Chapter 10 - Pay for Performance: Incentive Rewards DONE

Individual Incentive Plans; Incentive Awards and Recognition

- Awards are used to recognize productivity gains, special contributions or achievements, and service to the organization - Non cash incentives include merchandise, personalized gifts, theatre or sports tickets, vacations, dining out, gift cards or personalized clothing - Most effective when the award is combined with meaningful appreciation and recognition >> Let them know they are valued and appreciated

Incentives for Professional Employees

- Engineers, scientists, attorneys - Extended salary ranges for professional positions to equal or nearly equal management positions - Double track wage system

Incentive Plans as Links to Organizational Objectives

- Gives employees ownership; increases effort and overall performance - Encourages employees to exert more effort to their job tasks - Great way to retain and attract good employees

Problems with team incentive plans

- Individuals may think their efforts were greater than others - Intergroup social problems - Complex pay formulas

Problems with Merit Pay

- May not achieve an intended purpose - Perpetuated (prolong) year after year even when performance declines; sees an entitlement, unrelated to skill - May have biased evaluations; seniority and favouritism - Funds may not be available - Managers may not know how to measure performance - Employees may not believe compensation is based on effort and performance - May create feelings of inequality

Drawbacks of Piecework

- May not always be an effective motivator - "rate busting" = disapproval from coworkers - May be inappropriate when quality is more important than quantity - Frequent changes in technology - Standards difficult to develop

Unique Need of Sales Incentive Plans

- Performance is measured by the dollar volume of sales and ability to establish new accounts - The ability to promote new products or services and provide various forms of customer service

Advantage of Straight Salary

- Provides compensation during periods of poor sales - Encourages building customer relationships

Executive Pay Package; Exec Base Salary

- Usually 30-40% of total annual compensation

Cons of Incentive Plans

1) Sometimes don't satisfy employee expectations for pay gains 2) Confusion to the employee, of how incentives are given 3) Employees may not have the ability to sustain performance standards

Types of Individual Incentive Plans

1) Straight Piecework 2) Bonuses 3) Merit Pay 4) Lump sum merit pay 5) Incentive awards and recognition 6) Sales incentives

Types of Sale Incentive Plans

1) Straight Salary Plan 2) Straight Commission Plan 3) Combined Salary and Commission Plan 4) Salary Plus Bonus Plan

The Executive Pay Package Components (5)

1. Exec Base salary 2. Short term incentives or bonuses 3. Long term incentives or stock options 4. Benefits 5. Perks

Combined Salary and Commission Plan

A compensation plan that includes a straight salary and a commission

Enterprise Incentive Plans

All organizational members participate in the compensation layout - Reward employees on the basis of the success of the organization over an extended period - Normally one year but could be longer

Group Incentive Plans; Team Compensation

All team members receive an incentive bonus payment when production or service standards are met or exceeded

Individual Incentive Plans; Bonuses

An incentive payment given beyond his or her base wage - Given at the end of the year - Common to managerial and exec employees Pro: - Employees can get extra money and still have the security of basic wage

Straight piecework

An incentive plan that provides a fixed rate of incentive pay for each item produced.

Gainsharing Plans

An incentive program in which employees receive a bonus if the firm's costs are reduced because of greater worker efficiency and/or productivity.

Executive Pay Package; Short Term incentives or bonuses

Annual bonuses are the main element for exec short-term incentives A bonus can take the form of cash or stock, even be paid immediately - Most common is paying in cash; pay for performance

Straight Commission Plan

Compensation based upon a percentage of sales

Executive Pay Package; Exec Benefits

Extended health insurance, life insurance, retirement plans and vacations - Benefits are generally more broad in coverage and free of charge - Execs may also get financial assistance, such as estate planning, payment of mortgage and legal help

Employee Stock Ownership Plans (ESOPs)

Give stock to employees or allow them to purchase stock at special prices

Disadvantage of Straight Salary

May not provide sufficient motivation for maximizing sales volume

Executive Pay Package; Exec Perquisites

Non-monetary (compensation that doesn't involve cash) benefits given to executives - Often called perks - A "badge of merit", shows authority Pro: - Facilitate productivity and save executive time - Helps maintain the exec's physical and mental health Con: - Viewed as wasteful spending and overly lavish

Individual Incentive Plans; Merit Pay

Normally given on the basis of an employee having achieved some objective performance standard - Links an increase in base pay to how successfully an employee performs his or her job - Once given, does not depend on future performance

Salary Plus Bonus Plan

Pays a salary plus a bonus achieved by reaching targeted sales goals

Variable Pay

Plan that links pay to productivity/profitability. An incentive pay employees will only receive after a certain level of performance. Employers like variable pay for two reasons 1) More effective at motivating employees - clearer link with pay and performance 2) Variable pay is not part of the base pay Examples: - Bonuses, incentives, recognition - More flexible than fixed pay - Can be used to exercise fairness

Profit Sharing Plans

Plans that distribute a portion of an organization's profits to its employees. - Depending on the organization's profits

Executive Pay Package; Long Term incentives or bonuses

Stock options are the most common long term incentive - Be apart of the business's vision, rise and fall with the company - CAN GAIN A LOT OF PROFIT ! Pro:

Individual Incentive Plans; Sales Incentives

The nature of selling is a competitive field - Financial incentives for salespeople - Important for employees who cannot be supervised closely

Spot Bonus - double check the meaning!!!

Unplanned bonus given for employee effort unrelated to an established performance measure

Straight Salary Plan

a plan in which employees receive a set compensation, regardless of their level of sales fixed salary

Individual Incentive Plans; Lump Sum Merit Pay

employees receive a year-end merit payment, which is not added to their base pay

Differential Piece Rate

incentive pay in which the piece rate is higher when a greater amount is produced

problems with ESOPs

o Better in public than private companies o Potential inability to pay back the stock of employees when they retire o Not guaranteed

Disadvantages of Commission Plan

salespeople will stress high-priced products customer service after the sale is likely to be neglected

Advantages of Employee Stock Ownership Plans

they can increase employees' pride of ownership in the organization providing an incentive for them to increase productivity they help the organization prosper and grow

Requirements for a Successful Incentive Plan

• Employees must believe in it for it to work • Must be able to see a clear connection between performance and pay