Text Chapter 10: Pay For Performance

An increase in productivity is normally gained when

- Greater output is obtained with less or equal input. - Equal production output is obtained with less input.

Straight salary plan

A compensation plan that permits salespeople to be paid for performing various duties that are not reflected immediately in their sales volume

Individual Pay

DO - measure things that are quantitative and simple - measure work that is independent of others' contribution - measure in a way that shows a relationship between work and performance DONT - measure based on who you like and dislike - measure based on personalities - measure based on political preferences - measure without considering contributions of peers

Performance shares

Grants of actual stock or phantom stock units. Value is contingent on both predetermined performance objectives over a specified period of time and the stock market.

Bonus

an incentive payment that is supplemental to the base wage

Standard Hour Plan

an incentive plan that sets rates based on the completion of a job in a predetermined standard time

Straight piecework

an incentive plan under which employees receive a certain rate for each unit produced

Spot Bonus

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

Characteristics pf a Successful Incentive Plan

- Identify important organizational metrics that encourage employee behavior. - Involve employees. Incentive programs should seem fair to employees. - Find the right incentive payout. Payout formulas should be simple and understandable. - Establish a clear link between performance and payout.

Stock appreciation rights (SARs)

Cash or stock award determined by increase in stock price during any time chosen by the executive in the option period; does not require executive financing.

Profit Sharing Plans

Profit sharing is any procedure by which an employer pays, or makes available to all regular employees, special current or deferred sums based on the organization's profits

Perquisites

Special non-monetary benefits given to executives; often referred to as perks

Employee stock ownership plans (ESOPs)

Stock plans in which an organization contributes shares of its stock to an established trust for the purpose of stock purchases by employees

Variable Pay

Tying pay to some measure of individual, group or organizational performance

Straight commission plan

a compensation plan based on a percentage of sales

Differential piece rate

a compensation rate under which employees whose production exceeds the standard amount of output receive a higher rate for all of their work than the rate paid to those who do not exceed the standard amount

Improshare

a gainsharing program under which bonuses are based on the overall productivity of the work team

Combined salary and commission plan

A compensation plan that include a straight salary and a commission

Restricted stock

Grant of stock or stock units at a reduced price with the condition that the stock not be transferred or sold (by risk of forfeiture) before a specified employment date.

Administering Incentive Plans

1. Allowing incentive payments to become pay guarantees defeats the motivational intent of the incentive. The primary purpose of an incentive compensation plan is not to pay off under all circumstances but rather to motivate performance. Thus, if the plan is to succeed, poor performance must go unrewarded. 2. Annual salary budgets must be large enough to reward and reinforce exceptional performance. When compensation budgets are set to ensure that pay increases do not exceed certain limits (often established as a percentage of payroll or sales), these constraints may prohibit rewarding outstanding individual or group performance. 3. The overhead costs associated with plan implementation and administration must be determined. These may include the cost of establishing performance standards and the added cost of record-keeping. The tune consumed in communicating the plan to employees, answering questions, and resolving any complaints about it must also be included in these costs.

The following advantages indicate why the combination salary and commission plan is so widely used

1. The right kind of incentive compensation, if linked to salary in the right proportion, has most of the advantages of both the straight salary and the straight commission forms of compensation. 2. A salary-plus-incentive compensation plan offers greater design flexibility and can therefore be more readily set up to help maximize company profits. 3. The plan can develop the most favorable ratio of selling expense to sales. 4. The field sales force can be motivated to achieve specific company marketing objectives in addition to sales volume.

Group Pay

DO - measure when work is group interdependent - measure in a way that shows a relationship between work and performance DONT - measure without considering contributions of other teams - measure unless there is a mechanism for teams to discipline their "slackers"

Phantom stock

Grant of units equal in value to the fair market value or book value of a share of stock; on a specified date the executive will be paid the appreciation in the value of the units up to that time.

Scanlon Plan Suggestion Process

* Organization "Screening" committee Purpose - Evaluate suggestions affecting several departments - Review performance to determine bonus or deficit - Oversee entire program - Keep top management informed => feedback to/from Management Measurement/Evaluation * Production "Shop" committee Purpose - Solicit suggestions - Follow up on suggestions - Discuss suggestions with employees - Implement suggestions => feedback to/from individual employee suggestion

Advantages of Incentive Pay Programs

- Incentives focus employee efforts on specific performance targets. They provide real motivation that produces important employee and organizational gains. - Incentive payouts are variable costs linked to the achievement of results. Base salaries are fixed costs largely unrelated to output. - Incentive compensation is directly related to operating performance. If performance objectives (quantity and/or quality) are met, incentives are paid. if objectives are not achieved, incentives are withheld. - Incentives foster teamwork and unit cohesiveness when payments to individuals are based on team results. - Incentives are a way to distribute success among those responsible for producing that success. - Incentives are a way to increase equity and justice in an organization. - Incentives are a means to reward or attract top performers when salary budgets are low.

The following are some noted problems associated with team compensation

- Individual team members may perceive that "their" efforts contribute little to team success or to the attainment of the incentive reward. - Intergroup social problems. Team members may be afraid that one individual may make the others look bad, or that one individual may put in less effort than other but share equally in team awards--the "free-rider" effect - Complex payout formulas or insufficient payout rewards.

Problems with Employee Stock Ownership Plans

- The more retirement income comes from these plans, the more dependent a pensioner becomes on the price of company stock. Future retirees are vulnerable to stock market fluctuations as well as to management mistakes. - Unlike traditional pension plans, ESOP contributions are not guaranteed by the federally established Pension Benefit Guaranty Corporation, a major drawback to employees should their employer face serious financial setbacks or closure.

Piecework may also be inappropriate in the following situations

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

Corporate compensation committees justify big bonuses in the following ways

1. Large financial incentives are a way to reward superior performance. 2. Business competition is pressure-filled and demanding. 3. Good executive talent is in great demand. 4. Effective executives create shareholder value.

Problems with Merit Raises

1. Money available for merit increases may be inadequate to satisfactorily raise all employees' base pay. 2. Managers may have no guidance in how to define and measure performance, there may be vagueness regarding merit award criteria. 3. Employees may not believe that their compensation is tied to effort and performance; they may be unable to differentiate between merit pay and other types of pay increases. 4. Employees and their managers may hold different views of the factors that contribute to job success. 5. Merit pay plans may create feelings of pay inequity.

Straight Commission Plans are limited to the following disadvantages

1. Salespeople will stress high-priced products 2. Customer service after the sale is likely to be neglected. 3. Earnings tend to fluctuate widely between good and poor periods of business, and turnover of trained sales employees tends to increase in poor periods. 4. Salespeople are tempted to grant price concessions.

Scanlon Plan

A bonus incentive plan using employee and management committees to gain cost-reduction improvements

Team incentive plan

A compensation plan in which all team members receive an incentive bonus payment when production or service standards are met or exceeded

Salary Plus Bonus Plan

A compensation plan that pays a salary plus a bonus achieved by reaching targeted sales goals

Enterprise Pay

DO - measure when work is organizationally interdependent - measure results that employees can control - measure between work and performance DONT - measure unless employees can see how their work actually contributes to the enterprise - measure without considering effects of the environment (e.g. economic downturns)

Performance units

Grants analogous to annual bonuses except that the measurement period exceeds one year. The value of the grant can be expressed as a fact dollar amount or converted to a number of "units" of equivalent aggregate value.

Stock purchase

Opportunities for executives to purchase shares of their organization's stock valued at full market or a discount price, often with the organization providing financial assistance.

Gainsharing plans

Programs under which both employees and the organization share financial gains according to a predetermined formula that reflects improved productivity and profitability

Stock options

Rights granted to executives to purchase shares of their organization's stock at an established price for a fixed period of time. Stock price is usually set at market value at the time the option is granted.

Merit guidelines

guidelines for awarding merit raises that are tied to performance objectives