Chapters 5 and 6 Flashcards
what are the 3 broad categories of performance pay
individual performance, group performance, and organization performance
what are the 4 types of individual performance pay choices
piece rates, commissions, merit pay, and special purpose incentives
what are the 4 types of group performance pay
gain sharing, goal sharing competitive bonus, pooled performance pay
What is a piece rate and what are the 2 different types of them
piece rates are where individuals receive a specified sum of money for each unit of output they produce
2 diff types:
straight piece rate: same specified sum of money is paid for each piece produced, regardless of how many pieces are produced
differential piece rate: a Lowe sum of money per piece is paid if employee production does not meet production standard, and then once they do a meet it a higher sum per piece is paid
what are 4 advantages of piece rates?
- highly motivational in producing task behaviour
- reduce the need for external control of employees
- link compensation to output which reduces employer risk
- provide specific information about the standard level of output expected
what are 5 disadvantages of piece rates?
- can only be applied to limited number of circumstances
- needs to be recalculated each time a major change occurs
- setting rate is not a scientific process
- frequently does not motivation maximum effort
- can decrease production in layoff environments bc employees don’t want to work themselves out of a job
what is commission
commissions: pay that is geared towards the dollar volume of sales or transactions conducted
what is straight commission?
when the employee’s income is only based on their sales and the commission, they don’t receive base pay
what are the 4 types of selling
Maintenance selling:
Selling established products to existing customers
Conversion selling:
Selling established products to new customers
Leverage selling:
Selling new products to existing customers
New market selling:
Selling new products to new customers
what are 3 key dimensions for determining when commission is appropriate
degree of independence
degree of persuasive skills required
length of sales cycle (the time between meeting new client and closing the deal)
What are the 7 advantages of sales commissions
relatively easy to set and measure
less interdependence among sales employees than production
less worry about losing jobs
reduces the needs for other control mechanisms
serves as source of feedback and self-correcting
reduce employer risk bc based only on how much they sell
can increase sales
What are 6 disadvantages of sales commissions
income may be variable for employee
commissions might drop during poor economy
little to no income when building client base
sales people might not be interested in work that doesn’t bring them sales, such as training
may encourage overly aggressive sale behaviour and a competitive environment
deciding whose sale it actually is when multiple people work on different parts of sale can create conflict
what 3 things are included under merit pay
merit raises, merit bonuses, promotion
What is merit pay generally based off of
appraisals from overall employee performance
What are merit raises
An increase to an employee’s base bay in recognition of good job performance
what are the 4 advantages of merit raises
Provides feedback to employees
Employees can advance through their pay range
Helps to retain outstanding employees
Can foster perceptions of equity
What are the 5 disadvantages to merit raises
expensive for the company because they permanent
requires effective employee appraisal system
there needs to be a noticeable difference in pay between avg and above avg employees
employees can top out aka reach the top of their pay backet and then might not be motivated
can cause antagonism towards the supervisor bc its based on their judgment
What are merit bonuses
A cash payment, provided to recognize good employee performance, that does not increase base pay
What are the 4 advantages of merit bonuses
More flexible because they are not permanent, and employees have to keep performing well to keep their bonuses each year
Can be used in conjunction with a merit raise system
Can be related to financial conditions of firm
Can be paid out in lump sums and are more visible
What are 3 disadvantages to merit bonuses
Need valid performance measures
Not suitable where work is highly interdependent
Bonus amount may need to be higher because it’s not a permanent raise
What are 3 advantages of promotion?
Brings recognition and a pay raise
Typically the promotion contains more of the elements of intrinsically motivating work
Recognizes contributions employees have made to the organization
What are 5 disadvantages to promotions
Lack of promotion opportunity can be demotivating
Promotions in lieu of other rewards can result in a meaningless system if there are few upper-level vacancies
Those not promoted can become demotivated
Promotion not always seen as a reward
Peter principle
what is the Peter principle
that employees who are performing well will get promoted up, those who don’t will stay where they are meaning that eventually certain positions will just end up having someone incompetent
What are the 8 conditions you should have for merit pay to be applicable
Variable individual performance
Performance is controllable by individual
Individual performance can be separated out
accurate performance appraisal system
Pay has to be linked to performance appraisal
Merit system has to serve a purpose that cannot be served in another way
Undesirable side effects are easily manageable
Merit system fits with org culture and strategy
What are the 3 main purposes to merit pay
Motivate employee performance
Maintain equity
Salary progression
What is a special purpose incentive and what type of organization is it most useful in?
An incentive designed to motivate a specific type of employee behaviour that are important for the organization
Most useful in human relations organizations
What are 2 most common types of special purpose incentives
suggestion programs where employees receive cash for submitting creative money saving solutions
attendance programs: employees receive money for not missing work
what are the 3 components to a suggestion program
: system to channel suggestions, systematic process of evaluating them, incentive for submitting useable ideas
What is an advantages of a special purpose incentive
Focuses attention on key employee behaviours
Depends on specific nature of plan
what is a disadvantages of special purpose incentives
Employees may focus only on rewarded behaviours and neglect other important behaviours
When are special purpose incentives applicable
where intrinsic motivation does not exist
Where both intended and unintended behaviours are easy to observe
When there are no other alternatives to inducing desired behaviour
What is gain sharing
A group performance pay plan that shares cost savings or productivity gains generated by a work group with all members of that group
Where is gain sharing plans applicable and where is it the best
unionized firms, human relations, best in high involvement
What is goal sharing
A group performance pay plan in which a work group receives a bonus when it meets prespecified performance goals
When would goal sharing be an a applicable option
when there is a high level of trust between management and employees therefore good in a high involvement moderate in human relations, not good for dynamic firms
What is a competitive bonus
rewards work groups for outperforming other work groups
what is pooled performance pay
performance results of a group are pooled, and group members share equally in the performance bonus
What are 2 types of pooled performance pay
Group commissions: where commissions of a group a sales workers are pooled then shared equally among the group
Group piece rates: group members are paid based on the number of completed products produced by the group
What are 6 advantages of gain sharing plans
Self-funding if designed properly
Can stimulate higher productivity
May create positive group norms
May lead to internalized worker commitment, and reduce need for external control
increase employee knowledge of the business
Applicable to not-for-profits and government
What are the 6 disadvantages of gain-sharing plans
Costs of establishing and administering plan
Doesn’t work well with changing circumstances so you can’t determine if increase in productivity is due to increased worker input or other factors
focus attention on group’s interests only even if their actions have negative consequences
create more opportunities for labour-management conflict bc It provides additional matters to argue about
May create “free riders”
High discontinuation rate
What are some advantages of goal-sharing plans
More flexible than gain sharing
Less costly to operate that gain-sharing plans
Can be adjusted as circumstances require
Powerful motivational tool for groups and individuals
May create positive group norms
What are the 7 disadvantages of goal-sharing plan
Can be arbitrary in goal levels and bonus amounts
No established basis for judging value of meeting a goal
Setting appropriate goals can be difficult
Situational factors can affect goal development
May cause frustration if efforts fall slightly short
Can produce conflict
High discontinuation rate
What is a profit sharing plan and where does it work best
A formal pay program in which a firm provides bonus payments to employees based on the profitability of the firm
works best in high involvement, flat structure
3 forms of profit sharing are…
current distribution profit, deferred profit sharing plan, and combination profit-sharing plan
What is a current distribution performance pay plans
distributes the profit-sharing bonus to employees in the form of cash or shares at least annually
aka a cash plan
What is a deferred profit-sharing plan
profit-sharing bonuses are allocated to employee accounts but not actually paid out until a later date, usually on termination or retirement
Combination profit-sharing
combines the current distribution and deferred profit sharing plans by paying some of the profit sharing bonus on a current (cash) basis and deferring the remainder
What are 7 advantages of profit sharing plans
When interests are aligned, employees may be more motivated to improve performance
Can reduce need for supervision
Profit sharing is related to company ability to pay, it only has to pay higher amounts when the company is doing well
Leads to higher total employee earnings
May reduce the need for layoffs because in poor economic conditions labour cost are automatically adjusted downwards
Greater job satisfaction
Simpler to set up and administer than plans like gain-sharing
What are the disadvantages of a profit sharing plan
employees free riding
Unions may oppose
What are employee stock plans and what are the 3 types of them
any type of plan where employees acquire shares in the firm that employs them
3 main types: employee stock bonus, employee share purchase, employee stock option
what is a employee stock bonus
type of employee stock plan where employees receive shares from their employer at no cost
employee stock purchase
a plan through which employees may purchase shares in their employer but don’t have to pay full price
employee stock option
plan where employees have the option to purchase stock in their employee at a fixed price within a limited time period the idea they will purchase once the value of the stock price rises
what are advantages of employee stock plans
can create stronger understanding and concern for company performance
what are some disadvantages of employee stock plans
decline in share price can demoralize employees
What is a long-term incentive
type of performance pay where incentive are tied to org performance that’s way into the future
What are the 4 constraints on a compensation strategy
legislated
labour market
product/service market
financial
What are the 4 types of legislation that are legislated constraints
Employment standards
Sets minimum standards for pay and other conditions of employment
Human rights legislation
Prohibits discrimination in hiring or employment on the basis of gender, ethnicity, or age
Trade Union Legislation
Defines the rights of parties involved in a collective bargaining relationship
Tax Legislation
Income and corporate tax laws
What have tax laws does in terms of direct pay vs indirect pay
movement away from direct pay (which is fully taxed) and toward indirect pay (which often is not)
what are labour market constraints
Constraints on compensation strategy flowing from the relative levels of demand and supply for particular occupational groups
what are product/service market constraints
Constraints on compensation strategy caused by the nature of the product or service market in which the firm operates
what are examples of financial constraints
Unprofitable firms more limited in their compensation options than profitable firms
Growth stage (new or fast growing firms short on cash)
Funding (usually public sectors organizations, can limit how much they can give for compensation based on how much funding they get)
what are the steps in the compensation strategy formulation
- define the required behaviour (task, membership, or citizenship)
- define the role of compensation
- determine the compensation mix
- determine the compensation level
- evaluate proposed strategy
How would you define the role of compensation in each of the 3 managerial strategies
Classical organizations
Focus on economic needs as the main motivator of behaviour
Human relations organizations
Focus on social needs
High-involvement organizations
Focus on employee needs for participation, growth, and development
What are 3 options to determine compensation level
Lagging the market
A compensation level strategy based on paying below the average compensation level in a given labour market
Leading the market
A compensation level strategy based on paying above the average compensation level in a given labour market
Matching the market
A compensation level strategy based on paying at average compensation levels in a given labour market
What is a utility analysis
Utility analysis is an approach to analyzing whether a lead, lag, or match strategy would be most efficient for a given organization
what is the advantage of doing a utility analysis
Advantage: gives the ability to answer what if questions and identify min conditions necessary for a change in policy to pay off
Hybrid compensation level policies
A compensation-level strategy that varies across employee groups or compensation components
Firm could choose to lag for entry-level positions, especially if applicants are plentiful, but to lead in higher level positions in order to avoid turnover of highly trained personnel
Compensation mix affects the amount of compensation you can…
afford to pay
are are the 3 criteria to evaluating the compensation strategy
Affordability
Legality
Employee attraction
have to pass all 3 for the strategy to be good
what are job families
Employees are categorized into several groups
Separate compensation system is used for each group
what are 6 generic groups of job families
Hourly paid employees
Clerical employees
Sales employees
Professional employees
Managerial employees
Executives
what are contingent workers
Workers who are not employed on a full-time permanent basis
Other types of contingent workers
Temporary full-time employees, independent contractors, and persons hired from temporary help agencies
Who are the 3 main groups for whom the compensation system often differ from the compensation norm
Contingent workers
Executives
International employees (foreign workers)
how does pay for executive work
paid mostly on bonuses and incentives, with some amount of base pay too
what are 6 decision issues for CEO pay
Amount of performance pay relative to base pay and indirect pay
Amount of short-term (annual) performance pay versus longer-term performance pay
Nature of the performance pay itself
Specific performance indicators used as criteria for the performance pay
Stringency of the performance criteria
Time period to be used as the performance period for the incentive
which component accounts for the largest portion of total value of exec compensation in Canada
stock grants and stock options
what are 4 approaches to foreign worker compensation
Balance sheet: Provides a standard of living comparable with the home country
Negotiation: Process in which the employer and employee negotiate a mutually acceptable package
Localization: Practice of paying foreign worker employees the same compensation as local nationals in equivalent positions
Lump sum: Various allowance amounts are paid directly in home-country currency
