accept in their overall compensation package
In general, which of the following is an incentive plan design consideration?
Gainsharing
Incentives based on company performance in Increased productivity, Increased customer satisfaction, Lower costs, and Better safety records
performance
Individual incentive plans help to promote the relationship between pay and ________.
parallel
John is a design engineer in an auto manufacturer's research and development department. In addition to his normal duties, he is assigned to a team of other engineers developing a highly automated assembly line for the new model of a passenger car. To which type of team is John assigned?
Components of gainsharing programs
Leadership philosophy, Employee involvement systems, and Bonuses
Disadvantages of Group Incentives
May lead to higher employee turnover because of the free-rider effect; Members may feel uncomfortable with the fact that other members' performance influences their compensation level
Individual Incentive Pay Program Disadvantages
May promote inflexibility; Measurement problems; May promote undesirable behaviors
Improshare
Measure productivity physically rather than in terms of dollar savings; Incentive to finish products; Based on a labor hour ratio formula
traditional pay plans and incentive pay plans
Nowadays, most companies use a mix of which types of pay plans?
25 percent
Over the past 10 years, Lincoln's profit-sharing payments have been substantial. Maria's annual salary was $40,000 last year, and she earned a profit-sharing payment of $10,000. Maria's profit-sharing award represents approximately what percentage of her annual salary?
types of individual incentive plans
Piecework, management incentive, behavioral encouragement, referral plans, spot bonuses, signing bonuses
company-wide
Profit-sharing plans and employee stock option plans are incentives on what level?
Group Incentive Plans
Reward employees for their collective performance
options
Stock ________ describe an employee's right to purchase equity in the company.
Types of group incentive plans
Team based or small group; gainsharing
labor hour
The Improshare bonus is based on a ________ ratio formula.
productivity
The Rucker Plan use a value-added formula to measure ________.
deferred profit sharing
The XYZ Company pays a portion of company profits to its employees. The management offers this incentive plan as one kind of retirement program. Which kind of companywide incentive plan does XYZ Co. offer?
Improshare
The XYZ Manufacturing Co. uses a gainsharing plan that gives incentives to employees to finish products rather than to incentivize dollar savings. Therefore, this company measures productivity as the ratio of standard labor hours and actual labor hours. Which kind of gainsharing program does XYZ Manufacturing Co. use?
incentive
The ________ effect refers to a worker's willingness to work diligently to produce more quality output rather than simply attending work without putting in the effort.
5 years
The general rule of thumb is that short-term company goals last less than how long?
turnover
The main disadvantage of group incentive compensation is employee ________.
revenue
The sales value of production (SVOP) is the sum of sales ________ plus the value of goods in inventory.
group incentive plans
These plans promote supportive, collaborative behavior among employees.
individual incentive plans
These plans reward employees whose work is performed independently.
companywide incentive plans
These plans tie employee compensation to a company's performance over a short time frame, usually from a 3-month period to a 5-year period.
current
These profit-sharing plans award cash to employees on a quarterly or annual basis as part of their regular compensation.
graduated first-dollar-of-profits
This formula for calculating profit-sharing awards gives the employees a higher percentage of the profits as the profits increase.
fixed first-dollar-of-profits
This formula for determining the amount available for-profit sharing uses a specific percentage of annual profits contingent upon the successful attainment of a specified profit goal.
referral
This type of individual incentive plan rewards employees who recruit new customers or new employees.
behavioral encouragement
To have better safety records, the XYZ Company gives monetary incentive awards to its workers for lower accident rates due to improper use of heavy equipment. Which of the following incentive plans describes this example?
Profit sharing and employee stock options
Types of company-wide incentive plans
individual incentive, group incentive and companywide incentive
What are the categories of incentive pay plans?
to increase employee involvement
What is the main objective of Scanlon plans?
employee stock option plans
Which arrangement represents a long-term companywide incentive plan that provides employees with the option to purchase ownership in the company?
The criteria for judging an award tend to be objective, such as quantity produced.
Which best describes incentive pay?
Scanlon Plan
Which gainsharing plan bases incentives on the ratio between labor costs and sales value of production (SVOP)?
management incentive
Which individual incentive plans require the achievement of multiple, complex objectives without compromising the quality and quantity of output?
sorting
Which of the following effects describe the concept that a hard-working employee is likely to stay at an incentive pay position?
operating efficiency
Which of the following is NOT a financial measure?
it depends on the extent to which employees control the attainment of a desired goal.
Which of the following is true about the level of risk involved with incentive pay?
incentive pay awards are granted as one-time payments.
Which of the following is true concerning incentive pay?
they reinforce teamwork, cultivate loyalty to the company, and increase productivity
Which of the following is true regarding group incentive plans?
quality of work output, customer satisfaction, and revenue
Which of the following performance measures corresponds to individual, group, and companywide incentive plans, respectively?
project teams
Which of the following teams consists of a group of people who are assembled to complete a one-time assignment?
profitability threshold
With which profit-sharing formula does the profit-sharing pool become funded only after profits exceed a predetermined level, but fall below some established maximum level?
Types of Teams
Work (process); project; parallel (task forces)
deferred
________ profit-sharing plans place cash awards in trust accounts for employees and are set aside on employees' behalf as a source of retirement income.
project
________ teams consist of a group of people assigned to complete a one-time task.
Rucker plan
a particular type of gain sharing program that emphasizes employee involvement. Gain sharing awards are based on the ratio between value added (less the costs of materials, supplies, and services rendered) and the total cost of employment.
team-based incentives
a small group of employees shares a financial reward when a specific objective is met
Improshare
a specific kind of gain sharing program that rewards employees based on a labor hour ratio formula. A standard is determined by analyzing historical accounting data to find the number of labor hours needed to complete a product. Productivity is then measured as a ratio of standard labor hours and actual labor hours.
Scanlon plan
a specific type of gain sharing program that emphasizes employee involvement. Gain sharing awards are based on the ratio between labor costs and sales value of production.
incentive effect
a worker's willingness to work diligently to produce more quality output than simply attending work without putting in the effort
sorting effect
addresses an employee's choice to stay versus leave his or her employer for another job, presumably one without an incentive pay contingency.
stock options
an employee's right to purchase company stock
Management incentive plans
award bonuses to managers when they meet or exceed objectives based on sales, profit, production, or other measures for their division
management incentive plans
award bonuses to managers who meet or exceed objectives based on sales, profit, production, or other measures for their division, department, or unit.
incentive pay
compensation, other than base wages or salaries, that fluctuates according to employees' attainment of some standard (e.g., a preestablished formula, individual or group goals, or company earnings).
Project teams
consist of a group of people assigned to complete a one-time project. Example: Engineers working on the construction of a bridge.
gainsharing
describes group incentive systems that provide participating employees an incentive payment based on improved company performance, whether for increased productivity, increased customer satisfaction, lower costs, or better safety records.
Referral plans
employees receive bonuses for recruitment of highly qualified employees
Behavioral encouragement plans
employees receive payments for specific behavioral accomplishments
Spot bonuses
employees receive small monetary gifts for outstanding work or effort during a reasonably short time period
group incentive plans
gain sharing plans and team incentives
Parallel teams (task forces)
include employees assigned to work on a specific task in addition to normal work duties
referral plans
individual incentive pay plans that reward employees for referring new customers or recruiting successful job applicants
behavioral encouragement plans
individual incentive pay plans that reward employees for such behavioral accomplishments as good attendance or safety records
piecework plans
individual incentive pay programs, reward employees based on their individual hourly production against an objective output standard, determined by the pace at which manufacturing equipment operates. For each hour, workers receive piecework incentives for every item produced over the designated production standard. Workers also receive a guaranteed hourly pay rate regardless of whether they meet the designated production standard.
current profit sharing and deferred profit sharing
kinds of profit sharing plans
Signing bonuses
monetary awards given to promote recruitment and job offer acceptance
signing bonuses
monetary awards given to promote recruitment and job offer acceptance. These bonuses are particularly effective when coupled with a competitive wage or salary offer.
free-rider effect
occurs when employees of lower ability, skill, and effort benefit equally as employees of higher ability, skill, and effort in group incentive plans. It can lead to resentment and turnover of stronger contributors
profit sharing plans
pay a portion of company profits to employees, separate from base pay, cost-of-living adjustments, or permanent merit pay increases.
individual incentive plans
piecework plans, behavioral encouragement plans, and referral plans
current profit sharing
plans award cash to employees, typically on a quarterly or annual basis
deferred profit sharing
plans place cash awards in trust accounts for employees. These trusts are set aside on employees' behalf as a source of retirement income
companywide incentive plans
profit sharing plans and stock option plans
Work (process) teams
refer to organizational units that perform the work of the organization on an ongoing basis. Example: Customer service, assembly on production lines.
labor hour ratio formula
refers to a standard determined by analyzing historical accounting data to find the number of labor hours needed to complete a product. Productivity is then measured as a ratio of standard labor hours and actual labor hours.
spot bonuses
relatively small monetary gifts provided to employees for outstanding work or effort during a reasonably short period of time.
company stock shares
represent equity segments of equal value. Equity interest increases with the number of stock shares held
employee stock option plans
represent one type of companywide incentives. Companies grant employees the right to purchase shares of company stock
company stock
represents the total equity or worth of the company
group incentive programs
reward employees for their collective performance, rather than for each employee's individual performance.
Piecework plans
reward workers for every item produced over a designated production standard
value-added formula
the difference between the value of the sales price of a product and the value of materials purchased to make the product. This is part of the equation to determine payout amounts in Rucker gain sharing plans.
sales value of production (SVOP)
the sum of sales revenue plus the value of goods in inventory. This is part of the equation to determine payout amounts in Scanlon gain sharing plans.
labor hour ratio formula
used in determining the payouts in Improshare plans
factors the HR professionals should consider in the adoption of an incentive program to increase employee productivity in a manufacturing company
whether the plan should be based on group or individual employee performance; the level of risk employees would be willing to accept in their overall compensation package; whether incentive pay should replace or complement traditional pay; the criteria by which performance should be judged; and the time horizon of goals
group incentive plans
work well in manufacturing and service delivery environments that rely on interdependent teams. Group improvements in productivity, cost savings, or product quality are shared by employees within the group.