Strategic Compensation Exam 2 Study Guide (Chapter 4)

Employee Involvement Systems

This component of gain sharing programs involves driving organizational productivity improvements.

Leadership Philosphy

This component of gain sharing programs refers to a cooperative organizational climate that promotes high levels of trust, open communication, and participation.

Gain sharing plans.

This incentive plan is being used when a group of employees, generally a department or work unit, is rewarded for productivity gains.

Team-based or small-group incentive plans

This incentive plan is being used when a small group of employees share a financial reward when a specific objective is met.

Incentive Pay or Variable Pay

This rewards employees for partially or completely attaining a predetermined work objective pay.

Scanlon Plans

The hallmark of the __________________ plan is its emphasis on employee involvement. The creator believed that employees will exercise self-direction and self-control if they are committed to company objectives and that employees will accept and seek out responsibility if given the opportunity.

They are continuous (Employees must continuously work hard if they wish to receive their incentives)

Are the effects of incentives on performance continuous or limited?

1. Low sales = no money for commissioned employees 2. Incentivize selling expensive items without spending any time selling smaller commission items. 3. Can inspire a huge amount of unethical behavior

Cons of commission based incentive pay

(Sales Value Added )/ (Total Cost of Production)

How is the value-added formula calcuated.

A company should ultimately employ standards that represent work that [an employee actually performs.]

In terms of defining individual incentives, a company should ultimately employ standards that represent work that___________________________.

Labor Costs / Sales Value of Production

Scanlon Ratio = ?

The Rucker Plan

Similar to the Scanlon Plan, this plan also emphasizes employee involvement and provides monetary incentives. The main difference lies in the formula used to measure productivity. In this plan, the value-added formula is used.

The sorting effect

The ______________ addresses an employee's choice to stay versus leave his or her employer for another job, presumably one without an incentive pay contingency.

The incentive effect

The ___________________ refers to a worker's willingness to work diligently to produce more quality output than simply attending work without putting in the effort.

Company-Wide Incentive Plans

These incentive plans reward employees when the company exceeds minimum acceptable performance standards.

Group Incentive Plans

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

Indiivudal Incentive Plans

These plans reward employees whose work is performed independently.

Bonus

This component of a gain sharing plan awards gain sharing bonuses when its actual productivity exceeds its targeted productivity level.

Incentive Pay/Variable Pay

This is defined as compensation, other than base wages or salaries that fluctuate according to employees' attainment of some standard such as a preestablished formula, individual or group goals, or company earnings.

False. If the company is doing poor, profit sharing and stock options are hurt, which makes employees feel bad. Another issue with them is that they don't typically relate to actual employee performance, instead, they are affected by uncontrollable external factors.

True or False: Company-Wide Incentives are effective no matter the current state of the economy or success of the company.

True Incentive Pay tends to be based on criteria that are considered even more objective than those of merit pay.

True or False: Incentive levels tend to be based on very specific objective criteria such as the quantity of items an employee produces per production period or market indicators of a company's performance.

True Think Wells Fargo as an example

True or False: Incentives are difficult to design because it is easy to incentivise unethical behaviors.

False

True or false: If production is not easily countable or made often, a piecework plan is a great option.

1. ReinforceTeamwork 2. Cultivate loyalty to the company 3. Increase productivity

Well-designed group incentive plans affect the organization how? ( 3 things)

1. It pays people to not report and come in when they shouldn't 1.a People don't report because they don't want to lose incentives 1.b People come into work when they are sick. This can get more people sick which now affects the performance of a large portion of the organization.

What are some cons of Behavioral Encouragement Incentive Plans?

1. Doesn't work with manufacturing that is not easily countable. 2. Without quality checks, employees will cut corners 3. If 1 person is hugely successful compared to others, people fear that the incentive system might change. 4. Can lead to an unspoken social performance called "soldiering" where rates/paces are similar between employees and it doesn't typically ever improve or reduce. In this environment, high performers are discouraged.

What are some cons of piecework incentive plans?

Number of units produced, sales amount, reduction in error rate. They also reward employees for meeting such work-related performance standards as quality, productivity, customer satisfcation, safety, or attendance.

What are some examples of objective performance measures that could be used in individual incentive plans?

1. Companies can more easily develop performace measures for group incentive plans than they can for individual plans. (less groups than total employees) 2. Greater group cohesion. (Working collaboratively is undoubtedly in group members' best interest in order to maximize their incentive awards.)

What are the advantages of Group Incentives?

1. As employees benefit from profit sharing plans, they will be more liekly to work productively to promote profits. 2. Comapnies that use profit sharing programs gain greater financial flexibility.

What are the advantages of profit sharing plans?

1. Only tend to work in low skill, high turnover jobs. 2. People staying for the sake of helping their friend get the referral bonus. 3. Productivity drops because friends are working with friends 4. Social becomes more important than the task 5. Can lead to diversity problems 6. Hiring based on factors that are not job related

What are the cons of referrals?

1. Unstructured 2. Can create equity issues 3. can be complicated to manage 4. people can begin to expect it all of the time

What are the cons of spot bonuses?

1. Piecework Plans 2. Management Incentive Plans 3. Behavioral Encouragement Plans 4. Referall Plans 5. Spot Bonuses

What are the five common types of individual incentive plans?

1. Profit sharing plans may undermine the economic security of employees, particularly if profit sharing represents a sizable portion of direct compensation. 2. Profit sharing plans may fail to motivate employees may fail to motivate employees because they do not see a direct link between their efforts and corporate profits.

What are the main disadvantages of profit sharing plans?

The incentive effect, and the sorting effect

What are the names of the two advantages to companies using piecework plans in manufacturing settings?

Pro: Helps align managers to enforce practices that align with the organization's goals. Con: Managers focusing only on incentivized parts neglect to focus on the other important stuff.

What are the pros and cons of Management Incentive Plans?

Team-Based Incentives

_______________ are similar to individual incentives with one exception. Each group member recieves a financial reward for the attainment of a group goal.

sales value of production (SVOP)

_______________ is the sum of sales revenue plus the value of goods in inventory

Work (Process) Teams

_______________ refer to organizational units that perform the work of the organization on an ongoing basis Ex: Customer service teams, assembly teams on production lines.

Employee Stock Opion Plans

_______________ represent a long-term company-wide incentive plans that provide employees with stock options.

Parallel Teams, or task forces

________________ indclude employees assigned to work on a specific task in addition to normal work duties.

Management Incentive Plans

________________ reward bonuses to managers when they meet or exceed objectives based on sales, profit, production, or other measures for their division, department, or unit.

Group Incnetive Programs

________________ reward employees for their collective performance, rather than for each employee's individual performace.

Behavioral Encouragement Plans

_____________________ is where employees receive paymetns for specific behavioral accomplishments.

1. They are meaningful 2. They are linked to behavior 3. The Rules are Clear 4. They are provided as immediately as possible (Sometimes it is wise to defer incentives, to shift the focus of performance from short-term to long-term.) 5. They reward a combination of individual, group, and organizational performance. 6. Employees believe that extra effort will result in superior performance resulting in a timely and meaningful reward.

Incentives work well when ....

The Sales Value of Production

What is the name of the ratio that gain sharing formulas are usually based on?

(Value Added) / (Total Employement Costs)

What is the ratio to determine whether bonuses will be awarded under a Rucker Plan?

Company-Wide Incentive Plans

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

Smaller is better

Do you want a larger or smaller Scanlon Ratio?

Larger is better

Do you want a larger or smaller Value Added ratio?

It increases positively

Does equity interest increase positively or negatively with the number of stock shares?

Referral plans

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

1. Indiviudal 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 the 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.

What are the three assumptions that effective incentive pay systems are based on?

1. Individual Incenctive Plans 2. Group Incentive Plans 3. Comapny-Wide Incentive Plans

What are the three broad categories that Incentive Pay Plans are classified into?

1. An emphasis on teamwork to reduce costs, assisted by management-supplied information on production concerns. 2. Suggestion systems that route cost-saving ideas from the workforce through a labor-management committee that evaluates and acts on accepted suggestions. 3. A monetary reward based on productivity improvements to encourage employee involvement.

What are the three components of a Scanlon plan?

1. Leadership Philosophy 2. Employee Involvement Systems 3. Bonus

What are the three components of most gain sharing programs?

1. Employees' performance can be measured objectively. 2. When employees have sufficent control over work outcomes. 3. When the plan does not create a level of unhealthy competition among workers that ultimatley leads to poor quality.

What are the three conditions that incentive pay plans are most appropriate under?

1. They can promote the relationship between pay and performance. 2. They promote an equitable distribution of compensation within companies. (The better they perform, the more they earn) 3. Their compatiblity with such indiviudalistic cultures as the United States.

What are the three key advantages of individual incentive pay plans?

1. They posses the potential to promote inflexibility 2. They pose measurement problems when management implements improved work methods or equipment. 3. They may encourage undesirabel workplace behavior when these plans reward only one or a subset of dimensions that constitute employees' total job performance.

What are the three potential problems with incentive plans as mentioned in the book?

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 ratio of each team member's base ay to the total base pay of the group.

What are the three ways in which human resource experts allocate rewards?

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. (objective = units produced; subjective = quality of said units)

What are the two generally used piecework plans?

1. Profit Sharing Plans 2.Employee Stock Option Plans

What are the two major types of company-wide incentive plans?

1. Team-Based or Small-Group Incentive Plans 2. Gain Sharing Plans

What are the two major types of group incentive plans?

1. Current Profit Sharing Plans 2. Deferred Profit Sharing Plans

What are the two types of profit sharing plans?

Stock Options

What describe(s) an employee's right to purchase company stock.

Business Objectives (Such as company profits and sales growth)

What does management typically rely on to determine incentive pay levels?

1. Whether the plan should be based on group or individudal performance 2. The level of risk employees will be willing to accept in their overall compensation package 3. Whether incentive pay should replace or complement traditional pay 4. The criteria by which performance should be judged 5. The time horizon for goals -- long term, short term, or a combination of both.

What five key factors should HR professionals and Line Managers consider when designing an incentive pay plan?

Company Stock

What represent total equity of a company?

Company Stock Shares

What represents equity segments of equal value.

Trick question! For the best results, it is wise to use a combination of all three. (Individual, Group, and Company-Wide)

Which level of incentive pay is the best to use?

Current Profit Sharing Plans

Which profit sharing plan awards cash to employees, typically on a quarterly or annual basis?

Deferred Profit Sharing Plans

Which profit sharing plan places cash awards in trust accounts for employees and are set aside on employees' behalf as a source of retirement income, and can also be considered a long-tem incentive?

They are difficult because they require the measurement of more stuff: the group, the individuals, and the soft skills (team work, communication, and cooperation for example)

Why are group incentives hard when comparing them to individual incentives?

Spot Bonuses

____________ are relatively small monetary gifts provided to employees for outstanding work or effort during a reasonably short period of time.

Project Teams

____________ consist of a group of people assigned to complete a one-time project.

Employee Stock Option Plans

____________ plans are used when companies grant employees the right to purchase shares of company stock.

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.

Profit Sharing Plans

______________ plans are used when employees earn a financial reward when their company's profit objective is not met.