MIE330 Chapter Twelve
differences between gainsharing and profit sharing plans
- gainsharing uses group or plant level performance rather than organization level performance - payouts in gainsharing plans are not deferred and are paid more frequently
considerations in contracts
- risk aversion - outcome uncertainty - job programmability - measurable job outcomes - ability to pay - tradition
balanced scorecard
allows companies to track financial results while monitoring progress in building the capabilities and acquiring the intangible assets they would need for future growth
stock options
an employee ownership plan that gives employees the opportunity to buy the company's stock at a previously fixed price
employee stock ownership plan
an employee ownership plan that provides employers certain tax and financial advantages when stock is granted to employees
As jobs become less programmable...
behavior oriented contracts become less likely
The Scanlon plan is an example of what plan?
gainsharing
What compensation program would best support an organizational culture of cooperation and problem solving?
gainsharing
agent
in agency theory, a person who is expected to act on behalf of a principal
principal
in agency theory, a person who seeks to direct another person's behavior
What compensation program uses a management style that gives importance to control?
incentive pay
In incentive pay, performance measures are primarily based on....
individual productivity
According to a merit increase grid, one of the factors that determine the size and frequency of pay increases is the
individual's performance rating
What makes ESOPs less attractive?
less diversification of investment risk
risk aversion
makes outcome oriented contracts less likely
merit bonus
merit pay paid in the form of a bonus, instead of a salary increase
What compensation program is suitable for an organization with a culture that promotes individual competition?
merit pay plan
ability to pay
outcome oriented contracts contribute to higher compensation costs because of the risk premium
agents prefer a behavior based contract when...
outcome uncertainty is high
instrumentality
perceived link between behaviors and pay
Group incentives tend to measure performance in terms of...
physical output
In merit pay programs, an individual's compa-ratio represents her
position in the pay range
What compensation program relates costs to the ability to pay?
profit sharing
what are contingencies that may influence whether each pay program fits a situation?
type of work and management style
measurable job outcomes
when outcomes are more measurable, outcome oriented contracts are more likely
reinforcement theory
In Thorndike's Law of Effect, a response followed by a reward is more likely to recur in the future. The importance of a person's actual experience in receiving the reward is critical. If high performance is followed by a reward, high performance is likely to be repeated.
profit sharing
a compensation plan in which payments are based on a measure of organization performance and do not become part of the employees' base salary
gainsharing
a form of group compensation based on group or plant performance that does not become part of the employee's base salary
merit increase grid
a grid that combines an employee's performance rating with his/her position in a pay range to determine the size and frequency of his or her pay increases
tradition
a tradition of using (or not using) outcome-oriented contracts will make such contracts more (or less) likely
outcome uncertainty
agents are less willing to have their pay linked to profits to the extent that there is a risk of low profits; would prefer behavior oriented contract ^ example
What must a principal do to reduce agency costs?
align the agent's interests with the principal's interests
According to research, when an organization changes from a pay strategy that has below average variability to one with above average variability, on average they will experience a ROI increase of approximately
2%
agency theory
This theory focuses on divergent interests and goals of the organization's stakeholders and the ways that compensation can be used to align these interests and goals. Today, most stockholders are removed from the day‑to‑day operation of companies. This separation has many advantages, but it also creates costs—the interests of the principals (owners) and their agents (managers) may no longer converge.
job programmability
as jobs become less programmable outcome oriented contracts more likely
procedural fairness
based on the processes that were used to decide the amount of compensation
pay plans are used to do what?
direct, control, and energize employee behavior
In skill based pay systems, performance measures are primarily based on
employees' competency acquisition
gainsharing plans differ from profit-sharing plans in that...
gainsharing plans distribute payouts more frequently
According to research, intrinsic motivation is _____ when extrinsic incentives are available.
higher
When designing either managerial or nonmanagerial compensation, the central issue is determining
how agency costs can be minimized
According to the expectancy theory, the main influence of compensation is on....
instrumentality
individual incentives
reward individual performance, but payments are not rolled into base pay, and performance is usually measured as physical output rather than by subjective ratings
drawback of profit sharing
runs risk of contributing to employee dissatisfaction
What process helps ensure that extrinsic incentives do not adversely effect intrinsic motivation?
sorting process
What plan gives employees the opportunity to buy the company's shares at a previously fixed price?
stock option
incentive effect
the effect a pay plan has on the behaviors of current employees
sorting effect
the effect a pay plan has on the composition of the current workforce
What is the difference between profit-sharing plans and employee ownership plans?
the link between pay and performance is less obvious under ownership than under profit sharing
merit pay program
the pay program that results in annual pay increases being linked to performance appraisal ratings
expectancy theory
the theory that says motivation is a function of valence, instrumentality, and expectancy
What makes ESOPs attractive to organizations?
their tax advantages their financing advantages the defense they offer against takeovers
merit pay
traditional form of pay in which base pay is increased permanently
