Pay for Performance
Merit Pay: Issues
-Expensive -Doesn't necessarily achieve the desired goal: improving employee and corporate performance
Managing Merit Pay
-Improve accuracy of performance ratings -Allocate enough money to truly reward performance -Make sure size of merit increase differentiates across performance levels
Incentive Plan Design
-Individuals -Groups
4 behaviors?
-Join -Stay -Develop job skills -Perform better
Factors impacting turnover
-Level of employee satisfaction with pay -Pay based on individual performance -Group incentive plans -Extent of pay at risk -Other rewards affect the decision to stay
Lump-Sum Bonuses
-Lump-Sum Pay -Increasingly used substitute for merit pay -Viewed as less of an entitlement than merit pay -Less expensive than merit pay over the long run
Disadvantages of Individualized Incentive Plans
-New technologies/ production methods may be resisted by employees -Increased turnover among new employees discouraged by the unwillingness of experienced workers to cooperate in on-the-job training -Mistrust between workers and management over production standards and product quality
Individual Incentive Plans
Pay for production relative to specific, standard objectives Two types: Piece Rate Standard Hour
Group Incentive Plans: Advantages
Performance improvements Ease of developing metrics Promotes teamwork and employee participation
Rucker Plan
Ratio based on value of production for each dollar of wage bill Employees get some percentage of the savings
Internal process-focused measures
Resource utilization Change effectiveness
A merit pay system
links increases in base pay to how highly employees are rated on a subjective performance evaluation
Differential Piece Rate (Taylor Plan)
lower rate for employees below standard, higher rate for employees above standard
Piece Rate Plans
pay for each unit produced/ action performed
Pay for performance
plans signal a movement away from entitlements --Pay will vary with some measure of individual, team, or organizational performance
Gainsharing
portion of gains an organization realizes from a group effort is shared with the group (e.g. improved productivity)
Straight Piecework
same pay for each unit
Gantt Plan
Base hourly wage + possible bonus of 120 percent of time saved for employees who exceed the standard
Individuals: Piece Rate & Standard Hour
Based on comparison to standard
Individuals: Merit & Lump-Sum Pay
Based on performance assessments
Scanlon Plan
Based on ratio of labor costs to sales value If improves, employees get bonus as a percent of the savings Employee submit suggestions for improvements
Group
Collaboration required Difficult to measure individual contributions Dynamic environment Union
Improshare
Compares current worker productivity in hours to historical work standards Pay savings back to workers on a weekly or monthly basis
Group Incentive Plans: Disadvantages
Difficult to connect individual effort to outcomes Turnover of top performers More pay at risk
Success sharing plan
Employee base pay is constant -Variable pay increases in successful years -No reduction in base pay and no variable pay in poorly-performing years
Risk sharing plan
Employee base pay varies -Base pay often reduced in poor performance years -Shifts part of risk of doing business from company to employee
Halsey Plan
Employee bonus = % of wage for time saved e.g, took one less hour, 50 % X 1 hour wage
Lump-Sum Pay
Employee receives bonus for ratings on performance assessment/or reaching other targets (not incorporated into base pay)- cash payout, does not affect base pay
Balanced Scorecard
Examines performance on multiple measures, e.g. -Customer focused -Financially focused Measures are related to strategic objectives Award pool based on achieving performance targets
Plant and Organization Incentive Approaches
Gainsharing Profit sharing Employee stock ownership plans (ESOP) Balanced scorecard Earnings at Risk
Team Based Performance Pay
High interdependence & Common output Based on performance standards: E.g. expected level of costs, customer feedback or standard production rate Often include: Extrinsic (e.g. bonus pay) and intrinsic (e.g. recognition) rewards
Rowan Plan
Hourly rate based on percent of standard E.g. completes in 85 percent of standard, gets paid 1.15 X regular hourly rate
Capability-focused measures
Human resource capabilities Other asset capabilities
Employee perceptions
If the incentive depends on individual performance, applicants find the company more attractive -Team-based incentives less attractive
Individual
Independent tasks Individual measures available and stable Non-union
Profit-sharing & ESOP
Long term focus Indirect relationship between individual performance and reward Variables beyond individual control
Role of Performance Pay
Strong evidence that pay for performance has a direct and, at times, substantial impact on firm performance
Advantages of Individualized Incentive Plans
Substantial contribution to: -Individual productivity -Lower production costs -Workers earnings Reduces direct supervision to maintain reasonable output levels Enables labor costs to be estimated more accurately than under payment by time
Multiple Piece Rate (Merrick Plan)
Three different rates for employees at 83 percent of the standard, between 84 percent and 100 percent, and above 100 percent
Customer-focused measures
Time-to-market Customer satisfaction
Individual Spot Awards
Typically awarded for exceptional performance -Special projects -Exceptional performance
Financially-focused measures
Value creation Shareholder return
Group Plans
Work Team Plant Organization
Profit-sharing
bonus pay based on total net profit for some period of time
Standard Hour Plans
bonus pay for performing task in less time than required by the standard
ESOP
employee stock ownership plan