Ch 4: Incentive Pay Flashcards by Shevonnae Reid

What is Incentive Pay?

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

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Incentive pay fluctuates according to the:

A pre-established formula
Individual or group goals
Company earnings

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What are 3 other features of Incentive pay?

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

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Effective incentive pay systems are based on three
assumptions:

– 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

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Effective incentive pay systems are based on three
assumptions:

– 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

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

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

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What are the 3 incentive pay categories?

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

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

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

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What are the 4 main types of individual incentive plans?

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

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what are the adv of individual incentive pay plans

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

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individual Incentive Pay Program
Disadvantages

May promote inflexibility

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

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What is a group incentive plan?

Reward employees for their collective performance

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what are the 2 types of group incentive plans?

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.

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What are the types of teams?

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

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How are group incentives allocated?

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

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What are the 3 components of Gain sharing plans?

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

Employee involvement systems

Bonus

Go to text for explanation

Why was gain sharing plans made?

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

What are the 3 types of gain sharing plans?

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

What are the 3 components of Scanlon’s plan?

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

What ratio is Scanlon’s plans based on?

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

What formula does Rucker use?

Value-added formula

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

Value-added/Labour costs

Improshare plan formula

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

Advantages of Group Incentives

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

Disadvantages of Group Incentives

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

What are company-wide incentive plans

Rewards employees when company exceeds minimum acceptable performance standards

What are the two types of incentive plans

Profit sharing Employee stock options

What are profit-sharing plans and the two types

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

What re the 3 profit sharing formulas?

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

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

Equal payments Proportional Payments based on annual base earnings According to contribution(individual contribution would be hard to measure here)

Advantages of companywide profit sharing plans

Enable employees to share in companies’ profits – Allow companies greater financial flexibility

Disadvantages of Comapny-wide profit-sharing plans

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

What are employee stock ?

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

What do stock options encourage?

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)

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

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

Give 3 considerations for using incentive pay plans

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)

When are individual incentive plans appropriate?

-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

Why for company-wide incentives?

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.

What is the purpose of gain sharing pans

To improve worker productivity or lower labour costs