Ch 4: Incentive Pay

Question 1

What is Incentive Pay?

Answer 1

A non-permanent increase added to base pay as a reward for achieving a specified goal/objective

Question 2

Incentive pay fluctuates according to the:

Answer 2

A pre-established formula
Individual or group goals
Company earnings

Question 3

What are 3 other features of Incentive pay?

Answer 3

• Added to base pay on a non-recurring basis
• Controls Costs:Can replace annual merit, seniority pay increases, or fixed salaries and only pay out when company has an extraordinary profit gains

-Motivates employees through explicit goal setting

Question 4

Effective incentive pay systems are based on three
assumptions:

Answer 4

– Individual employees and work teams differ in how much they contribute to the company, both in what they do as well as in how well they do it

– The company’s overall performance depends on a large
degree on the performance of individuals and groups
within the company

– To attract, retain, and motivate high performers and to
be fair to all employees, a company needs to reward employees on the basis of their relative performance

Question 4

Effective incentive pay systems are based on three
assumptions:

Answer 4

– Individual employees and work teams differ in how much they contribute to the company, both in what they do as well as in how well they do it

– The company’s overall performance depends on a large
degree on the performance of individuals and groups
within the company

– To attract, retain, and motivate high performers and to
be fair to all employees, a company needs to reward employees on the basis of their relative performance

Question 5

What are the differences between traditional pay methods and incentive pay?

Answer 5

Traditional: Generally includes annual salary or hourly wage

Increased periodically on seniority or merit basis with permanent increase in pay

Incentive: Increases only after attainment of goal

Non-permanent
can reward individuals, teams, or whole companies

Question 6

What are the 3 incentive pay categories?

Answer 6

Individual: reward employees whose work is performed individually

Group: promotes supportive, collaborative behaviour

Company-wide: Ties employee compensation to company’s performance over a short time frame

Question 7

State 3 performance measures for individual, group and company-wide incentive plans

Answer 7

Individual: quantity of output, quality of output, monthly sales

Group: Material cost savings, customer satisfaction, service cost savings (like utilities)

Company-wide: Customer satisfaction, Operational efficiency, safety/occupational injury(reduction)

Financial: Revenue, earnings per share, operating income, revenue growth

Question 8

What are the 4 main types of individual incentive plans?

Answer 8

Piecework plans: reward workers for every item produced
over a designated production standard

Management incentive plans: award bonuses to
managers when they meet or exceed objectives based on
sales, profit, production, or other measures for their division

Behavioural encouragement: employees receive
payments for specific behavioural accomplishments- work attendance, follow safety protocols

Referral plans: employees receive bonuses for
recruitment of highly qualified employees

Question 9

what are the adv of individual incentive pay plans

Answer 9

• Helps relate pay to performance
• Promotes equitable distribution of compensation
• Instills an ownership mentality
• Compatible with America’s individualistic cultur

Question 10

individual Incentive Pay Program
Disadvantages

Answer 10

May promote inflexibility

• Measurement problems
• May promote undesirable behaviors- competition that produces a reduction in quality

Question 11

What is a group incentive plan?

Answer 11

Reward employees for their collective performance

Question 12

what are the 2 types of group incentive plans?

Answer 12

Team-based or small group- A small group of employees shares a financial reward when a specific objective is met- like individual, only that it is based on group objective.

– Gain sharing: A group of employees, generally a department or work unit, is
rewarded for productivity gains, customer satisfaction, lower costs etc.

Question 13

What are the types of teams?

Answer 13

Work (process) teams- perform work of organization on an ongoing basis-membership relatively permanent- like Hr dept doing their functional tasks.

More effective when members can cover for each other

Project teams- people coming together to work on a one-time project:
Like cross-functional teams

Parallel Teams/Task forces: assigned to work on a specific task in addition to normal work duties (seems continuall- verify)- teamwork is temporary and ends in a recommendation to top management.

Used to evaluate systems and processes, select new tech, improve existing products

Question 14

How are group incentives allocated?

Answer 14

Equally- reinforces cooperation except when members perceive differences in member’s performance

Based on individual’s contribution to team’s performance- can cause one to focus on own performance than the group
As a compromise- some base it partly on individual performance and part on group

Based on ratio of individual base pay to base pay of group- based on assumption that one with higher base pay contributes more to group

Question 15

What are the 3 components of Gain sharing plans?

Answer 15

Leadership Philosophy- cooperative org. climate that promotes high level of trust, open communication, and participation

Employee involvement systems

Bonus

Go to text for explanation

Question 16

Why was gain sharing plans made?

Answer 16

all employees could benefit financially from productivity improvements resulting from the suggestion systems

Question 17

What are the 3 types of gain sharing plans?

Answer 17

Scanlon plan- Joseph scanlon- made to lower labour costs through suggestionand send it in for review. If efficiency occurs, then they get a share of the gains

Rucker Plan- Allan W. Rucker
in 1933

Improshare- Mitchell Fein in 1973, Improshare—Improved Productivity through Sharing: based on time savings per unit, rather than cost savings

Question 18

What are the 3 components of Scanlon’s plan?

Answer 18

Empahsis on teamwork to reduce costs, assisted by management-supplied info on production costs

Suggestion systems that route cost saving ideas through labour-management committee

Monetary reward based on productivity improvements to encourage employee involement

Question 19

What ratio is Scanlon’s plans based on?

Answer 19

Formulas are usually based on the ratio between labour costs and Sales Value of Production (SVOP)

SVOP= sum of sales revenue plus value of goods in inventory

Smaller rations mean that labour costs are lower relative to SVOP

Question 20

What formula does Rucker use?

Answer 20

Value-added formula

Value-added= SP of product- the cost of raw materials

Value-added/Labour costs

Question 21

Improshare plan formula

Answer 21

Labour hour ratio formula

Standard is determined using historical data to find # labour hours needed to complete job. Productivity is the measured as: standard labour hours: actual labour hours

Workers receive bonuses on weekly basis

Question 22

Advantages of Group Incentives

Answer 22

• Companies can more easily develop performance
  measures for group incentive plans than for individual
  incentive plans
• Greater group cohesion

Question 23

Disadvantages of Group Incentives

Answer 23

May lead to higher employee turnover because of the
free-rider effect

• Members may feel uncomfortable with the fact that other
  members’ performance influences their compensation
  level

Question 24

What are company-wide incentive plans

Answer 24

Rewards employees when company exceeds minimum
acceptable performance standards

Question 25

What are the two types of incentive plans

Answer 25

Profit sharing
Employee stock options

Question 26

What are profit-sharing plans and the two types

Answer 26

Profit-sharing- rewarding employees with a portion of profit

Current profit-sharing plans:
-Award cash to employees typically on a quarterly/annual basis

Deferred profit-sharing plans
-Place cash awards in trust accounts for employee

Question 27

What re the 3 profit sharing formulas?

Answer 27

Fixed first-dollar-of profits formula
– Ex: 7% of corporate profits
* Graduated first-dollar-of profits formula

– Ex: 3% of the first $8 million of profits and 6% of the
profits in excess of that level

• Profitability threshold formula- Have minimum (at that point shareholders get paid first), and maximum(anything over that is attributed to other factors than employee productivity- new tech

Question 28

What are the 2 distribution methods of company-wide methods?

Answer 28

Equal payments
Proportional Payments based on annual base earnings

According to contribution(individual contribution would be hard to measure here)

Question 29

Advantages of companywide profit sharing plans

Answer 29

Enable employees to share in companies’ profits

– Allow companies greater financial flexibility

Question 30

Disadvantages of Comapny-wide profit-sharing plans

Answer 30

Can undermine the economic security of employees

– May fail to motivate employees if they do not see a direct link between their efforts and profits- like assembly line worker who only does the trims- a small part of the process

Question 31

What are employee stock ?

Answer 31

These give workers rights to purchase share of company

You can purchase stock after a pre-determined period lapses. Usually no more than 5 years

Question 32

What do stock options encourage?

Answer 32

Encourage productivity as workers know that if they make more profit it will increase the value of shares (so you make money when you sell it at the high price)

Question 33

Employee stock option plans just represent one stock plan, what are the other 2?

Answer 33

Employee stock ownership plans- place company stock in trust accounts for employee (similar to deferred profit sharing)

Stock compensation plans- type of deferred compensation for executives

Question 34

Give 3 considerations for using incentive pay plans

Answer 34

Whether it will be based on individual or group performance

Replace or complement traditional pay

Risk- riskier for higher level employees, also consider how much control they have over outcome. Incentive programme will fail if the goal is too hard to reach

Appropriate for time horizon goals- Usually have short-term goals for lower level and long-term goals for higher level(as their stakes are more complex)

Question 35

When are individual incentive plans appropriate?

Answer 35

-When individual performance can be measured objectively

-When workers have control over outcomes

• appropriate when they do not create a level of unhealthy competition among workers that ultimately leads to poor quality

Question 36

Why for company-wide incentives?

Answer 36

ease workers’ dissatisfaction with low pay and to change
their beliefs that company management paid workers substandard wages while earning substantial profits.

-management believed that workers would be less likely to challenge
managerial practices if they received a share of company profits.

Question 37

What is the purpose of gain sharing pans

Answer 37

To improve worker productivity or lower labour costs