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8/12/2019 Incentive Plans OK New
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2010 McGraw Hill Ryerson
11-1
COMPENSATIONThird Canadian Edition
Milkovich, Newman, Cole
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2010 McGraw Hill Ryerson
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Pay-for-Performance Plans
pay that varies with some measure of
individual or organizational performance
also called variable pay plansthese plans have a positive impact on
performance if they are designed well
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Short Term
Pay-for-Performance Plans
Merit Pay
Lump-Sum Bonuses
Individual Spot Awards
Individual Incentives
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Individual Incentive PlansMethod of Rate Determination
Units of production pertime period
Time period per unit ofproduction
(1) (2)
(4)(3)
Straight piecework plan Standard hour plan
Halsey 50 - 50 methodTaylor differential piece
rate system
Merrick multiple piece
rate system
Pay constant function of
production level
Pay varies as function ofproduction level
Relationship
between
production level
and pay
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Advantages of Individualized
Incentive Plans substantial contribution to:
increased productivity
lower production costs
increased earnings of workers
less direct supervision is required to maintain
output than under pay for time
payment for results (if accompanied by improved
organizational and work measurement) enablelabour costs to be estimated more accurately than
under pay for time
helps costing and budgetary control
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Disadvantages of Individualized
Incentive Plans (1 of 2)conflict between employees seeking to
maximize output and managers concerned
about deteriorating quality levelsattempts to introduce new technology may
be resisted by employees concerned aboutthe impact on production standards
reduced willingness of employees tosuggest new production methods for fear ofsubsequent increases in productionstandards
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Disadvantages of Individualized
Incentive Plans (2 of 2) 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
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Team / Group
Incentive PlansGain-Sharing Plans
Profit Sharing PlansEarnings-at-Risk Plans
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Sample Group/Team
Performance Measures (1 of 2)Customer-Focused Measures
Time to Market Measures
On time delivery
Cycle time New product introductions
Customer Satisfaction
Measures
Market share
Customer satisfaction
Customer growth and retention
Account penetration
Financial ly-Focused Measures
Value Creation
Revenue growth
Resource yields Profit margins
Economic value added
Shareholder Return
Return on invested capital
Return on sales / earnings
Earnings per share
Growth in profitability
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Sample Group/Team
Performance Measures (2 of 2)Capabil i ty -Focu sed Measu res
HR Capabilities
Employee satisfaction
Turnover rates Total recruitment costs
Rate of progress ondevelopmental plans
Promotability index
Staffing mix/head-count ratio Other Asset Capabilities
Patents and copyrights
Distribution systems
Internal Process-Focused
Measures
Resource Utilization
Budget-to-actual expenses
Cost allocation ratios
Reliability / rework
Accuracy / error rates
Safety rates
Change Effectiveness Program implementation
Teamwork effectiveness
Service / quality index
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Different Types of Variable
Pay PlansCash ProfitSharing Stock Ownership
or Options
Balanced
Scorecard
Productivity /
Gain- SharingTeam / Group
Incentives
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Gain-Sharing Plans
under gain-sharing plans,
employees share in cost-savings or productivity gains
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Key Elements in Designing a
Gain-Sharing Planstrength of reinforcement
productivity standards
sharing the gains
scope of the formula
perceived fairness of the formula
ease of administration
production variability
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Three Gain-Sharing
FormulasScanlon Plan(single ratiovolume)
Rucker Plan Improshare
Numerator ofratio (input
factor)
Payroll costs Labour cost Actual hoursworked
Denominator
of ratio(outcome
factor)
Net sales (+/-
inventories)
Value added Total standard
value hours
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Profit-Sharing Plans
variable pay plans requiring a
corporate profit target to be met
before any payouts occur
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Earnings-at-Risk Plans
incentive plans sharing profits in
successful years and reducing
base pay in unsuccessful years
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Advantages of Group
Incentive Planspositive impact on organization and individual
performance of about 5 10 percent per year
easier to develop performance measures than
for individual plans
signals that cooperation, both within and
across groups, is a desired behaviour
teamwork supported by most employees
may increase participation of employees in
decision making process
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11-18
Disadvantages of Group
Incentive Plans
line of sight may be lessened
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 because they must
share with lesser contributorsincreases compensation risk to employees
because of lower income stability
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Long-Term Incentive Plans
Employee Stock Ownership
Plans (ESOPs)
Stock Options
Broad-Based Option Plans
(BBOP)
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Special Groups in
Compensation Managementsupervisors
top management
corporate directors
professional employees
sales staff
contingent workers
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Components of an Executive
Compensation Package
1. base salary
2. short-term (annual) incentives or bonuses
3. long-term incentives and capitalappreciation plans
4. executive benefits
5. executive perquisites
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Examples of Long-Term
Incentives for Executives1. Appreciation-Based Plans
stock options
stock appreciation rights
2. Full-Share Plans
restricted stock plans
restricted stock units/phantom stock plans
Deferred share units
3. Performance-Based Plans
performance share / unit plans
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Pay Components for
Professional Employeesdual career ladders
maturity curves
performance bonusesattaining professional licenses
perks
flexible work schedules
Campus-like environment
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Key Factors in Designing a
Sales Compensation Planthe nature of the people who enter the
sales profession
organizational strategy
competitor practices
product/service being sold
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Key Issues in Contingent
Workforce Compensation
equity/fairness relative to
permanent employees
boundaryless careers
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Conclusion
the design and effective administration ofpay-for-performance plans is key to theirsuccess
special employee groupscompensation must address high
potential for conflict in these jobs
compensation treatment differs from thatfor other employees