Chapter 10: Pay-for-Performance: Incentive Rewards

Lump-Sum Merit Pay

increase is given at the employee's review period. This salary increase is not added to the employee's base salary.

profit sharing

pay employees on a current or deferred basis some amount of money based on organizational profits.

Problems with Merit Raises

(1) they come to be expected regardless of performance levels, (2) they can be based on favoritism or seniority, (3) objective criteria do not exist against which to measure performance, and (4) employees can have little trust in merit pay programs.

Computing the Piece Rate

60min (per hour)/12min(standardtimeperunit) = 5 units per hour 12.75(hourly rate)/5 units per hour = $2.55 per unit

ENTERPRISE INCENTIVE PLANS

All employees in the organization participate in the incentive plan's payout. The incentive bonus is based on the success of the organization over an extended period of time. The idea is to create a feeling of ownership in the organization, thereby fostering teamwork and cooperation among organizational members

Requirements for a Successful Incentive Plan

Employees' acceptance of the plan. Employees must see a direct relationship between job performance and incentive plan payout. Clearly and continuously communicated to employees.

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 means to reward or attract top performers when salary budgets are low.

Merit Pay

Increase of base pay to an employee's performance. Often done in conjunction with the annual review.

SMARTT

Specific, Measurable, Agreed-to, Realistic, Time bound, TIED TO REWARD

Incentive Awards and Recognition

These are non-cash incentive awards. These awards might include theater or sports tickets, clothing or jewelry, merchandise awards, or week-end vacations

Why Incentive Plans Fail

They fail to meet employee expectations for pay gains. There is confusion about incentive payment calculations due to poor design and implementation of the plan. Employees do not have the capability to change their performance levels. The organization environment does not support plan.

Scanlon Plan

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

straight commission plan

a compensation plan based on a percentage of sales

Group 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

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

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

combined salary and commission plan

a compression plan that includes a straight salary and a commission

Improshare

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

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 of time

straight piecework

an incentive plan under which employees receive a certain rate for each unit produced. in which pay is based on the number of units produced times the rate assigned to the unit

spot bonus

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

merit guidelines

guidelines for awarding merit raises that are tied to performance objectives

Employee Stock Options Plans Problems

is the possibility that the organization will not be able to pay back the stock of employees when they retire. Also, they are at the whim of the stock market. If stock prices should fail, the value of employees' retirement accounts will diminish.

gainsharing plans

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

variable pay or pay at risk

promotes employee involvement through a philosophy of shared rewards through performance and commitment.

perquisites

special nonmonetary benefits given to executives

employee stock ownership plan (ESOPs)

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