Topic 9 Flashcards
Commission-based
Commission-based reward systems are most often used for jobs with a sales component and provide employees a set percentage of the sales that they make. They are used to provide a strong incentive to create sales and also to maximize the size of those sales. In a pure Commission system, the full risk of low performance is borne by the employees. For this reason many organizations pair a commission-based system with some other form of base pay (such as salary) to more evenly distribute that risk.
Control Costs
Without a variable pay component, labor costs remain the same even when revenues, sales, or profits drop. Performance-based pay helps ensure that when performance is low, the company’s cost structure is also reduced.
Cost of Living Adjustment (COLA)
A periodic salary or wage increase to compensate for inflation.
Differential Piece Rate
A system in which a lower rate is paid for the first 10 units assembled, and then a higher rate is paid for each unit over 10 assembled.
Fixed Rewards
Remain constant independent of changes in the criteria.
Gain Sharing
Is a system of establishing a baseline of unit-level results and sharing improvements above that baseline with employees in that unit.
Group-based Variable Pay
Ties rewards to the collective actions and results achieved by teams, groups and units in the organization.
Incentive Stock Options
Specify an exercise price that is above the current market price to take into account that the organization expects the employees to outperform expected market returns.
Individual Bonus
First, it is a monetary reward given to a single employee based upon that employee’s performance. It is an individual-level reward. Second, bonuses do not accumulate into base pay. That is, receiving a year-end bonus one year does not affect the employees’ wages or salary for the next year.
Merit Pay
An annual increase in future compensation based on past performance.
Merit Pay Matrix
Allows organizations to simultaneously reward past performance but also support its Integrated Reward Structure.
Motivation
Refers to the focus, effort and persistence that employees demonstrate.
Pay Compression
New employees and long-tenured employees are paid very similar amounts.
Pay Inversion
New employees are paid more than those employees with substantial experience in the organization.
Performance Appraisal
Obtaining ratings of an employee’s past performance.
Performance Assessment
Refers to the process of defining and measuring the performance of individuals, teams, units, and organizations.
Performance Management System
Involves creating performance plans, providing support and resources, appraising performance, and providing feedback and coaching.
Performance-based Pay
Rewards with distributions dependent upon performance levels.
Piece Rate
A system that rewards employees with a fixed amount of compensation for each unit of work they produce.
Profit Sharing
Designed to distribute a portion of the firm’s annual profits back to the firm’s employees. The goal of these systems is to align both the incentives for employees and the variable labor costs with the interests of the organization.
Risk and Uncertainty
A situation in which unforeseen or uncontrollable circumstances result in changes in profitability.
Rucker Plans
Have a broader base of metrics.
Scanlon Plans
Focus on improvements in labor costs.
Spot Awards
Cash bonuses given out based on weekly or daily behavior, to recognize extra effort.
Stock Options
Provide employees the right to purchase a set amount of shares of stock for a set price.
Team-based Bonuses
Are like Individual-based bonuses in that they provide a lump sum reward that does not get added into future base pay, but the bonus is based on some measure of team performance instead of individual performance. That is, in order for an employee to receive a team-based bonus, it is not sufficient for the employee to perform well; the employee also has to ensure that the team collectively performs well.
Variable Pay
Rewards that vary as performance varies.
Variable Rewards
Variable rewards are forms of compensation that increase or decrease based upon a criterion such as employee performance, unit performance, market performance, or even stock price.
