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 %