Chapter 10 - Pay for Performance
Individual incentive plans are not widely used because....
Individual incentive plans are not widely used because THEY CARRY RISKS
What are individual incentive plans?
Individual incentive plans differ from merit and lump sump payments because they offer a PROMISE OF PAY FOR SOME OBJECTIVE, pre-established level of performance Compared against individual worker performance All plans have an established standard These don't tend to work for every job
Describe the advantages and disadvantage of individual incentive plans and team incentive plans.
Individual incentive plans yield higher productivity gains, BUT group incentive often are right in situations where team coordination is the issue Group plans suffer from creating "free-rider" problems
T or F: Because employees assume some of the risk, risk sharing plans pay more generously than success-sharing plans in good years
true
What are performance plans?
typically feature corporate performance objectives for a time three years in the future. Driven by financial earnings or return measures They pay for meeting or exceeding specific goals
ADDED to the base pay! What an employee does in a year in performance is rewarded EVERY YEAR for as long as the employee remains with the employer Once awarded, the increase is there forever :)
merit pay system
What are Rowan plans?
similar to the Halsey plan, but in this plan, a worker's bonus increases as the time required to complete the task decreases
What is a self-funding plan?
specifies that payouts only occur after the company reaches a certain profit target; then variable payouts for individual, team, and company performance are triggered These are often favored by CEOs who don't like to make payouts when the company loses money
Pay as a constant function of production level based on units of production per time period:
straight piecework plans
T or F: there is strong evidence that individual incentives have substantial and positive effects on performance
true
What is a success sharing plan?
an incentive plan in which an employee's base wage matches the market wage and variable pay adds on during successful years
What is a risk sharing plan?
an incentive plan in which employees' base wages are set below a specified level and incentive earnings are used to raise wages above the base.
What are combination plans?
created to both motivate individual behavior and to insure that employees work together, where needed, to promote team and corporate goals.
What are standard hour plans?
rate determination is based on time period per unit of productions and wages vary directly as a constant function of production level
What are pay for performance plans?
Pay-for-performance plans result in pay that varies with some measure of an individual or organizational performance, such as merit pay, lump-sum bonus plans, skill-based pay, incentive plans, variable pay plans, risk sharing, and success sharing
What is a rucker plan?
A group cost savings plan in which cost reductions due to employee efforts are shared with the employees It involves more complex formulas than a Scanlon plan
What is a merit pay system?
A merit pay system links increases in base pay to how highly employees are rated on a performance evaluation At the end of a performance year, the employee is evaluated, usually by the direct supervisor Generally determined through a merit increase grid :)
Two major components are vital to the implementation and success of a Rucker or Scanlon Plan:
A productivity norm Effective worker committees
What are the concern of gain sharing plans?
Administratively complicated
What is variable pay?
pay tied to productivity or some measure that can vary with the firm's profitability
What are bedeaux plans?
provides a variation on straight piecework and standard hour plans - Requires determination of the time required to complete each simple action of a task - Workers receive a wage incentive for completing a task in less than the standard time
What is the Halsey 50/50 method?
provides for variable incentives as a function of a standard expressed as time period per unit of production - Shared split between worker and employer of any savings in direct costs
What are Gantt Plans?
provides for variable incentives as a function of a standard expressed as time period per unit of production. - A standard time for a task is purposely set at a level requiring high effort to complete
What are the risks involved with individual incentive plans?
Can lead to unexpected, undesired behaviors Greater conflict may emerge between employees seeking to maximize output managers concerned about deteriorating quality levels Reduced willingness of employees to suggest new production methods Elevated levels of mistrust Increased turnover Increased complaints that equipment is poorly maintained
Compa-ratio = ???
Compa-ratio = employee salary / salary range midpoint
What are the concerns with using group incentive plans?
Complexity - (some plans are simply too complex) Control - (Without fairness, employees seem to have less sense of responsibility for the team's outcomes) Communications - (These plans are simply not well communicated; more effort has to be devoted to designing the plan and deciding how to explain it)
What is the evidence from merit pay systems?
Create an environment that rewards excellence - Incentive effect - (Organizations with better merit pay programs have higher performance) - Sorting effects (Employees who do not want pay tied to performance leave) - Needs to be well managed to be effective
What are earnings-at-risk plans?
Earnings-at-Risk plans share in successes but also penalized during poor performance years in the form of lower total compensation - Base pay is reduced by some amount relative to the level that would be offered in a success-sharing plan These plans shift part of the risk to the employee :( Can results in higher turnover
What are the advantages of seniority plans?
Employees perceive that they are treated fairly Facilitates administration of pay Avoids perception of favoritism
Do group incentives work?
Evidence is not very encouraging : Teams come in many varieties The "level problem" creates difficulty equalizing assigning rewards Some plans are simply too complex Control and fairness are key issues Team-based plans are simply not well communicated
What are group incentive plans?
Group incentive plans are based on some measure of group performance rather than individual performance - May focus on cost savings or on profit increases
Pay varies as a function of production level based on time period per unit production:
Halsey 50-50 method Rowan plan Gantt plan
What is an incentive?
Incentives are inducement offered in advance to influence future performance
What are the disadvantages of seniority plans?
Poor fit with most competitive strategies No incentives to improve Growing costs
What are the concerns with profit sharing plans?
Profit influenced by many factors beyond May be viewed as an entitlement Limited motivational impact Higher risk than gain sharing plans because profit measures are based on factors not influenced by employee's control
What are the disadvantages of individual incentive plans?
Quality control Fears about changes to the production standard Reduced willingness to help new, inexperienced workers
What are the disadvantages of group incentive plans?
Reduced line of sight Negative sorting effects (Top people may leave) Increased risk to the employee because of lower income stability
Does variable pay improve Pay-for-performance plans?
Seems to have a positive impact on performance IF they are designed well
What are seniority plans?
Seniority plans provide automatic additions to base pay according to an employee's length of service with an organization Public or private sector and in unions
What are spot awards?
Spot awards are one-time awards for exceptional performance; also called a spot bonus Seen by many organizations as being effective (Special projects Non-monetary "Employee of the month")
Pay as a constant function of production level based on time period per unit production:
Standard hour plan Bedeaux plan
What are broad-based option plans?
Stock grants; the company gives employees shares of stock over a designated time period Versatile; they can either reinforce a strong emphasis on performance or inspire greater commitment and retention of employees Incentive effect is relatively small though
What are straight piecework systems?
Straight piecework systems have rate determined based on units of production per time period Wages vary directly as a constant function of production level
T or F: Too often though, pay for performance plans have: Too small a payout for the work expected Unattainable (or too easy) goals Outdated or inaccurate metrics Or too many metrics making it difficult to determine what is important
True
Pay varies as a function of production level based on units of production per time period:
Taylor differential piece-rate system Merrick multiple piece-rate system
What are profit sharing plans?
Award is based on organizational profitability Uses financial measures to gauge performance Shares a percentage of profits Usually an annual payout Can be cash or deferred 401k Simple, understandable, low administrative costs
What are gain-sharing plans?
Awards that share economic benefits of improved productivity, quality, or other measurable results in a group incentive plan Focus on group, plant, department, or division results; using operating measures to gauge performance Designed to capitalize on untapped knowledge of employees
What are long-term incentive plans
Long-term incentives plans are inducements offered in advance to influence longer-rate (multiyear) results. These are usually offered to top managers and professionals to get them to focus on long-term organization objectives. These plans can increase retention and provide a sense of ownership to employees with a company
What are the advantages of group incentive plans?
May cause organizations to evolve into learning organizations Positive impact on performance Easier to develop performance measures than individual plans Signals the importance of cooperation Employees can become more enthusiastic about teamwork
What are lump sum or merit bonus systems?
Merit bonuses differ from merit pay increases in that employees receive an end-of-year bonus that does not build into base pay. Less of an entitlement than merit pay
What is a merit increase grid?
Most organizations use a merit increase grid, which determines merit pay increases not only on the basis of performance rating but also on the basis of an employee's position in the salary range/grade
What are the key elements of gain-sharing plans?
Strength of reinforcement - (What role should base pay assume relative to incentive pay?) Productivity standards (What standard will be used to calculate whether employees will receive an incentive payout? This is usually taken from historical data) Sharing the gains split between management and workers - (Part of the plan must address the relative cuts between management and workers of any profit or savings generated) Scope of the formula - (Recent innovations in gain-sharing plans largely address broadening the types of productivity standards considered appropriate) Perceived fairness Ease of administration Production variability
What are Scanlon plans?
group cost-savings plan designed to lower labor costs without lowering the level of a firm's activity Incentives are derived as the ratio between labor costs and sales value of production
What are the advantages of individual incentive plans?
Increases productivity Reduces production costs Higher earning potential Helps control labor costs
What are the concerns for merit pay systems?
Increases fixed compensation costs over time; making them expensive to maintain Becomes too costly if too many high performance ratings are awarded Too many high ratings are rewarded May not motivate employees Merit pay differentials based on performance are too small to motivate performance, which creates a challenge
What are Taylor plans?
provides for variable incentives as a function of units of production per time period. - Provides two piecework rates that are established for production above and below standard, and these rates are higher and lower than the regular wage incentive level
What are Merrick Plans?
provides for variable incentives as a function of units of production per time period. Three rates are set: High - for production exceeding 100% of standard Medium - for production between 83 and 100% of standard Low - for production less than 83% of standard
What are employee stock ownership plans
put together to increase employee involvement in the organization - Has little impact on productivity or profit - Results are very modest; positive effect on employee participation - Should be implemented with high goal setting to be effective
