Reasons for Incentive Plans
Pay-for-Performance: Incentive Rewards
Chapter 10
Variable Pay
Tying pay to some measure of individual, group, or organizational performance. Emphasize a shared focus on organizational objectives. Create shared commitment in that every individual contributes to organizational performance and success.
Incentive Pay Programs
Type of Incentive Plans
INDIVIDUAL
Piecework Standard hour plan Bonuses Merit pay Lump-sum merit pay Incentive awards Sales incentives Incentives for professional employees Executive compensation
Linking to Organizational Objectives
ENTERPRISE
Profit sharing Stock options Employee stock ownership plans (ESOPs)
GROUP
Team compensation Scanlon Plan Rucker Plan Improshare Earnings-at-risk plans
Incentive Plan Purposes
Encourage employees to assume ownership of their jobs, thereby improving effort and job performance. There is evidence of a relationship between incentive plans and improved organizational performance.
Incentive Plan Effectiveness
Employee Opposition to Incentive Plans
Successful Incentive Plans
Production standards are set unfairly. Incentive plans create competition among workers. Payout formulas are complex and difficult to understand. Incentive plans cause friction between employees and management.
Employees are encouraged to participate. Employees see a clear connection between the incentive payments they receive and their job performance performance. Employees are committed to meeting the standards. Standards are challenging but achievable. Payout formulas are simple and understandable.
Effective Incentive Plan Administration
Individual Incentive Plans
Grant incentives based on individual performance differences. Have the financial resources to reward performance. performance Set clearly defined, accepted, and challenging yet achievable performance standards. Use an easily understood payout formula
Straight Piecework - An incentive plan under which employees receive a certain rate for each unit produced. 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.
Piece Rate Example
60 minutes (per hour) 12 minutes(standard time per unit)
Piecework: The Drawbacks
= 5 units per hour
$7.50 (hourly rate) 5 units (per hour)
= $1.50 per unit
Individual contributions can be difficult measure. Not easily applied to work that is highly mechanized with little employee control over output. Piecework may conflict with organizational culture (teamwork) and/or group norms (rate busting). When quality is more important than quantity.
Individual Incentive Plans (Continued)
Bonuses
Standard Hour Plan - An incentive plan that sets pay rates based on the completion of a job in a predetermined standard time.
If employees finish the work in less than the p y expected time, their pay is still based on the standard time for the job multiplied by their hourly rate.
Bonus - Incentive payment that is supplemental to the base wage for cost reduction, quality improvement, or other performance criteria. Spot bonus - Unplanned bonus given for employee effort unrelated to an established performance measure.
Merit Pay
Problems with Merit Raises
Merit Pay Program (merit raise) - Links an increase in base pay to how successfully an employee achieved some objective p performance standard. Merit Guidelines - Guidelines for awarding merit raises that are tied to performance objectives.
Employees may not believe that their compensation is tied to effort and performance; they may be unable to p y differentiate between merit pay and other types of pay increases. There may be a lack of honesty and cooperation between management and employees.
Motivation Through Merit Raises
Lump-Sum Merit Pay
Develop employee confidence and trust in performance appraisal. Establish job-related performance criteria. Separate merit pay from regular pay. pay Distinguish merit raises from cost-of-living raises. Withhold merit payments when performance declines.
Lump-sum Merit Program - Program under which employees receive a year-end merit payment, which is not added to their base p y pay. Advantages:
Provides financial control by maintaining annual salary expenses and not escalating base salary levels. Provides a clear link between pay and performance.
Incentive Awards and Recognition
Sales Incentives
Sales Incentive Plans
Awards - Often used to recognize productivity gains, special contributions or achievements, and service to the organization. Noncash Incentive Awards - Are most effective as motivators when the award is combined with a meaningful employee recognition program.
Straight Salary Straight Commission Salary and Commission Combinations
Straight Salary Plan
Straight Commission Plan
Straight Salary Plan - Compensation plan that permits salespeople to be paid for performing various duties that are not reflected immediately in their sales volume.
Encourages building customer relationships. Provides compensation during periods of poor sales.
Straight Commission Plan - Compensation plan based upon a percentage of sales. Draw - is a cash advance that must be paid back as commissions are earned. earned Disadvantage of straight commission incentive:
Emphasis is on sales volume rather than on profits.
Combined Salary and Commission Plan
Incentives for Professional Employees
Managerial and Executive Incentives
Bonuses and merit increases DoubleDouble-track wage systems Performance incentive bonuses Profit sharing and stock ownership Executive perquisites (perks)
Combined Salary and Commission Plan - A compensation plan that includes a straight salary and a commission component ( (leverage). g ) Advantages:
Combines the advantages of straight salary and straight commission forms of compensation. Offers greater design flexibility
Executive Compensation
Types of Long-Term Incentive Plans
Stock Price Appreciation Plans Stock Options Stock Appreciation Rights (SARS) Stock P h St k Purchase Phantom Stock Restricted Stock/Cash Plans Restricted Stock Restricted Cash Performance-Based Plans Performance Units Performance Shares Formula-value Grants Dividend Units
The Executive Pay Package:
Base salary Short-term incentives or bonuses Long-term incentives or stock plans Perquisites (perks)
Executive Compensation: Ethics and Accountablility
Executive Compensation Reform
Incentive payments are excessive compared with return to stockholders. Time periods for judging and rewarding performance are too short short. Benefits do not relate closely to individual performance.
The Internal Revenue Service (IRS) is looking for tax-code violations in executive pay packages and will make executive pay a part of corporate audit. The Sec rities and E change Commission Securities Exchange ruled that companies on the New York Stock Exchange and NASDAQ must obtain shareholder approval before granting stock options and other equity compensation to executives and employees.
Executive Compensation Reform (Continued)
Group Incentive Plans
Corporate policy changes governing how compensation committees structure executive pay packages. Restraints on stock options making it harder for executives to cash out and receive windfall cash sums.
Team Incentive Plans Compensation plans where all team members receive an incentive bonus payment when production or service t h d ti i standards are met or exceeded.
Establishing Team Incentive Payments Set performance measures upon which incentive payments are based
Group Incentive Plans (Continued)
Employee Bonus and Gainsharing Plans
Scanlon Plan Rewards come from employee participation in improving productivity and reducing costs. Shared rewards come from the difference between labor costs and sales value of production. Gainsharing based on increases in productivity of the standard hour output of work teams.
Gainsharing Plans - Programs under which both employees and the organization share the financial gains according to a p predetermined formula that reflects improved p productivity and profitability.
Rucker Plan (SOP)
Improshare
Enterprise Incentive Plans
Profit Sharing - Any procedure by which an employer pays, or makes available to all regular employees, in addition to their base pay, current or deferred sums based upon the profits of the enterprise enterprise. Challenges:
Enterprise Incentive Plans (Continued)
Stock Options - Granting employees the right to purchase a specific number of shares of the companys stock at a guaranteed price (the option price) during a designated time period.
Agreement over division of profits between company and employees. Possibility of no payout due to financial condition of company.
The value of an option is subject to stock market conditions at the time that option is exercised.
Enterprise Incentive Plans (Continued)
Employee Stock Ownership Plans
Rewards and Risks of ESOPS
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 its employees.
Advantages
Retirement benefits Pride of ownership Deferred taxes
Disadvantages
Liquidity and value Single funding basis Not insured
Stock bonus plans are funded by direct employer contributions of its stock or cash to purchase its stock.
