Chapter 11 Flashcards
Pay-for-performance plans signal a movement away from what?
> Signal a movement away from entitlement—sometimes a very slow movement—toward pay that varies with some measure of individual or organizational performance.
What pay components (that we have already discussed) aren’t included in the pay-for-performance category?
> base pay and across-the-board increases
Is merit pay a pay-for-performance plan? If so, how often is it used in Canada?
> Merit pay is a pay-for-performance plan used for more than 80% of employees in Canada.
What used to be primarily a compensation tool for top management is gradually becoming more prevalent for what other employees?
> more prevalent for lower-level employees too
What are the 4 variable pay plans most often used in Canada?
1) Individual cash bonus / incentive
2) Team-based incentive
3) Profit-sharing
4) Gain-sharing
The prevalence of variable pay can be traced to two trends - what are they?
1) First, global competition forces North American firms to cut costs and/or increase productivity.
2) Second, today’s fast-paced business environment means that workers must be willing to adjust what they do and how they do it.
Are pay-for-performance plans short-term, long-term, individual, or group? can they be all?
> Pay-for-performance plans can be short term or long term, and can be individual or group plans.
> Short-term incentive plans are based on attainment of financial, operational, and individual goals during a period of 12 months or less.
> Long-term plans are based on attainment of goals over a period of longer than 12 months.
> These goals can be individual goals, or something a group of people have to work together to achieve.
What sector are pay-for-performance plans most prevalent in?
> They are more prevalent in the private sector than in the public sector.
> According to the Conference Board of Canada, over 90% of private sector organizations have one or more short-term incentive plans versus about only 46% of public sector organizations.
> Similarly, almost half of private sector organizations have long-term incentive plans in place, versus only 11% in public sector organizations.
What is a merit pay system?
> A merit pay system links increases in base pay (called merit increases) to how highly employees are rated on a subjective performance evaluation.
What is a key feature of merit pay?
> A key feature of a merit pay increase is that, unlike other variable pay programs (short-term or long-term), the increase is added into base pay.
Merit pay has its detractors, who argue what about it?
> Merit pay has its detractors, who argue that it is expensive and that it doesn’t achieve the desired goal: improving employee and corporate performance.
> Some have also argue that sometimes merit pay based on performance are too small to motivate performance.
In practice, tying pay to performance requires three things.
1) First, there must be some definition of performance. Whether performance is measured by behaviours, competencies, or traits, there must be agreement that higher levels of performance will have a positive impact on achieving corporate strategic objectives.
2) Second, there must be a continuum that describes different levels from low to high on the performance measure, and
3) third, there must be decisions regarding how much of a merit increase will be given for different levels of performance.
A more complex guideline ties pay not only to performance but also to what?
> Position in the pay range
What are the two patterns that are evident in the position pay range merit guideline?
1) First, as would be expected in a pay-for-performance system, lower performance is tied to lower pay increases.
2) The second relationship is that pay increases at a decreasing rate as employees move through a pay range. (For the same level of performance, employees low in the pay range will receive higher percentage increases than employees who have progressed farther through the range.)
Once salary budgets are allocated to each subunit manager, they become a constraint - what does this mean?
> a limited fund of money that each manager has to allocate to their employees.
Typically, merit increase guidelines about what decisions?
> Typically, merit increase guidelines are used to help managers make these allocation decisions.
> Merit increase grids help ensure that different managers grant consistent increases to employees with similar performance ratings and in the same position in their ranges.
Designing merit guidelines involves answering four questions. what are they?
1) First, what should the poorest performer be paid as an increase?
2) The second question involves average performers. How much should they be paid as an increase?
3) Third, how much should the top performers be paid?
4)
What can be used to differ the size of pay differentials?
> matrices can differ in the size of the differential between levels of performance.
> A larger jump between levels would signal a stronger commitment to recognizing performance with higher pay increases. (larger differentials also cost more!)
What is the goal in merit pay differentials?
> The goal is to continuously adjust employee pay so that it is appropriately positioned relative to the market—an employee with a consistently high performance rating should move above the market median and range midpoint, whereas an employee with consistently average performance should be near the range midpoint.
Lump-sum bonuses differ from merit pay increases in that:
> in that employees receive an end-of-year bonus that does not build into base pay.
How are lump-sum bonuses viewed?
> Because employees must earn this increase every year, it is viewed less as an entitlement than as merit pay.
How do lump-sum pay bonuses provide employers with a way to make pay vary more in line with variations in company performance?
> It also provides employers a way to make pay vary more in line with variations in company performance by reducing fixed salary costs that can grow rapidly through merit pay increase.
It should come as no surprise that cost-conscious firms report switching to which bonus plans?
> It should come as no surprise that cost-conscious firms report switching to lump-sum bonuses.
By giving lump-sum bonuses for several years, a company is essentially doing what?
> By giving lump-sum bonuses for several years, a company is essentially freezing base pay.
What are individual spot awards used for?
> The mechanics are simple: someone in the organization alerts top management to the exceptional performance.
> payouts are awarded for exceptional performance, often on special projects or for performance that so exceeds expectations as to be deserving of an add-on bonus.
How do individual incentive plans differ from merit pay/lump-some bonuses?
> These plans differ from the above because they offer a promise of pay for some objective, pre-established level of future performance.
> A standard is established against which worker performance is compared to determine the magnitude of the incentive pay.
The first dimension on which incentive systems vary is in what?
> The first dimension on which incentive systems vary is in the method of rate determination. Plans either set up a rate based on units of production per time period or on time period per unit of production.
The second dimension on which individual incentive systems vary is what?
> . is the specified relationship between production level and wages.
> The first alternative is to tie wages to output on a one-to-one basis so that wages are some constant function of production. By contrast, some plans vary wages as a function of production level.
The most frequently implemented incentive system is what?
> The most frequently implemented incentive system is a straight piecework plan.
> Rate determination is based on units of production per time period, and wages vary directly as a function of production level.
> The major advantages of this type of system are that it is easily understood by workers and, perhaps consequently, more readily accepted than some of the other incentive systems.
What is the standard hour plan?
> Another relatively common plan, called a standard hour plan, sets standards based on time per unit and ties incentives directly to level of output. A standard hour plan is a generic term for plan that set the incentive rate based on the completion of a task in some expected time period.
What two plans provide for variable incentives as a function of units of production per time period?
> Both the Taylor plan and the Merrick plan provide different piece rates, depending on the level of production relative to the standard.
What is the Taylor Plan?
> The Taylor plan establishes two piecework rates. One rate goes into effect when a worker exceeds the published standard for a given time period. This rate is set higher than the regular wage incentive level. A second rate is established for production below standard, and this rate is lower than the regular wage.
How does the merrick plan operate the same way as the Taylor plan?
> The Merrick system operates the same way (establishing multiple peicework rates) except that three piecework rates are set: (1) high—for production exceeding 100% of the standard; (2) medium—for production between 83% and 100% of the standard; and (3) low—for production less than 83% of the standard.
What is the halsey 50-50 method?
> Incentive plans that provide for variable incentives linked to a standard expressed as time period per unit of production. One example is the Halsey 50–50 method.
What occurs under the rowan plan? When does the incentive increase under this plan?
> Under the Rowan plan, an employer and employee share in savings resulting from work completed in less than the standard time. The worker’s incentive increases as the time require to complete the task decreases.
What occurs under the Gantt plan?
> Under the Gantt plan, the standard time for a task is purposely set a a level requiring a very high level of effort to complete.
> Any worker who fails to complete the task in the standard time is guaranteed a pre-established wage.
> However, for any task completed in the standard time or less, wages are pegged at 120% of the time saved.
> Consequently workers’ wages increase faster than production whenever standard time is met or exceeded.
Individual incentive plans, with all its best intentions, can sometimes lead to what?
> Individual incentive plans, with all its best intentions, can sometimes lead to unexpected and undesired behaviours.
> the incentive system often focuses only on one small part of what it takes for the company to be successful
What are three main advantages of Individual Incentive Plans?
- Motivates employees, raises productivity, lowers production costs, and increases earnings of workers.
- Less direct supervision is required to maintain reasonable levels of output than under payment by time.
- In most cases, systems of payment by results, if accompanied by improved organizational and work measurement, enable labour costs to be estimated more accurately than under payment by time. This helps costing and budgetary control.
What are six main advantages of Individual Incentive Plans?
- Greater conflict may emerge between employees seeking to maximize output and managers concerned about deteriorating quality levels.
- Attempts to introduce new technology may be resisted by employees concerned about the impact on production standards.
- Reduced willingness of employees to suggest new production methods for fear of subsequent increases in production standards.
- Increased complaints that equipment is poorly maintained, hindering employee efforts to earn larger incentives.
- Increased turnover among new employees discouraged by the unwillingness of experienced workers to cooperate in on-the-job training.
- Elevated levels of mistrust between workers and management.
Perhaps the longest-running success with individual incentives, going back to before World War I, belongs to what company?
> belongs to a company called Lincoln Electric in Cleveland, Ohio.
What is the basic concept of group incentive plans?
> The basic concept is to establish a standard against which team performance is compared to in order to determine the magnitude of the incentive pay.
Most companies with group incentive plans set team performance standards based on what measures?
> based on productivity improvements (38% of plans), customer satisfaction measures (37%), financial performance (34%), or quality of good and services (28%).
What problem do group plans suffer from and what does it cause?
> Group plans suffer from what is called the “free rider” problem, in which at least one person doesn’t carry his or her share of the load.
> Top-performing employees quickly grow disenchanted with having to carry free riders, and leave.
How can the free rider problem be lessened?
> Research on free riders suggests that the problem can be lessened through use of good performance measurement techniques.
> Specifically, free riders have a harder time loafing when there are clear performance standards.
Failures of team incentive schemes can be attributed to at least five causes. What are those 5?
1) First, teams come in many varieties - therefore it is hard to find one best type of incentive plan, and it is often necessary to look at different compensation approaches for different types of teams.
2) The “level problem” or “line of sight” problem. If teams are defined at a very broad level—say, the whole organization—much of the motivational impact of incentives can be lost.
> The last three major problems with team compensation involve the three Cs: complexity, control, and communications.
What are gain-sharing plans?
> As its name implies, employees share in the gains in these type of group incentive plans.
What are the 7 key elements in designing a gain-sharing plan:
1) Strength of reinforcement: what behaviours should be reinforced (incentive pay) and how does that differ from base pay
2) Productivity standards: What standard will be used to calculate whether employees will receive an incentive payout? (almost all are historical standards)
3) Sharing the gains between management and workers: Part of the plan must address the relative share paid to management and workers of any savings generated.
4) Scope of the formula for how the amount is calculated: Formulas can vary in the scope of inclusions for both the labour inputs in the numerator and the productivity outcomes in the denominator.
5) Perceived fairness of the formula: One way to ensure that the plan is perceived as fair is to let employees vote on whether implementation should go forward + union participation
6) Ease of administration: Sophisticated plans with involved calculations can become too complex for existing company information systems.
7) Production variability: One of the major sources of problems in group incentive plans is failure to set targets properly.
Scanlon plans are designed to do what and how are incentives derived from this?
> Scanlon plans are designed to lower labour costs without lowering the level of a firm’s activity. Incentives are derived as a function of the ratio between labour costs and sales value of production (SVOP).
Essentially, what is the ratio of a rucker plan?
> a ratio is calculated that expresses the value of production required for each dollar of total wage bill.
There are two major components vital to the implementation and success of a Scanlon or Rucker plan: what are they?
> (1) a productivity norm and
> (2) effective worker committees.
Scanlon and Rucker plans have the best chance for success in which companies?
> These plans have the best chances for success in companies with competent supervision, cooperative union-management attitudes, strong senior management interest and participation in the development of the program, and management who are open to criticism and willing to discuss different operating strategies.
What are Improshare (IMproved PROductivity through SHARing) plans?
> a standard is developed that identifies the expected hours required to produce an acceptable level of output.
> This standard comes either from time and motion studies conducted by industrial engineers or from a base period measurement of the performance factor.
> Any savings arising from production of the agreed-upon output in fewer than the expected hours is shared by the firm and the worker.
What does profit sharing continue to be used?
> This standard comes either from time and motion studies conducted by industrial engineers or from a base period measurement of the performance factor.
> Any savings arising from production of the agreed-upon output in fewer than the expected hours is shared by the firm and the worker.
What is a downsizing to profit sharing?
> On the downside, most employees don’t feel their jobs have a direct impact on profits. Furthermore, even if workers are able to improve operating efficiency, there is no guarantee that profits will automatically increase. Strength of the market, global competition, even the way we enter accounting information into the balance sheet all can affect profits and serve to disenchant workers.
What is the trend in variable design in terms of success-sharing plans?
> The trend in variable pay design is to combine the best of gain-sharing and profit-sharing plans.4
What is earnings at risk?
> Earnings-at-risk, as its name implies, is a risk-sharing plan where base pay is reduced by some amount relative to the level that would be offered in in a success-sharing plan.
> In an incentive scheme that includes an earnings-at-risk plan, base pay is reduced if the company does poorly.
What is a key design element of the earnings at risk plan? What does the success hinge on?
> A key design element is to identify possible risks and incorporate design features that minimize them.
> It’s clear that the long-term success of at-risk plans depends on employee acceptance.
What are results for earnings at risk plans?
> At-risk plans appear to be met with decreases in satisfaction with both pay in general and the process used to set pay.
> In turn, this can result in higher turnover.
What are the 5 advantages of group incentive plans?
- Positive impact on organization and individual performance of about 5% to 10% per year.
- Easier to develop performance measures than for individual plans.
- Signal that cooperation, both within and across groups, is a desired behaviour.
- Teamwork meets with enthusiastic support from most employees.
- May increase participation of employees in decision-making process.
What are the 3 disadvantages of group incentive plans?
- Line of sight may be lessened; that is, employees may find it more difficult to see how their individual performance affects their incentive payouts.
- May lead to increased turnover among top individual performers who are discouraged because they must share with lesser contributors.
- Increases compensation risk to employees because of lower income stability. May influence some applicants to apply for jobs in firms where base pay is larger compensation component.
When should we use individual or group incentive plans?
> Individual incentives may yield higher productivity gains, but group incentives are often right in situations in which team coordination is critical.
Under performance measurement, when should you choose an individual plan? How about a group plan?
> IP: Good measures of individual performance exist. Task accomplishment not dependent on performance of others.
> GP: Output is group collaborative effort. Individual contributions to output cannot be assessed.
Under organizational committment, when should you choose an individual plan? How about a group plan?
> IP: Commitment strongest to individual’s profession or superior. Supervisor viewed as unbiased and performance standards readily apparent.
> GP: High commitment to organization built upon sound communication of organizational objectives and performance standards.
Under organizational adaptability, when should you choose an individual plan and how about a group plan?
IP: Individual performance standards are stable. Production methods and labour mix are relatively constant.
GP: Performance standards for individuals change to meet environmental pressures on relatively constant organizational objectives. Production methods and labour mix must adapt to meet changing pressures
Under union status, when should you choose an individual plan and how about a group plan?
IP: Non-union. Unions promote equal treatment. Competition between individuals inhibits “fraternal” spirit.
GP: Union or non-union. Unions less opposed to plans that foster cohesiveness of bargaining unit and that distribute rewards evenly across group.
What is a cash profit sharing plan?
> Award based on organizational profitability
> Shares a percentage of profits (typically above a target level of profitability)
> Usually an annual payout
> Can be cash or deferred
What are the advantages and disadvantages of a cash profit sharing plan?
A: Simple, easily understood, low administrative costs
D: Profit influenced by many factors beyond employee control, May be viewed as an entitlement, Limited motivational impact
Why are cash profit sharing profit plans?
> To educate employees about business operations
> To foster teamwork or “one for all” environment
What does a stock ownership or option plan do?
> Award of stock shares or options
What are advantages and disadvantages of stock ownership plans or options?
A > Option awards have minimal impact on the financial statements of the company at the time they are granted
A > If properly communicated, can have powerful impact on employee behaviour
A > Tax deferral to employee
D > Indirect pay/performance link
D > Many factors outside individual influence affect stock price
D > Employees may be required to put up money to exercise grants
Why do we use stock ownership/share plans?
> To recruit top-quality employees when organization has highly uncertain future (e.g., start-ups, high-tech or biotech industries)
> To address employee retention concerns
What do productivity/gain sharing plans do?
> Awards that share economic benefits of improved productivity, quality, or other measurable results
> Focus on group, plant, department, or division results
> Designed to capitalize on untapped knowledge of employees
What are advantages and disadvantages of productivity/gain sharing plans?
A: Clear performance– reward links
A: Productivity and quality improvements
A: Employee’s knowledge of business increases
A: Fosters teamwork, cooperation
D: can be administratively complicated
D: Unintended effects, such as a drop-off in quality
D: Management must “open the books”
D: Payouts can occur even if company’s financial performance is poor
Why do we use productivity and gain sharing plans?
> To support a major productivity/quality initiative (such as TQM or re-engineering)
> To foster teamwork environment
> To reward employees for improvements in activities that they control
What do team/group incentives do?
> Awards determined on the basis of team/group performance goals or objectives
> 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
What are advantages and disadvantages of team/group incentive plans?
A: Reinforces teamwork and team identity/results
A: Effective in stimulating ideas and problem solving
A: Minimizes distinctions between team members
A: May better reflect how work is performed
D: May be difficult to isolate impact of team
D: Not all employees can be placed on a team
D: Can be administratively complex
D: May create team competition
D: Difficult to set equitable targets for all teams
Why do we use team/group incentive plans?
> To demonstrate an organizational commitment to teams
> To reinforce the need for employees to work together to achieve results
Recent explosive growth in long-term plans appears to be spurred in part by whay?
> appears to be spurred in part by a desire to motivate longer-term value creation.
What are Stock option plans?
> Stock option plans are stock grants in which the company gives employees the rights to purchase shares of the company stock at a specified (exercise) prices over a designated time period.
What are broad based stock option plans?
> Stock option plans are stock grants in which the company gives employees the rights to purchase shares of the company stock at a specified (exercise) prices over a designated time period.
What is the strength of BBOPS?
> The strength of BBOPs is their versatility. Depending on the way they are distributed to employees, they can either reinforce a strong emphasis on performance (a condition known as a performance culture) or inspire greater commitment and retention (ownership culture) of employees.
Some companies believe that employees can be linked to the success or failure of a company in yet another way - what is that stock plan called?
> employee stock ownership plans (ESOPs).
What is the goal of ESOPs?
> The goal is to increase employee involvement in the organization and hopefully this will influence performance.
Not a lot of Canadian companies have ESOP plans, why? is it effective?
> Not a lot of Canadian companies have ESOP plans, as these plans are not particularly effective incentives. First, the effects are generally long term. It is difficult to predict what makes stock prices rise and this is the central ingredient in the reward component of ESOPs.
> But ESOPs do foster employee willingness to participate in the decision-making process.
> Aside from the positive effect on employee participation, ESOPs have little impact on productivity or profit.
In compensation, what does special treatment focus on?
> Special treatment tends to focus on a few specific groups of employees that share two characteristics.
1) First, special groups tend to be strategically important to the company. If they don’t succeed at their jobs, success for the whole organization is in jeopardy.
2) Second, their positions tend to have built-in conflict, conflict that arises because different factions place incompatible demands on members of the group.
What conflict do supervisors face that justifies special treatment?
> Caught between upper management and employees. Must balance need to achieve organization’s objectives with importance of helping employees satisfy personal needs. If unsuccessful, either corporate profit or employee morale suffers, or both.
What conflict do boards of directors face that justifies special treatment?
> Face possibility that disgruntled stockholders may sue over corporate strategies that don’t “pan out.”
What conflict do executives face that justifies special treatment?
> Stockholders want healthy return on investment. Government wants compliance with laws. Executives must decide between strategies that maximize short-run gains at the expense of the long-run versus directions that focus on long-run gains.
What conflict do professional employees face that justifies special treatment?
> May be torn between goals, objectives, and ethical standards of their profession (e.g., should an engineer leak information about a product flaw, even though that information may hurt corporate profits?) and demands of an employer concerned more with profits.
What conflict do sales staff face that justifies special treatment?
> Often spend extended periods in the field with little supervision. Challenge is to stay motivated and continue to make sales calls even in the face of limited contact or scrutiny from manager. Conflict is inevitable between customers who want product now and production facilities that can’t deliver that quickly.
What conflict do contingent workers face that justifies special treatment?
> Play an important “safety valve” role for companies. When demand is high, more are hired. When demand drops, these are the first workers to be let go. Employment status is highly insecure and challenge is to find low-cost ways to motivate.
There are five basic elements of most executive compensation packages:
(1) base salary > Although formalized job evaluation still plays an occasional role in determining executive base pay, other sources are much more important (competition pays)
(2) short-term (annual) incentives or bonuses,
(3) long-term incentives (stock options and stock grants),
(4) benefits > Because many benefits are tied to income level (e.g., life insurance, disability insurance, pension plans), executives typically receive higher benefits than most other employee
(5) perquisites > Because many benefits are tied to income level (e.g., life insurance, disability insurance, pension plans), executives typically receive higher benefits than most other employee
What are the three executive stock option plans?
1) Appreciation-Based Plans (Non-qualified Stock options/Stock appreciation rights)
2) Full share plans (restricted stock plans/restricted stock units or phantom stock plans/deferred share units)
3) Performance based plans (performance share / share unit plans)
What are non-qualified stock options?
> Option to purchase company stock at a stipulated price at a future time.
What are stock appreciation right plans
> Stock award determined by increase in stock price during any time chosen (by the executive) in the option period.
What are restricted stock plans?
> Grant of stock on the condition it may not be sold before a specified date.
What are restricted stock units / phantom stock plans?
> Grant of notional shares/units on the condition that they may not be sold before a specified date.
What are deferred share unit plans?
> Restricted stock units/phantom stock payable upon retirement, termination, or death.
What are performance plans?
>
Stock award earned when specific performance goals achieved.
Agency theory argues that executive compensation should be designed to do what?
> should be designed to ensure that executives have the best interests of stockholders in mind when they make decisions.
What rewards do sales persons not value as much?
> Promotional opportunities, sense of accomplishment, personal growth, and job security were all less highly regarded by salespeople.
Promotional opportunities, sense of accomplishment, personal growth, and job security were all less highly regarded by salespeople. :
Strategy
