ch 13 - recognizing employee contributions with pay

Short-Term Incentives

- Bonuses based on ROI, year's profits, or other measures related to goals - Actual payment of bonus can be delayed to gain tax advantages - In an analysis of CEO pay at 300 large U.S.-traded companies, none of the 10 top-paid CEOs worked for companies that attained the top 10% in terms of performance, even though their pay far exceeded the median. And in a study that compared historical CEO pay with the companies' performance over the following three years, CEOs who earned in the top 10% saw their companies do increasingly worse than others over the three years that followed

Balanced Scorecard

- Combination of performance measures - Directed toward company's long- and short-term goals - Used as the basis for awarding incentive pay - So that not just profit or finance is prioritized but training and growth and other metrics are also prioritized - The aim is to balance the disadvantages of one type of incentive pay with the advantages of another type - Helps emps understand companies goals

Communication

- Demonstrates that the pay plan is fair - When employees understand the plan, it is more likely to influence their behavior as desired - Important when changing pay plan

Participation in Incentives

- Employee participation can be part of general move to employee empowerment - Employees have hands-on knowledge of behaviors that are effective - Employees may make decisions at expense of the company, can also make the process more complex

ESOP

- Employee stock ownership plan - Organization distributes shares of stock to all its employees by placing them in a trust that it manages - Most common form of ownership - number of participants has grown while the number of companies that offer it has fallen - When emps leave they can sell the stock back to the firm or on the market (if public) - By law, companies must invest 51% of ESOP in its own stock which can have serious risk for retirement funds - ESOP is not guaranteed by the pension benefit guarantee corp

Four Categories

- Financial - stock goals satisfy stockholders - Customer - quality/price goals - Internal - efficiency goals for better ops - Learning and Growth - emps acquire skills and knowledge to better tap emps potential

Incentive Pay

- Forms of pay designed to energize, direct, or control employees' behavior - Often linked to employee's performance as an individual, group member, or organization member - May be in form of a commission or bonus - Linked to some measure of success whether individual performance, profit, etc. - Over 75% of companies use variable pay at part of total compensation

Incentive Pay for Executives

- Have a much stronger influence on org performance than other emps - In study only 2 of the top 10 paid CEOs returned positive share holder value for the year. CEOs who earned in top 10% saw companies do worse than others in 3 years that followed in other study

Sales Commissions

- Incentive pay calculated as a percentage of sales - Some earn commission in addition to base salary (draw) - Some work on straight commission plan with no salary - this encourages closing sales (straight commission plan) Some earn no commissions at all If they have more base salary it may encourage building customer goodwill

Gainsharing

- Measures improvements in productivity and effectiveness and distributes portion of each gain to employees. If earn 30000 in productivity, half may go to employees - Addresses challenge of identifying appropriate performance measures for complex jobs - Employees determine how to improve own and group's performance - Knowing they can enjoy a financial benefit from helping the company be more productive, employees supposedly will look for ways to improve and work more efficiently.

Ethical Issues

- Occur when company links pay to stock performance - Executives may be tempted to lie about company's performance due to potential for large earnings - Insider trading gives unethical advantage and SEC has strict limits - Execs may stretch accounting past the norm to inflate metrics

Stock Ownership

- Part owners of firm - Employees may not see a direct link between their work and stock price leading to it being not very motivating - Often financial benefits come when the stock is sold when emps leave the firm

Profit Sharing

- Payments are a percentage of organization's profits and are not part of employees' base salary - May encourage employees to think like owners - Evidence not clear whether profit sharing is effective in improving performance - Makes employees feel more like a owners and work harder for profit when they share in profit one strategy is to use them as a component of a pay system that includes other kinds of pay more directly linked to individual behavior. This increases employees' commitment to organizational goals while addressing concerns about fairness - May be seen as unfair as employees have little control over profits

Standard Hour Plan

- Pays workers extra for work done in less than a preset "standard time" - Encourages employees to work as fast as possible - Employees often neglect quality or customer service

Effective Incentive Pay Plan Requirements

- Performance measurements linked to company goals - Employees believe they can meet performance standards - Employees given resources needed to meet goals - Employees value rewards given - Employees believe reward system is fair - Pay plans consider that employees may ignore any goals that are not rewarded

Stock Options

- Rights to buy certain number of shares of stock at specified price - Traditionally have been granted to executives but has now been offered to more emps

Long-Term Incentives

- Stock options - Stock purchase plans - Rationale is that executives will want what is best for organization because that will cause the value of their stock to grow - Relying on such long-term incentives is associated with greater profitability

Group Bonuses

- Used in smaller work groups - Reward members of group for attaining a specific goal - Usually measured in terms of physical output - Can cause competition between teams

Distribution guidelines

- Usually 60% are found to be on target in that they are on target in most areas and exceeded targets in two areas This may lead to a 3-4% increase in pay - Benefits =/ incentives - Benefits don't change behavior Incentives - Bonus for performers if all seats sell out - Bonus based on customer feedback - Bonus if they stay the entire season Performance bonus - not in base pay, linked to performing certain behaviors or reaching objectives

Dodd-Frank Wall Street Reform/Consumer Protection Act

- report median compensation of all employees to CEOs total comp. - shareholders can also vote on to indicate approval or disapproval of exec pay plans (say on pay)

Securities and Exchange Commission (SEC)

- require clear reporting of exec compensations and the companies relative performance to competitors. - Shine light on companies that pay well yet perform poorly to link pay to performance

Performance Bonuses

- variable, Not rolled into base pay - Employee must re-earn bonus during each period - May be a one-time reward - May be linked to objective performance measures - retention bonuses—one-time incentives paid in exchange for remaining with the company—to top managers, engineers, top-performing salespeople, and information technology specialists. - Flexible on what behaviors to reward. Tie it to behaviors that impact org performance - One time bonuses can help motivate

Performance Measures for Executives

Balanced-scorecard approach is useful Delivering value to shareholders, customers, and employees

Straight Piecework Plan

Employer pays same rate per piece no matter how much worker produces

- piecework; merit pay - Piece-rate pay plans typically are suited for routine, standardized jobs with output that is easy to measure, such as the number of pretzels twisted. Merit pay rewards employees based on performance appraisals.

John works twisting pretzels in a pretzel factory. Pablo works on IT systems integration at a credit card company. The best pay plans for these individuals would most likely be _____ and _____, respectively.

Conditions for Effective Gainsharing

Management commitment Need for change or commitment to continuous improvement Management acceptance and encouragement of worker input High levels of cooperation and interaction Employment security Information sharing on productivity and costs Goal setting Commitment of all parties to process improvement Performance standards and calculations that are fair, relevant, and understandable Employees who value working in groups

Merit Pay

Pay increases linked to ratings on performance appraisals Uses a merit increase grid - Performance rating - exceeds, meets, below expectations - Compa-ratio - what percentage is your pay based on average for the job. 80% (below average) may have 7% increase vs 110% (above average) having 3% Good for top performers but it can become expensive and be unfair as ratings may be based on who managers like

Differential Piece Rates

Peice rate is higher when a greater amount is produced. If they produce past some amount they are paid more per piece - One study piece rates increased production output by 30% more than any other motivational device. Easy to understand and fair

Team Awards

Similar to group bonuses Likely to use a broad range of performance measures - Cost savings - Completion of project - Meeting deadlines

Piecework Rate

Wage based on the amount an employee produces, Rate of pay per unit produced.

Cirque de Crile Differentials -

when someone is paid differently for working unique thing such as at night