MNGT 463 Chapter 4

Group versus individual incentives

-Group incentive programs are most suitable where the nature of the work is interdependent and the contributions of individual employees are difficult to measure -Individual plans reward employees for meeting or surpassing such predetermined individual goals as production or sales quotas

Three advantages of individual incentive pay plans

1. Can promote the relationship between pay and performance 2. Individual incentive plans promote an equitable distribution of compensation within companies (The better they perform, the more they earn) 3. Their compatibility with such individualistic cultures as the United States

Three conditions individual incentive plans are most appropriate under

1. Employees' performance can be measured objectively 2. Are appropriate when employees have sufficient control over work outcomes 3. Appropriate when they do not create a level of unhealthy competition among workers that ultimately leads to poor quality

Human resource experts allocate rewards in on of the three ways:

1. Equal incentive payments to all team members. 2. Differential incentive payments to team members based on their contribution to the team's performance 3. Differential payments determined by a ration of each team member's base pay to the total base pay of the group.

Effective pay systems are based on three assumptions:

1. Individual employees and work teams differ in how much they contribute to the company, both in what they do as well as in how well they do it. 2. The company's overall performance depends to a large degree on the performance of individuals and groups within the company 3. To attract, retain, and motivate high performers and to be fair to all employees, a company needs to reward employees on the basis of their relative performance

Disadvantages of Individual incentive pay programs

1. Individual incentive plans possess the potential to promote inflexibility 2. Supervisors must develop and maintain comprehensive performance measures to properly grant incentive awards. 3. They may encourage undesirable workplace behavior when these plans reward only one or a subset of dimensions that constitute employees' total job performance

Piecework plans

1. Rewards employees based on their individual hourly production against an objective output standard and are determined by the pace at which manufacturing equipment operates 2. Establishes individual performance standards that include both objective and subjective criteria

Gain sharing plans

A group of employees, generally a department or work unit, is rewarded for productivity gains.

Team-based or small-group incentive plans

A small group of employees shares a financial reward when a specific objective is met

Labor hour ratio formula

A standard is determined by analyzing historical accounting data to find the number of labor hours needed to complete a product.

Sorting effect

Addresses an employee's choice to stay versus leave his or her employer for another job, presumable one without an incentive pay contingency

Group incentive programs are most effective when:

All group members have some impact on achieving the goal, even though individual contributions might not be equal

Team-based incentives

Are similar to individual incentives with one exception - Each group member receives a financial reward for the attainment of a group goal

Management incentive plans

Award bonuses to managers when they meet or exceed objectives based on sales, profit, production, or other measures for their division, department, or unit - Require multiple complex objectives

Project teams

Consist of a group of people assigned to complete a one-time project

Gain sharing

Describes group incentive systems that provide participating employees with an incentive payment based on improved company performance for increased productivity, increased customer satisfaction, lower costs, or better safety records.

Scanlon plan

Emphasis on employee involvement. Believed that

Rucker Plan

Emphasizes employee involvement Uses a value-added formula (value added/total employment costs) Value of sales price Value of materials used Total labor costs Larger ratios show that value added is greater than total employment costs

Referral plans

Employees may receive monetary bonuses for referring new customers or recruiting successful job applicants

Traditional pay plans

Employees receive compensation based on a fixed hourly pay rate or annual salary

Behavioral encouragement plans

Employees receive payments for specific behavioral accomplishments (ex. goos attendance or safety records)

Free-Rider effect

Gaining the benefits of group membership by avoiding costly obligations of membership and by allowing other members to incur those costs.

Five important factors when designing effective incentive pay plans

Group versus individual incentives, level of risk, compensating or replacing base pay, performance criteria, and short or long term time horizon

Improshare

Improved Productivity through sharing measures productivity physically rather than in terms of dollar savings like those used in the Scanlon and Rucker plans.

Parallel teams

Include employees assigned to work on a specific task in addition to normal work duties

Three components of gain sharing programs

Leadership philosophy Employee involvement systems Bonus

Work (process) teams

Refer to organizational units that perform the work of the organization on an ongoing basis

Incentive effect

Refers to a worker's willingness to work diligently to produce more quality output then simply attending work without putting in the effort

Long-term goals

Require more than five years

Group incentive programs

Reward employees for their collective performance, rather than for each employee's individual performance

Company-wide incentives

Reward employees when the company exceeds minimum acceptable performance standards

Incentive pay

Rewards employees for partially or completely attaining a predetermined work objective

Spot bonuses

Small monetary gifts provided to employees fro outstanding work or effort during a reasonably short period of time

Scale value of production (SVOP)

The sum of sales revenue plus the value of goods in inventory

Group incentive plans

These plans promote supportive, collaborative behavior among employees - Work well in manufacturing and service delivery environments that rely on interdependent teams

Individual incentive plans

These plans reward employees whose work is performed independently - Piecework plans are an example in which compensation depends on the number of units she/he produces over a given period

Company-wide incentive plans

These plans tie employee compensation to a company's performance over a short time frame, usually from one-month period to a five-year period.

Short-term goals

can be achieved in five years or less

Advantages of companies using piecework plans

incentive and sorting effect