Ch. 10 - Pay for Performance: Incentive Rewards HR 312

Enterprise Incentive Plans

All employees benefit from the payout - determined on a basis of success of an organization over a period of time

Executive Pay Package

1) Base Salary 2) Short term incentives/bonuses 3) Long term incentives/stock plans 4) Benefits 5) Perks

Executive Compensation Reform

1) IRS always looking for tax violations 2) required to disclose info about some really high paid executives 3) stock options must be recognized as an expense on income statements 4) shareholders have "say on pay" and must approve salaries

Computing Piecerate

1) Minutes per hour/Standard time per hour = units per hour 2) Hourly Rate/Units per hour

Three Step Approach (team incentive)

1) set performance measure upon which incentive payments are based 2) Size of the incentive bonus must be determined 3) payout form is established and fully explained to employees

Executive Base Salaries

30 to 40% of annual compensation

Spot bonus

A bonus given "on the spot" - usually given for an employee effort NOT TIED TO EMPLOYEE STANDARD

Remember

EMPLOYEES MUST BE ABLE TO SEE A CLEAR CONNECTION BETWEEN THE INCENTIVE PAYMENTS THEY RECEIVE AND THEIR JOB PERFORMANCE

Straight Piecework

Employees receive a certain rate for each unit produced - compensation is determined by the number of products they produce during a pay period

Scanlon Plan

Employees should offer ideas to increase productivity, in turn, be rewarded for their efforts - employee participation and committees is key - incentives offered to all employees

Differential piece rate

Employees who exceed the standard output get paid at a higher rate than those who only produce the standard output

Characteristics of a Successful Incentive Plan

Identify important organizational metrics that encourages employee behavior, involve employees, find the right incentive payout, establish a clear link between performance and payout

Improshare

Improved Productivity Through Sharing - bonuses based on the productivity of a work team - both production and non-production employees are considered in the value of the bonus - promotes greater interaction and support between employees and management

Individual Incentive Plans

Key word: Flexibility - technology, job tasks, duties, and organizational goals all impact an organizations choices

Stock Options

Managers believe that giving this will persuade employees to seek a higher part in the organization, rising the stock - specific number of shares at a guaranteed price - sometimes can be associated with corruption, executives get better options

Gain Sharing Plans

Organizational programs designed to increase productivity or decrease labor cost and share monetary gains with employees - based on a mathmatical formula that compares a baseline of performance with actual productivity

Before implementing organization measures, organizations must consider...

Performance measures, Define the intent of performance measures, Involve employees, consider the organizations culture and demographics, widely communicate the importance of performance measures

Problems with Merit Pay

Unlike bonuses, merit based pay can increase year after year even if performance declines, can be given because of seniority or favoritism, money available may be inadequate, managers may have no guidance regarding how to measure performance, employees may not believe that their compensation is tied to effort, employees and mangers may hold different views on what makes job success, merit pay plans may create feeling for pay inequity

Piecework is inappropriate in the following situations

When quality is more important than quantity, when technology changes frequently, productivity standards on which piecework must be based are difficult to develop

Incentive pay plans establish...

an employee threshold that an employee or group must achieve to qualify for incentive payments

Bonus

an incentive payment given to an employee beyond their normal wage - can be one of the most effective tools to increase future performance

Executives short term incentives

annual bonus is the main one,

Straight Commission Plan

based on a percentage of sales -- maximum incentive and simple to compute Cons: Salespeople will stress high priced products, customer service after the sale is likely to be neglected, earning fluctuate between good and poor periods, salespeople are tempted to grant price concessions

Variable pay programs

bonuses, incentives, or recognition for good work - attached to fix cost that allow increase and decrease of wages USED TO EXERCISE FAIRNESS AND EQUITY IN AN ORGANIZATION

Employee Stock Ownership Plans (ESOP)

company buys its own stock, repays the loan back? - significant tax benefits for the company, employees, and the sellers - better for publicly held companies than private ones, not guaranteed, retirement plans

Salespeople are measured by

dollar volume of their sale, ability to establish new accounts, ability to promote new products and services, provide various forms of assistance

Lesson from Scalon plan and Improshare

employees must be psychologically and financially involved in the organization

Group Plans

enables people to share in the benefits - encourage a cooperative environment

Advantages of incentive pay programs

focus employee efforts on specific performance targets, payouts are variable costs linked to achievement of results, directly related to operating performance, fosters teamwork and cohesiveness, increase equity and justice, attract top performers

Degree of success for incentive plans depends on....

identifying important organizational metrics, a customized incentive plan which effectively measures employee output

Merit Pay

links an increase in base pay to how an employee has been doing at their job - 7 to 9% is necessary if you really want it to increase motivation

Combined Salary and Commission plan

most popular - "pay mix" plan

Straight Salary Plan

permits salespeople to be paid for performing various duties not reflected immediately by their sales volume Pro: allows them to devote more time to their services Con: may not motivate salespeople to exert sufficient effort in maximizing their sales volume

Team Incentive Plan

reward team members when an incentive reward when agreed-on performance was met or exceeded -- sometimes its difficult to adopt uniform measurement standards

Standard Hour Plan

sets incentives rates on a basis of a predetermined "standard time" for completing a job - popular in service and automobile dealerships

Why incorporate piecework...

simple to compute, CONSIDERABLE ACCURACY IN PREDICTIONS, must likely to succeed when measures of output are predictable

Disadvantages to Piecework

sometimes desire for peer approval outweighs desire for pay, sometimes individual performance can be difficult to measure

Problems with incentive plans can often be traced back to...

the choice of employment measures

Profit Sharing Plans

when an employer pays, or makes available to all regular employees, special current or differed sums based on the organizations profit - increase your earnings when you help the organization grow - range from 5 to 50% of net profit most share about 20-25% - little linkage between what employees do and their %