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CMS 2 > A9 - Aligning Strat., Talent, and Rewards: Pay-for-Perf. Plans > Flashcards

A9 - Aligning Strat., Talent, and Rewards: Pay-for-Perf. Plans Flashcards

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1
Q

payout awarded for exceptional perf., often on special projects or for perf. that so exceeds expectations as to be deserving of an add-on bonus

A

spot award

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2
Q

type of incentive plan that uses a calculated ratio that expresses the value of production required for each $ of total wage bill

A

rucker plan

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3
Q

gain-sharing plan where any savings derived from output prod. in fewer that the expected hours is shared by the firm and by the worker

A

improshare

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4
Q

incentive plan based on units of production per time period

A

piecework system

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5
Q

L/T incentive of an award of shares that actually are recieved only after the completion of a predefined service period

A

time-based restricted stock

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6
Q

incentive plan used when a worker’s bonus increases as time required to complete the task decreases

A

rowan plan

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7
Q

incentive plan that requires division of a task into simple actions and determination of the time required by an avg. skilled worker to complete each action

A

bedeaux plan

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8
Q

type of reward system that links increases in base pay to how highly EEs are rated on a perf. evaluation

A

merit pay system

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9
Q
  • pay that varies w/ some measure of indiv. or org. perf., such as:
    • merit pay
    • lump-sum bonus plans
    • skill-based pay
    • incentive plans
    • variable pay plans
    • risk sharing
    • success sharing
A

pay-for-perf. plans

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10
Q

inducement offered in advance to influence future perf. (sales commissions)

A

incentive

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11
Q

pay tied to productivity or some measure that can vary w/ the firm’s profitability

A

variable pay

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12
Q
  • an incentive plan in which EEs’ base wages are set below and specified level and incentive earnings are used to raise wages above the base
  • in good yrs, an EE’s incentive pay will more than make up for the 20% shortfall, giving the EE a pay premium
  • b/c EEs assume some of the risk, these plans pay more generously than success-sharing plans in good years
A

risk sharing (comp at risk or earnings at risk)

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13
Q
  • an incentive plan in which an EE’s base wage matches the mkt wage and variable pay adds on during successful yrs
  • b/c base pay is not reduced in bad yrs, EEs bear little risk
A

success sharing

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14
Q

Merit Pay

A
  • a reward that recognizes outstanding past perf.
    • increases in base pay; linked to how highly EEs are rated on a perf. eval.
  • can be given in lump-sum pmts or as increments to the base pay
  • commonly designed to pay different amts (often at different times) depending on the level of perf.
  • EEs are given perf. ratings which determines the size of the increase added into base pay
    • built in to base pay
  • critics: expensive and some believe that it doesn’t achieve the desired goal of improving EE and corp. perf.
  • proponents: there are studies that show it does have a small but significant impact on perf. - sorting factor
    • sorts out the ppl that don’t want to work for ER that uses perf. to set wages which turns around and leave those that are more productive and more responsive to merit rewards
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15
Q

ways to better manage merit pay systems

A
  • improving the accuracy of perf. ratings
  • allocating enough merit money to truly reward perf.
  • making sure the size of the merit increase differentiates across perf. levels
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16
Q

Lump-Sum Bonuses

A
  • pmt of entire increase (typically merit-based) at one time
  • not factored into base pay
    • any benefits tied to base pay do not increase
  • thought to be substitute for merit pay
  • based on EE or company perf., EEs receive an end-of-year bonus
  • since this must be earned every year, it is viewed as less of an entitlement than merit pay
  • cost considerably less than merit pay over the long run
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17
Q

Indiv. Spot Awards

A
  • one-time award for exceptional perf.
  • also called ‘spot bonus’
  • technically falls under pay-for-perf. plans
  • usually awarded out on exceptional perf., often on special projects or for perf. that so exceeds expectations as to be deserving of an add-on bonus
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18
Q

Individual Incentive Plans

A
  • incentive comp that is tied directly to obj. measures of indiv. prod.
  • studies show conclusive evidence that indiv. incentive plans increase perf. substantially
  • _1 common feature: an establ’d standard against which worker perf. is compared to determine the magnitude of the incentive pay - standard is compared against indiv. worker perf. _
  • don’t work for all plans b/c it is hard to find good, obj. measures
    • if the job is complex or has a chance to perform many tasks - then this would be hard
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19
Q

penalty for poor perf. rather than reward for good

A

reverse incentive plan

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20
Q

(2) dimensions that indiv. incentive plans can be broke down in to

A
  1. Method of Rate Determination
  2. Relationship b/w prod. level and pay
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21
Q

dimensions of indiv. incentive plans

Method of Rate Determination

A
  • plans set up a rate based either on units of prod. per time period or on time period per unit of prod.
  • deviations arise b/c tasks have differnt cycles of operations
    • S/T Tasks: those completed in a relatively short period of time; have as a standard a designated # of units to be produced in a given time period (units of prod. per time period)
    • L/T Tasks: entirely possible that only one task or some portion of it may be completed in a day; standard is typically set in terms of time required to complete one unit of prod. (time period per unit of prod.)
  • indiv. incentives are based on whether or not workers complete the task in the designated time period
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22
Q

dimensions of indiv. incentive plans

Relationship b/w prod. level and wages

A
  • tie wages to output on a one-to-one basis
    • wages are some constant function of prod.

OR

  • vary wages as a function of prod. level
    • prod. is some constant function of wages (which is the constant)
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23
Q

types of indiv. incentive plans

A
  • straight piecework system
  • standard hour plans
  • Bedeaux plans
  • Taylor Plan
  • Merrick Plan
  • Hansely 50-50 method
  • Rowan Plan
  • Gantt Plan
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24
Q

types of indiv. incentive plans

Straight Piecework System

A
  • rate determination is based on units of prod. per time period
  • wages vary directly as a constant function of prod. level
  • most frequently implemented incentive system
  • major adv’s:
    • easily understood by workers
    • more readily accepted than some of the other incentive systems
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25
Q

types of indiv. incentive plans

Standard Hour Plan

A
  • based on time per unit and tie incentives directly to level of output
  • rate determination is based on time period per unit of prod. and wages vary directly as a constant function of product level.
  • incentive rate is set based on completion of a task in some expected time period
  • more practical than straight piecework plans for long-cycle ops and jobs that are nonrepetitive and require numerous skills for completion
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26
Q

types of indiv. incentive plans

Bedeaux plan

A
  • provides variation on straight piecework and standard hr plans
  • instead of timing an entire task, a Bedeaux plan requires determination of the time req’d to complete each simple action of a task
  • workers receive a wage incentive for completing a task in less than the standard time
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27
Q

types of indiv. incentive plans

Taylor Plan

A
  • provides for variable incentives as a function of units of prod. per time period
  • provides 2 piecework rates that are estab’d for prod. above and below standard
  • rates are higher and lower than the reg. wage incentive level
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28
Q

types of indiv. incentive plans

Merrick Plan

A
  • indiv. incentive plan that provides for variable incentives as a function of units of prod. per time period
  • like the Taylor plan, but three piecework rates are set
    • High - for prod. exceeding 100% of standard
    • Medium - for prod. b/w 83 and 100% of standard
    • Low - for prod. less than 83% of standard
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29
Q

types of indiv. incentive plans

Halsey 50-50 Method

A
  • provides for variable incentives linked to a standard expressed as time period per unit of prod.
  • derives its name from the shared split b/w worker and ER of any savings in direct costs
    • the savings from completion of a task in less than the standard time are allocated 50-50 b/w the worker and company
  • an allowed time for a task is determined via time study
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30
Q

types of indiv. incentive plans

Rowan Plan

A
  • similar to Halsey plan
  • provides for variable incentives linked to a standard expressed as time period per unit of prod.
  • a worker’s bonus increases as the time req’d to complete the task decreases
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31
Q

types of indiv. incentive plans

Gantt Plan

A
  • provides for variable incentives linked to a standard expressed as time period per unit of prod.
  • standard time for a task is purposely set at a level requiring high effort to complete
  • any worker that fails to complete the task in the standard time is still guaranteed a presetab’d wage
  • if task is completed in standard time or less, earnings are pegged at 120% of the time saved
    • earnings incr. faster than prod. whenever standard time is met or exceeded
32
Q

Adv. of Indiv. Incentive Plans

A
  • substantial impact that raises productivity, lowers prod. costs, and incr. earnings of workers
  • less direct supervision is req’d to maintain reasonable levels of output than under pmt by time
  • in most cases, systems of pmt by results, if accompanied by improved org. and work measurement, enable labor costs to be estimated more accurately than under pmt by time
    • helps costing and budgetary control
33
Q

Disadv. of Indiv. Incentive Plans

A
  • greater conflict may emerge b/w EEs seeking to maximize output and mgrs concerned about deteriorating quality levels
  • attempts to introduce new tech. may be resisted by EEs concerned about the impact on prod. standards
  • reduced willingness of EEs to suggest new prod. methods for fear of subsequent incr. in prod. standards
  • incr’d complaints that equipment is poorly maintained, hindering EE efforts to earn larger incentives
  • incr’d turnover among new EEs discouraged by the unwillingness of experienced workers to cooperate in OTJ training
  • elevated levels of mistrust b/w workers and mgmt
34
Q

group incentive plans

A
  • start focusing on ppl working together
  • incentive plans that are based on some measure of group perf. rather than indiv. perf.
  • standard is set against which team perf. is compared to determine the magnitude of the incentive pay
  • there is interest in this, but studies find that most companies are not satisfied w/ the way their team comp systems work
35
Q

failures for team incentive schemes

teams come in too many varieties

A
  • F/T teams; P/T teams; temporary teams; teams across functions
  • hard to argue that there is a consistent type of comp plan.
36
Q

failures for team incentive schemes

“level problem”

A
  • if teams are defined at a very broad level, the motivational impact of incentives can be lost
  • thinking that your effort won’t be noticed if you are part of a big team with broad incentives
  • small work teams tend to show behaviors that are clearly unhealthy for overall corp. success due to competition
  • they hoard stars, afraid to waste time taking on new team members b/c of training it would take
  • awards cause bickering among the teams members b/c it is difficult to equalize for difficutly when assigning rewards
37
Q

failures for team incentive schemes

(3) C’s

A
  1. complexity
  2. control
  3. communication
38
Q

ways to still reward groups of EEs for their interdependent work efforts

A
  • productivity improvements
  • cust. satisfaction
  • financial perf.
  • quality of goods and services
  • huge range of options for different types of corp. objs.
39
Q

types of variable pay plans

A
  • cash profit sharing
  • stk ownership or options
  • balanced scorecard
  • productivity/gain sharing
  • team/group incentives
40
Q

types of variable pay plans

cash profit sharing

A
  • award based on org. profitability
  • shares a %age of profits (above a target level of profitability)
  • usually an annual payout
  • can be cash or deferred 401K
  • ADV:
    • simple, easily understood
    • low admin costs
  • DISADV:
    • profit influenced by many factors beyond EE control
    • may be viewed as an entitlement
    • limited motivational impact
  • Why?
    • to educ. EEs about bus. ops
    • to foster teamwork or “one-for-all” environ.
41
Q

types of variable pay plans

Stock ownership or options

A
  • award stk shares or options
  • ADV:
    • option awards have minimal impact on the fin. stmts of the company at the time they are granted
    • if properly communicated, can have powerful impact on EE behavior
    • tax deferral to EE
    • communicates org. priorities
  • DISADV:
    • indirect pay/perf. link
    • EEs may be req’d to put up money to exercise grants
  • Why?
    • to recruit top-quality EEs when org. has highly uncertain future or biotech
    • to address EE retention concerns
42
Q

types of variable pay plans

Balanced Scorecard

A
  • awards that combine fin. and operating measures for org., bus unit, and/or indiv. perf.
  • award pool based on achieving perf. targets
  • multiple perf. measures: nonfin/operating or fin.
  • ADV:
    • communicates org. priorities
  • DISADV:
    • perf. critiera may be met, but if fin. targets are not met, there may be a reduced payout or no payout at all
    • can be complex
  • Why?
    • to focus EEs on need to incr. s/h value
    • to focus EEs on org, division, and/or indiv. goals
    • to link payouts to a specific fin. and/or operational target
43
Q

types of variable pay plans

productivity/gain sharing

A
  • awards that share econ. benefits of improved productivity, quality, or other measurable results
  • focus on group, plant, dept, or division results
  • designed to capitalize on untapped knowledge of EEs
  • ADV:
    • clear perf-reward links
    • productivity and quality improvements
    • EE’s knowledge of bus. incrs.
    • fosters teamwork, cooperation
  • DISADV:
    • can be administratvely complicated
    • unintended effects, like decrease in quality
    • mgmt must “open the books”
    • payouts can occur even if company’s fin. perf. is poor
  • Why?
    • to support a major productivity/quality initiative
    • to foster teamwork environ.
    • to reward EEs for improvements in activities that they control
44
Q

types of variable pay plans

team/group incentives

A
  • awards determined based on team/group perf. goals or objs.
  • payout can be more frequent than annual and can also extend beyond the life of the team
  • payout may be uniform for team/group members
  • ADV:
    • reinforces teamwork and team ID/results
    • effective in stimulating ideas and prob-solving
    • minimizes distinctions b/w team members
    • may better reflect how work is performed
  • DISADV
    • may be difficult to isolate impact of team
    • not all EEs can be placed on a team
    • can be administratively complex
    • may create team competition
    • difficult to set equitable targets for all teams
  • Why?
    • to demonstrate an org. commitment to teams
    • to reinforce the need for EEs to work together to achieve results
45
Q

comparing group and indiv. incentive plans

A
  • Indiv - win “productivity” medal
  • group - often right for specific situations where team coordination is the issue.
46
Q

Choice b/w Indiv. and Group Plans

perf. measurement

A
  • Indiv:
    • good measures of indiv. perf. exist
    • task accomplishment not dependent on perf. of others
  • Group:
    • output is group collaborative effort
    • indiv. contribs to output cannot be assessed
47
Q

Choice b/w Indiv. and Group Plans

org. adaptability

A
  • Indiv:
    • indiv. perf. standards are stable
    • prod. methods and labor mix relatively constant
  • Group:
    • _perf. standards for indivs. chg to meet environ. pressures of relatively constant org. objs. _
    • prod. methods and labor mix must adapt to meet changing pressures
48
Q

Choice b/w Indiv. and Group Plans

org. commitment

A
  • Indiv:
    • commitment strongest to indiv.’s profession or superior
    • super viewed as unbaised and perf. standards readily apparent
  • Group:
    • high commitment to org. built upon sound communication of org. objs. and perf. standards
49
Q

Choice b/w Indiv. and Group Plans

union status

A
  • Indiv:
    • nonunion; unions promote equal treatment
    • competition b/w indivs. inhibits “fraternal” spirit
  • Group:
    • union or nonunion; unions less opposed to plans that foster cohesiveness of bargaining unit and which distribute rewards evenly across group
50
Q

(2) types of LARGE group incentive plans

A
  • gain-sharing plans: use operating measures to guage perf.
  • profit-sharing plans: use financial measures
51
Q

LARGE group incentive plans

Gain-Sharing Plans

A
  • use operating measures to gauge perf.
  • _common component for team-based comp. _
  • EEs share in gains
  • looks at cost components of the income ledger and IDs savings over which EEs have more impact (operational)
  • key elements of design:
    • **strength of reinforcement - what role should base pay assume relative to incentive pay? **
    • ***productivity standards: * what standard will be used to calc. whether EEs will receive an incentive payout? usually historical standards involving choice of a prior year’s perf. to use for comparison w/ current perf. **
    • sharing the gains split b/w mgmt and workers - must address the relative cuts b/w mgmt and workers of any profit or savings generated
    • scope of the formula - can vary in the scope of inclusions for both the labor inputs in the numerator and the productivity outcomes in the denominator
52
Q

Gain-Sharing Plans

key elements of design

A
  • _strength of reinforcement _
    • what role should base pay assume relative to incentive pay?
  • productivity standards
    • what standard will be used to calc. whether EEs will recieve an incentive payout?
    • usually historical standards involving choice of a prior year’s perf. to use for comparison w/ current perf.
    • must address the relative cuts b/w mgmt and workers of any profit or savings generated
  • sharing the gains split b/w mgmt and workers
    • part of the plan must address the relative cuts b/w mgmt and workers of any profit or savings generated
  • Scope of the formula
    • can vary in the scope of inclusions for both the labor inputs in the numerator and the productivity outcomes in the denominator
  • Great care must be exercised w/ such alt. measures
    • must ensure that behaviors reinforced actually affect the bottom line
    • best to encourage coorperative planning behaviors that result in more efficient work
  • perceived fairness of the formula
    • let EEs vote on whether implementation should go forward
  • ease of admin
    • incr’d complexities also require more effective communications and higher levels of trust among participants
  • production variability
    • one major prob is not setting targets properly which is usually due to the variability of the environ
53
Q

(3) types of gain-sharing formulas

A
  • Scanlon Plan
    • Input - payroll costs
    • output - net sales (plus or minus inventories)
  • Rucker Plan
    • Input - labor cost
    • output - value added
  • Improshare
    • Input - actual hrs worked
    • output - total standard value hrs
54
Q

type of gain-sharing formulas

Scanlon Plan

A
  • INPUT - payroll costs
  • OUTPUT - Net Sales ( + or - inventories)
  • designed to lower labor costs w/o lowering the level of a firm’s activity
  • incentives are derived as a function of the ratio b/w labor costs and sales value of prod (SVOP)
    • SVOP includes sales rev and the value of goods in inventory
55
Q

type of gain-sharing formulas

Rucker Plan

A
  • cost reductions due to EE efforts are shared w/ the EEs
  • it involves a somewhat more complex formula than a Scanlon plan for deterimning EE incentive bonuses
  • a ratio is calc’d that expresses the value of prod. req’d for each $ of total wage bill
56
Q

implementation of Scanlon/Rucker Plans

A

(2) major components:

  • productivity norm
    • requires effective measurement of base-yr data
    • requires acceptance by workers and mgmt of this standard for calc’g bonus incentives
  • effective worker committees
    • evaluate EE and mgmt suggestions for ways to improve productivity and/or cut costs
57
Q

similarities/differences b/w Scanlon and Rucker Plans

A
  • Differences:
    • Rucker plans tie incentives to a wide variety of savings, not just the labor savings focused on in Scanlon plans
    • greater flexibility may help explain why Rucker plans are more amenable to linkages w/ indiv. incentive plans
  • Similarities:
    • both focus attention on org. behavior variables
    • key is to promote faster, more intelligent, and more accepetable decisions through participation
58
Q

type of gain-sharing formulas

Improshare

A
  • Improved Productivity through Sharing
  • a standard is developed to ID the expected hrs req’d to produce an acceptable level of output
    • standard comes from either time-and-motion studies or base-period measurement
  • any savings arising from prod. of agreed-upon output in fewer-than-expected hrs are shared by the firm and the workers
59
Q

LARGE group incentive plans

Profit-Sharing Plans

A
  • plan that focuses on profitability as the standard for group incentive
  • (3) types of distribs.
    • cash or current distrib. - provide full pmt to participants soon after profits have been determined (quarterly or annually)
    • deferred plans - have portion of current profits credited to EE accts, w/ cash pmts made at time of retirement, disability, severance, or death
    • combo plans - incorporate aspects of both current and deferred options
60
Q

Earnings at Risk Plans

A
  • basically - Risk Sharing plans
  • any incentive plan could be an at-risk plan
  • base pay is reduced by some amt relative if it is a bad year for company
  • _shift risk of doing bus. from the company to the EE which can result in higher turnover for EEs that don’t want to be part of that. _
    • ESOPs
61
Q

ADV of group incentive plans

A
  • positive impact on org. and indiv. perf. of about 5 to 10% per year
  • easier to develop perf. measures than it is for indiv. plans
  • signals that cooperation, both w/in and across groups, is a desired behavior
  • teamwork meets w/ enthusiastic support from most EEs
  • may incr. participation of EEs in decision-making process
62
Q

DISADV of group incentive plans

A
  • line-of-sight may be lessened
    • EEs may find it more difficult to see how their indiv. perf. affects their incentive payouts
  • _May lead to incr’d turnover among top indiv. performers who are discouraged b/c they must share w/ lesser contribs. _
  • increases comp. risk to EEs b/c of lower income stability
    • may influence some apps to seek jobs in firms where base pay is a larger comp. component
63
Q

long-term incentives

A
  • inducements offered in advance to influence longer-rate (multiyr) results
  • usually offered to top mgrs and profs. to get them to focus on L/T org. objs.
  • focus on perf. beyond the 1-yr time line used for S/T plans
64
Q

types of L/T Incentive Plans

A
  • Level One: Low Risk/Reward
    • Time-based restricted stk
    • perf.-accelerated restricted stk
    • stk purch. plan
  • Level Two: Medium Risk/Reward
    • time-vested stk option
    • perf-vested restricted stk
    • perf-accelerated stk option
  • Level Three: High Risk/Reward
    • premium-priced stk option
    • indexed stk option
    • perf.-vested stk option
65
Q

type of L/T Incentive Plans

time-based restricted stk

A
  • Level 1: low risk/reward
  • an award of shares that actually are received only after the completion of a predefined service period
  • EEs who term. employment b4 the restriction lapses must return their shares to the company
66
Q

type of L/T Incentive Plans

perf-accelerated restricted stk

A
  • Level 1: Low Risk/Reward
  • restricted stk granted only after attainment of specified perf. objs.
67
Q

type of L/T Incentive Plans

Stk Purchase Plan

A
  • Level 1: Low Risk/REward
  • opportunity to buy shares of company stk either at prices below mkt price or w/ favorable financing
68
Q

type of L/T Incentive Plans

time-vested stk option

A
  • Level 2: Medium risk/reward
  • most stk options
  • the right to purch. stk at a specified price for a fixed time period
69
Q

type of L/T Incentive Plans

perf-vested restricted stk

A
  • Level 2: Medium Risk/Reward
  • this is a grant of stk to EEs upon attainment of defined perf. objs.
70
Q

type of L/T Incentive Plans

perf-accelerated stk option

A
  • Level 2: Medium Risk/Reward
  • an option w/ a vesting schedule that can be shortened if specific perf. criteria are met
71
Q

type of L/T Incentive Plans

premium-priced stk option

A
  • Level 3: High Risk/Reward
  • stk option that has an exercise price about MV at the time of grant
  • creates an incentive for EEs to create value for the company, see the stk price rise, and thus be eligible to purch. the stk
72
Q

type of L/T Incentive Plans

Indexed Stk Option

A
  • Level 3: High Risk/Reward
  • option whose exercise price depends on what peer companies’ experiences are w/ stk prices
  • if industry stk prices are generally rising, it would be difficult to attribute any similar rise in specific improvements beyond general industry improvement
73
Q

type of L/T Incentive Plans

perf-vested skt option

A
  • Level 3: High Risk/Reward
  • one that vests only upon the attainment of a predetermined perf. obj.
74
Q

broad-based option plans (BBOPs)

A
  • stk grants - company gives EEs share of stk over a designated time period
  • available to ALL EEs
  • strength of these plans = versatility
    • can either reinforce a stong emphasis on perf. or inspire greater commitment and retention of EEs
75
Q

mixing indiv. and group incentive plans

A
  • not uncommon
  • goal is to motivate indiv. behavior and to insure that EEs work together, to promote team and corp. goals
  • usually start w/ standard indiv. and group measures
  • variable pay level is ased on how well indivs. perform and how well the company does
  • payout is portioned out based on how well the indiv. worker does and the other portion is dependent on corporate perf.
76
Q

self-funding plan

A
  • these plans usually specifiy that payouts only occur after the company reaches a certain profit target
  • then variable payouts for indiv., team, and company perf. are triggered
  • usually favored when top mgmt doesn’t like to make payouts if the company loses money

CMS 2 (13 decks)

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