HRM: Compensation & Benefits Chapter 4

why is group incentive plans used more now?

-technology -better emphasis on quality - promotes innovation in the workplace

what are advantages of group incentive plans?

BOOK: - companies can more easily develop performance measures for group incentive plans than they can for individual incentive plans - fewer groups in a company than individuals - greater group cohesion NOTES: - fewer groups than individuals - makes things simpler -promotes the idea of team work

what are the disadvantages of group incentive plans?

BOOK: - employee turnover - free rider effect

what are the disadvantages of profit sharing plans?

BOOK: 1. undermine the economic security of employees (employee) 2. may fail to motivate employees (company) NOTES: employee: 1. limited control 2. company make decisions that cut into profits employer: 1. lose best employees if incentive is not performance based 2. profits are cyclical

what are the advantages of profit sharing plans?

BOOK: 1. when properly designed it enables employees to share in companies' fortunes (employees) 2. companies gain greater financial flexibility (company) NOTES: 1. nice incentives 2. good message to employees

- represent one type of companywide incentive plan - companies grant employees the right to purchase shares of company stock

employee stock option plan

- may be the basis for a company's Section 401(k) plan - these plans invest in company securities, making them similar to profit sharing plans and stock bonus plans, presumably when the value of stock has increased

employee stock ownership plans (ESOPs)

everyone gets the same amount is what kind of distribution?

equal payments to employees

- uses a specific percentage of either pretax or post tax annual profits, contingent upon successful attainment of a company goal - give employees a certain percentage of profits

fixed first dollar of profits formula

- occurs when employees of lower ability, skill, and effort benefit equally as employees of higher skill, ability, and effort in group incentive plans - can lead to resentment and turnover of stronger contributors because weaker contributors are getting a "free ride"

free rider effect

group incentive systems that provide participating employees an incentive payment based on improved company performance, whether for increased productivity, increased customer satisfaction, lower costs, or better safety records

gain sharing

- motivate employees to strive for extraordinary profit targets by sharing even more of the incremental gain - give employees a percentage when profits are low and as profits rise so does the percentage

graduated first dollar profits formula

plans that promote supportive, collaborative behavior among employee's

group incentive plans

what is an example of a work team?

hospital teams

what is an example of a behavioral encouragement plan?

if you don't miss any work days for four months in a row you get $200

- measure productivity physically rather than in terms of dollar savings like those used in the scanlon and rucker plans - emphasis is on providing employees with an incentive to finish products

improshare plans

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

incentive effect

compensation, other than base wages or salaries, that fluctuates according to employee's attainment of some kind of some standard

incentive or variable pay

a one time payment that has various outcomes

incentive pay

plans that reward employees whose work is performed independently

individual incentive plans

what are the following examples of: -quantity of work output -quality of work output -monthly sales -work safety record -work attendance

individual incentive plans

- used to determine the payouts in the improshare plan - a standard is determined by analyzing historical accounting data to find the number of labor hours needed to complete a product - productivity is then measured as a ratio of standard labor hours and actual labor hours

labor hour ratio formula

goals that may require 5 or more years

long term goals

a goal oriented performance appraisal method, requires that supervisors and employee's determine objectives for employee's to meet during the rating period, and then employees appraise how well they have achieved their objectives

management by objectives (MBO)

award bonuses to managers who meet or exceed objectives based on sales, profit, production, or other measures for their division, department, or unit

management incentive plans

-employees assigned to work on a specific task in addition to normal work duties -operate on a temporary basis until their work culminates in a recommendation to top management -normally not compensated for extra work or outcome of extra work

parallel teams or task force

rewards based on individual hourly production against an objective output standard

piecework plan

rewards based on individual performance standards that include both objective and subjective criteria

piecework plan

- usually includes a department foreman or supervisor and at least one elected worker - communicate the suggestion program and its reward features to employees - encourage and assist workers in making suggestions and record them for consideration - may reject suggestions but need a written explanation why - forwards appropriate suggestions to a company wide screen committee

production-level committee

- employees earn a financial reward when their company's profit objective is met

profit sharing plans

pay a portion of company profits to employees, separate from base pay, cost-of-living adjustments, or permanent merit pay increases

profit sharing plans

fund profit sharing pools only if profits exceed a predetermined minimum level but fall below some established maximum level

profitability threshold formula

-a group of people assigned to complete a one-time project -many have well defined roles and may work on specific phases of the project -either full time or in addition to other work responsibilities of the team

project teams

what kind of distribution os based on: - people who make more money get a higher bonus - people who make low wages get less money in their bonus

proportional payments based on annual salary

the distribution that has to do with job performance is?

proportional payments based on contribution to profits

fixed hourly wage or annual salary is based on what?

raises

individual incentive pay plans that reward employees for referring new customers or recruiting successful job applicants

referral plans

- emphasized employee involvement - gain sharing awards are based on the ratio between value added and the total costs of employment - developed by Allan W. Rucker

rucker plan

rucker ratio equals what?

rucker ration= value added/total employment costs

what is the sum of sales revenue plus the value of the goods in inventory?

sales value of production (SVOP)

-emphasizes employee involvement -gain sharing awards are based on the ratio between labor costs and sales value of production -developed by Joseph Scanlon

scanlon plan

these goals can generally be achieved in 5 years or less

short term goals

guaranteed or risk

should the incentive pay replace or complement traditional pay?

you would have to make the call --- no right answer

should the plan be based on group or individual employee performance?

addresses an employee's choice to stay versus leave his or her employer for another job, presumably one without an incentive pay contingency ex: those who receive a lot of money linked to performance will stay...where those who do not will leave

sorting effect

- companywide incentive plans that grant employees the right to purchase shares of a company - represents an important type of deferred compensation for executives

stock compensation plans

describe an employee's right to purchase company stock

stock options

used to evaluate existing systems and processes, to select new technology, and to improve existing products

task force

each team member receives a financial reward upon completion of the group goal

team-based or small-group incentive plan

what do advocates of companywide incentives believe?

they believe that well designed programs make workers and owners goals more compatible as workers strive toward increasing company profits or value

employee's receive compensation based on a fixed hourly pay rate or annual salary

traditional pay plan

what does value added in the rucker plan equal?

value added= sales revenue - non-labors costs

incentive pay is also known as what?

variable pay

should relate to company's competitive strategy

what criteria should be used to judge performance?

how much will the incentive impact total compensation?

what level of risk will the employees be willing to accept in their overall compensation package?

long term, short term, some combination

which time horizon for meeting goals would be most effective?

-organizational units that perform the work of the organization on an ongoing basis -full-time team member -refers to a job assigned to a team

work teams

tradition pay plans are based on what?

-fixed hourly wage or annual salary -raises

what are raises based on?

-length of service in the organization -superiors appraisal of employee's job performance

what is incentive pay designed to do?

-link employee performance to pay -to control labor costs

the scanlon plan has three main components:

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 two basic types of profit sharing plans used widely today?

1. current profit sharing plan 2. deferred profit sharing plan

two other types of stock plans are widely used today. what are they?

1. employee stock ownership plan (ESOPs) 2. stock compensation plans

rewards are allocated in three ways:

1. equal incentive payments to all team members 2. differential payments to team members based on their contributions to the goal 3. differential payments determined by a ratio of each team member's base pay to the total base pay of the group

Companies usually make distributions in one of three ways:

1. equal payments to employees 2. proportional payments to employees based on annual salary 3. proportional payments to employees based on contribution to profits

HR professionals determine the pool of profit sharing money with any three possible formulas. what are they?

1. fixed first dollar of profits formula 2. graduated first dollar of profits formula 3. profitability threshold formula

what are the two key advantages to the piecework plan?

1. incentive effect 2. sorting effect

what are the three categories incentive pay can be classified into?

1. individual incentive plans 2. group incentive plans 3. companywide incentive plans

what are the three components of gain sharing?

1. leadership philosophy 2. employee involvement systems 3. bonus

What are the four types of individual incentive plan?

1. piecework plan 2. management incentive plan 3. behavior encouragement plan 4. referral plan

what falls under the two-tiered cost savings suggestions systems?

1. production-level committees 2. companywide screening committees

what are the two types of companywide incentive plans?

1. profit sharing plans 2. employee stock option plan

what are the three most commons used forms of the gain sharing plan?

1. scanlon plan 2. rucker plan 3. improshare plan

what are the 5 key considerations for designing incentive pay programs?

1. should the plan be based on group or individual employee performance? 2. what level of risk will the employees be willing to accept in their overall compensation package? 3. should the incentive pay replace or complement traditional pay? 4. what criteria should be used to judge performance? 5. which time horizon for meeting goals would be most effective?

what are the two major types of group incentives companies use?

1. team-based or small-group incentive plans 2. gain sharing plans

what is the best known management incentive plan?

MBO

what are some advantage of individual incentive plans?

Book Adv.: -promote the relationship between pay and performance -promote equitable distribution of compensation within companies -compatibility with such individualistic cultures Notes Adv.: -seen by employees as fair -if you work harder you should get more money -also fair from the organizations stand point

what are some disadvantages of the individual incentive plan?

Book DisAdv.: -promote inflexibility -encourage undesirable workplace behavior -employees resistance to new methods Notes DisAdv.: -create narrow focus for the employee -hurt motivation

team based pay plans should:

Book: -emphasize cooperation between and within teams -compensate employees for additional responsibilities -encourage team members to attain predetermined objectives for the team Notes: -motivate performance -promote teamwork in and across groups

you want the labor costs to be smaller then what?

SVOP

what does the scanlon ratio equal?

Scanlon Ratio=Labor Costs/SVOP

monetary rewards for productivity improvement is based on what?

based on a ratio of labor costs and sales value of production (SVOP)

individual incentive pay plans that reward employees for specific such behavioral accomplishments as good attendance or safety records

behavioral encouragement plans

- a maximum productivity improvement payout level on productivity gains - any bonus money that is generated because improvements above the maximum is placed in a reserve - if productivity improves to the point where the maximum is repeatedly exceeded, the firm buys back the amount of the productivity improvement over the maximum with a one-time payment to employees

buy-back provision

represents total equity of a company

company stock

represents equity segments of equal value

company stock shares

rewards employees when the company exceeds minimum acceptable performance standards

companywide incentive

- includes worker representatives - reviews suggestions referred by the production committee - serves as communication links between management and employees - reviews the company's performance each month

companywide screening committee

award cash to employees, typically on a quarterly or annual basis

current profit sharing plan

- refers to an agreement between an employee and a company to render payments to an employee at a future date - hallmark of executive compensation packages

deferred compensation

- place cash rewards in trust accounts for employees - source of retirement income

deferred profit sharing plan