Chapter 4 - HRMN 5470

team-based incentives (small-group incentive plans)

A small group of employees shares a financial reward when a specific objective is met. Rewards allocated three ways: 1. Equal incentive payments to all teak members. 2. Different payments to team members based on their contributions to the goal. 3. Different payments determined by a ratio of each team member's base pay to the total base pay of the group.

sorting effect

Addresses an employee's choice to stay versus to leave his/her employer for another job, presumably one without an incentive pay contingent.

gain sharing plans

Group incentive systems that give employees a financial reward based on improved company performance in areas such as increased productivity, lowering costs, and improving safety. Emphasizes employee involvement and giving suggestions. Three main components of most _____________ ______________ ________________: 1. Progressive leadership philosophy, involving a cooperative organizational climate 2. Employee involvement through suggestions and problem-solving ideas 3. Bonuses - awarded when productivity exceeds productivity targets

piecework plans

Individual incentive pay program, rewards employees based on their individual hourly production against an objective output standard, determined by the pace at which manufacturing equipment operates. For each hour, workers receive piecework incentives for every item produced over the designated production standard. Workers also receive a guaranteed hourly pay rate regardless of whether they meet the designated production standard. Some of these individual incentive pay program include a subjective criterion: Quality. This is based on the supervisors' interpretation and judgment.

Deferred compensation

Is supposed to create a sense of ownership, aligning the interests of the executive with those of the owners or shareholders of the company over the long term.

Incentive pay

Known as variable pay. Rewards employees for partially or completely attaining a predetermined work objective.

Stock compensation plans

Represent an important type of deferred compensation for executive.

T/F: Research shows that incentives are often associated with higher performance.

True

Disadvantages of Individual Incentive Pay Plans:

1. Can promote inflexibility. Because supervisors determine employee performance levels, workers under individual incentive plans are dependent on supervisors setting work goals. If worker becomes highly proficient, he/she is not likely to increase performance beyond reward compensation goal. 2. Poses measurement problems when management implements improved work methods or equipment. Employees will need time to become proficient performers under changes. 3. May encourage undesirable workplace behavior when plans reward only one or a subset of dimensions that constitute employees' total job performance.

Main advantages of profit sharing plans:

1. Enable employees to share in companies' fortunes 2. Companies gain greater financial flexibility

management incentive plans

Award bonuses to managers when they meet or exceed objectives on sales, production, or other measures for their division, department, or unit. Often involves multiple complex objectives.

referral plans

Companies commonly rely on ___________ _________to enhance recruitment of qualified employees. Employees receives monetary bonuses under these plans for referring new customers or recruiting successful job applicants

Employee stock option plans

Companies grant employees the rights to purchase shares of company stock.

stock options

Describe an employee's right to purchase company stock.

individual incentive plans

These plans reward employees whose work is performed independently. Some companies have piecework plans, typically for their production employees. Under piecework plans, an employee's compensation depends on the number of units she/he produces over a given period.

Advantages of Individual Incentive Pay Plans:

1. Can promote the relationship between pay and performance. Employees strive for excellence when they expect to earn incentive awards commensurate with job performance. 2. Promote an equitable distribution of compensation within companies (i.e., the amount the employees earn depends on job performance). Enables companies to retain best performers. 3. Are compatible with such individualistic cultures as the United States.

Two advantages of group incentive plans for companies:

1. Companies can more easily develop performance measures for group incentive plans than they can for individual incentive plans. - fewer groups than individuals - Companies generally use fewer resources to develop performance measures for groups. 2. Greater group cohesion associated with group incentive plans. - Cohesive groups usually work more effectively toward achieving common goals than do individual group members.

Main disadvantages for profit sharing plans:

1. May undermine the economic security of employees 2. May fail to motivate employees because they do not see the link between their efforts and corporate profits

Improshare

Defined as "Improved Productivity through Sharing". • Measures productivity physically rather than on dollar savings • Aims to produce more products with fewer labor hours - main focus is on labor-hour ration • Emphasis on giving employees incentives to finish products: o Unlike Scanlon and Rucker Plans, employee participation is not a feature. (Workers receive bonuses on a weekly basis.) o Has a buy-back provisions: - Productivity improvement earnings are placed in reserve. When productivity exceeds a set standard, earnings are distributed as employee bonus. (Bonus is paid from the reserve.) Company is then permitted to adjust standards to a higher level of productivity.

Main disadvantage of group incentive compensation:

Employee turnover. • Implementation of group incentive program may lead to turnover due to the free-rider effect. • Free-rider effect: Some employees may make fewer contributions to the group because they possess lower ability, skills, or experiences than other group members. - Members who make greatest contributions are likely to leave overtime, especially if each group member is receiving the same compensation regardless of effort/contribution.

profit sharing plans

Employees earn a financial reward when their company's profit objective is met; • pay that is over and above COLAs and/or merit raises

behavioral encouragement plans

Employees receive payments for specific behavioral accomplishments (e.g., good attendance or safety records).

Scanlon Plan

Plan's main components: Emphasis on employee involvement in teamwork to reduce costs Two-tiered cost-savings suggestion system: 1. production-level committees 2. company-wide screening committees Monetary rewards for productivity improvements - based on ratio of labor costs and sales value of production (SVOP) - SVOP = the sum of sales revenue + the value of goods in inventory - __________________ Ratio = labor costs/SVOP

incentive effect

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

Employee stock option plans

Represent one type of companywide incentive. Companies grant employees the right to purchase shares of company stock

stock shares

Represents equity segments of equal value. Equity interest increases positively with the number of stock shares held.

company stock

Represents total equity or worth of a company.

group incentive programs

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

Companywide incentives

Reward employees when the company exceeds minimum acceptable performance standards (e.g., profits or overall value of the company based on its stock price).

Rucker Plan

Similar to Scanlon Plan. This plan: • Emphasizes employee involvement and monetary incentives • Uses a value-added formula to measure productivity: - the difference between the value of the sales prices and the value of materials used to make the product • ____________ Ratio = (value added) - (costs of materials, supplies, services rendered)/ Total employment costs (wages, salaries, payroll taxes, etc.) • A larger _____________ ratio indicates that the value added is greater than the total employment costs.

T/F: A hardworking, highly skilled employee is likely to choose to remain employed under an incentive system because both diligence and skill presumably contribute to higher quantity and quality of output - thus higher pay.

True