vpay & compf

PowerPoint Presentation by Charlie CookThe University of West Alabama

PowerPoint Presentation by Charlie CookThe University of West Alabama© 2008 Thomson/South-Western All rights reserved.© 2008 Thomson/South-Western All rights reserved.

CHAPTER 13CHAPTER 13

Variable Pay and Executive Variable Pay and Executive

CompensationCompensation

S E C T I O N 4 Compensating Human Resources

© 2008 Thomson/South-Western. All rights reserved. 13–2

Chapter ObjectivesChapter ObjectivesChapter ObjectivesChapter Objectives

■ Define variable pay and identify three elements of successful pay-Define variable pay and identify three elements of successful pay-for-performance plans.for-performance plans.

■ Discuss three types of individual incentives.Discuss three types of individual incentives.

■ Identify key concerns that must be addressed when designing Identify key concerns that must be addressed when designing group/team variable pay plans.group/team variable pay plans.

■ Discuss why profit sharing and employee stock ownership are Discuss why profit sharing and employee stock ownership are common organizational incentive plans.common organizational incentive plans.

■ Explain three ways that sales employees are typically Explain three ways that sales employees are typically compensated.compensated.

■ Identify the components of executive compensation and discuss Identify the components of executive compensation and discuss criticisms of executive compensation levels.criticisms of executive compensation levels.

After you have read this chapter, you should be able to:After you have read this chapter, you should be able to:


Variable Pay: Incentives for Variable Pay: Incentives for PerformancePerformance

Variable Pay

Assumptions

Some people perform better and are more

productive than others

Better performing employees should

receive more compensation

Some jobs contribute more to organizational

success than others

Part of compensation should be tied

directly to performance and

results


FIGURE 13-1

Examples of Incentives

GainsharingGainsharing is the system of sharing with employees greater-than- is the system of sharing with employees greater-than-expected gains in profits and/or productivity. Also called expected gains in profits and/or productivity. Also called teamsharingteamsharing or goal-sharing, the focus is to increase “discretionary or goal-sharing, the focus is to increase “discretionary efforts,” that is, the difference between the maximum amount of efforts,” that is, the difference between the maximum amount of effort a person can exert and the minimum amount of effort that effort a person can exert and the minimum amount of effort that person needs to exert to keep from being fired. Some person needs to exert to keep from being fired. Some organizations have labeled their programs organizations have labeled their programs goalsharinggoalsharing to to emphasize the attainment of results based on business strategy emphasize the attainment of results based on business strategy objectives. objectives.

“Spot” Bonuses“Spot” Bonuses – can be awarded at any time. Often, spot bonuses – can be awarded at any time. Often, spot bonuses are given in cash, although some firms provide managers with gift are given in cash, although some firms provide managers with gift cards, travel vouchers, or other rewards. The keys to successful use cards, travel vouchers, or other rewards. The keys to successful use of spot bonuses are to keep the amounts reasonable and to provide of spot bonuses are to keep the amounts reasonable and to provide them for exceptional performance accomplishments. The downside them for exceptional performance accomplishments. The downside is that it can create jealousy and resentment from other employees is that it can create jealousy and resentment from other employees that did not get a spot bonus. that did not get a spot bonus.

Profit SharingProfit Sharing – – Profit sharingProfit sharing is a system to distribute a portion of is a system to distribute a portion of the organization's profits to employees. The major objectives of the organization's profits to employees. The major objectives of profit-sharing plans are to improve productivity, recruit or retain profit-sharing plans are to improve productivity, recruit or retain employees, improve product/service quality, and improve employee employees, improve product/service quality, and improve employee morale. Typically, the percentage of the profits distributed to morale. Typically, the percentage of the profits distributed to employees is set by the end of the year before distribution. In some employees is set by the end of the year before distribution. In some profit-sharing plans, employees receive portions of the profits at the profit-sharing plans, employees receive portions of the profits at the end of the year while in other plans the profits are deferred and end of the year while in other plans the profits are deferred and made available to employees on retirement or on their leaving the made available to employees on retirement or on their leaving the organization. organization.


Employee Stock PlansEmployee Stock Plans – A – A stock option planstock option plan gives employees the gives employees the right to purchase a fixed number of shares of company stock at a right to purchase a fixed number of shares of company stock at a specified price for a limited period of time. If the stock’s market specified price for a limited period of time. If the stock’s market price exceeds the exercise price, employees can exercise the option price exceeds the exercise price, employees can exercise the option and buy the stock. and buy the stock.

Employee Stock Ownership Plans (ESOPs)Employee Stock Ownership Plans (ESOPs) – An – An employee stock employee stock ownership plan (ESOP) ownership plan (ESOP) is designed to give employees significant is designed to give employees significant stock ownership in their employers. stock ownership in their employers.

Advantages include: (1) favorable tax treatment for Advantages include: (1) favorable tax treatment for earmarked earnings by the employer, (2) employees get a “piece of earmarked earnings by the employer, (2) employees get a “piece of the action;” and (3) people like the concept of “people's capitalism.” the action;” and (3) people like the concept of “people's capitalism.” However, the sharing can also be a disadvantage for employees However, the sharing can also be a disadvantage for employees because it makes both their wages/salaries and their retirement because it makes both their wages/salaries and their retirement benefits dependent on the performance of their employers. benefits dependent on the performance of their employers.


HR Best Practices: T-Mobile and Rewards/RecognitionHR Best Practices: T-Mobile and Rewards/RecognitionT-Mobile targeted the company’s employees that deal with the T-Mobile targeted the company’s employees that deal with the customers to increase customer satisfaction and reduce turnover. customers to increase customer satisfaction and reduce turnover. This group included 11,000 diverse customer service employees. T-This group included 11,000 diverse customer service employees. T-Mobile felt most incentive programs rewarded the top 10-20% of the Mobile felt most incentive programs rewarded the top 10-20% of the workforce but they wanted to increase the efforts of the middle workforce but they wanted to increase the efforts of the middle 60%. The program that was designed included travel and activity 60%. The program that was designed included travel and activity rewards. The company promoted the program with national events, rewards. The company promoted the program with national events, conference calls, meetings, and newsletters. Employee attrition conference calls, meetings, and newsletters. Employee attrition rates decreased by 50% and there was marked improvement in rates decreased by 50% and there was marked improvement in performance scores especially for the targeted mid 60%. performance scores especially for the targeted mid 60%. Questions for Discussion:Questions for Discussion:1. 1. With T-Mobile’s emphasis on the middle 60% what do you think With T-Mobile’s emphasis on the middle 60% what do you think could happen to the motivation of the top 10-20%? What would could happen to the motivation of the top 10-20%? What would you do?you do?2. Do you think travel awards would motivate some of the workforce 2. Do you think travel awards would motivate some of the workforce more than others? Explain. more than others? Explain. 3. Do you think an organization would ever try to design an 3. Do you think an organization would ever try to design an incentive program that would target the lower 10-20% of the incentive program that would target the lower 10-20% of the workforce? Why or why not?workforce? Why or why not?



Developing Successful Developing Successful Pay-for-Performance PlansPay-for-Performance Plans

Pay-for-Performance Plans

Link strategic goals and employee

performance

Enhance results and reward employees financially

Reward and recognize employee

performance

Promote achievement

of HR objectives


FIGURE 13-2

Metric Options for Variable Pay Plans


Successful Variable Pay PlansSuccessful Variable Pay Plans

Effective Incentive Plans

Does the Plan Fit the

Organization?

Does the Plan Reward the Appropriate

Actions?

Is the Plan Administered

Properly?


Why Variable Pay Plans FailWhy Variable Pay Plans Fail

Plan incentives are

not seen as desirable

Plan doesn’t reward doing

a good job

Plan doesn’t motivate

Plan rewards teams/groups rather than individuals

Plan doesn’t increase base

pay

Employees’ View of

Variable Pay Plan


Developing Successful Incentive Plans Developing Successful Incentive Plans

Develop clear, understandable plans that are continually

communicated.

Use realistic performance measures.

Keep plans current and linked to organizational objectives.

Link results to payouts that recognize differences.

Identify variable pay incentives separately from base pay.

Successful Incentive

Plans


Individual IncentivesIndividual Incentives

Necessary Conditions For Individual Incentive Plans

Individual performance

must be identified

Individual competitiveness must be desired

Individualism must be

stressed in the organizational

culture


FIGURE 13-3 Categories of Variable Pay Plans


Individual IncentivesIndividual Incentives• Piece-Rate Systems Piece-Rate Systems

Straight piece-rate systemStraight piece-rate systemDifferential piece-rate systemDifferential piece-rate system

• BonusBonus• ““Spot” BonusesSpot” Bonuses• Special Incentive ProgramsSpecial Incentive Programs

Performance awardsPerformance awardsRecognition awardsRecognition awardsService awardsService awards


FIGURE 13-4 Purposes of Special Incentives


Why Organizations Establish Variable Why Organizations Establish Variable Pay Plans for Groups/TeamsPay Plans for Groups/Teams

Group/Team-Based

Variable Pay Plans

Improve productivity

Tie pay to team performance

Improve customer service or production

quality

Increase employee retention


Design of Group/Team Incentive PlansDesign of Group/Team Incentive Plans

Group/Team Incentive Plan Issues

Distribution of Group/Team Incentives

Timing of Group/Team Incentives

Decisions About

Group/Team Incentive Amounts


Group/Team Incentives (cont’d)Group/Team Incentives (cont’d)• Distributing RewardsDistributing Rewards

Same-size reward for each memberSame-size reward for each member

Different-size reward for each memberDifferent-size reward for each member

• Problems with Group/Team IncentivesProblems with Group/Team Incentives Rewards in equal amounts may be perceived as Rewards in equal amounts may be perceived as

“unfair” by employees who work harder, have more “unfair” by employees who work harder, have more capabilities, or perform more difficult jobs.capabilities, or perform more difficult jobs.

Group/team members may be unwilling to handle Group/team members may be unwilling to handle incentive decisions for co-workers.incentive decisions for co-workers.

Many employees still expect to be paid according to Many employees still expect to be paid according to individual performance.individual performance.


FIGURE 13-5 Conditions for Successful Group/Team Incentives


Types of Group/Team IncentivesTypes of Group/Team Incentives• Group/Team ResultsGroup/Team Results

““Self-funding” pay plans for groups/teams that reward Self-funding” pay plans for groups/teams that reward through improved organizational results on the basis through improved organizational results on the basis of group output, cost savings, or quality improvement.of group output, cost savings, or quality improvement.

• Gainsharing (Gainsharing (Teamsharing or Goal SharingTeamsharing or Goal Sharing)) The sharing with employees of greater-than-expected The sharing with employees of greater-than-expected

gains in productivity through increased discretionary gains in productivity through increased discretionary efforts.efforts.

ImproshareImproshare

Scanlon PlanScanlon Plan


Organizational IncentivesOrganizational Incentives

Primary Objectives

• Increase productivity and organizational performance

• Attract or retain employees

• Improve product/service quality

• Enhance employee morale

Drawbacks

•Disclosure of financial information

•Variability of profits from year to year

•Profit results not strongly tied to employee efforts

Profit Sharing


FIGURE 13-6 Framework Choices for a Profit-Sharing Plan


Employee Stock PlansEmployee Stock Plans• Stock Option PlanStock Option Plan

A plan that gives employees the right to purchase a A plan that gives employees the right to purchase a fixed number of shares of company stock at a fixed number of shares of company stock at a specified price for a limited period of time.specified price for a limited period of time. If market price of the stock is above the specified If market price of the stock is above the specified

option price, employees can purchase the stock option price, employees can purchase the stock and sell it for a profit.and sell it for a profit.

If the market price of the stock is below the If the market price of the stock is below the specified option price, the stock option is specified option price, the stock option is “underwater” and is worthless to employees.“underwater” and is worthless to employees.


Employee Stock PlansEmployee Stock Plans• Employee Stock Ownership Plan (ESOP)Employee Stock Ownership Plan (ESOP)

A plan whereby employees gain significant stock A plan whereby employees gain significant stock ownership in the organization for which they work.ownership in the organization for which they work.

AdvantagesAdvantagesFavorable tax treatment for ESOP earningsFavorable tax treatment for ESOP earningsEmployees motivated by their ownership stake in Employees motivated by their ownership stake in

the firmthe firm DisadvantagesDisadvantages

Retirement benefit is tied to the firm’s future Retirement benefit is tied to the firm’s future performanceperformance

Management tool to fend off hostile takeover Management tool to fend off hostile takeover attempts.attempts.


Types of Sales Compensation PlansTypes of Sales Compensation Plans• Salary-OnlySalary-Only

All compensation is paid as a base wage with no All compensation is paid as a base wage with no incentives.incentives.

• CommissionCommission Straight CommissionStraight Commission

Compensation is computed as a percentage of Compensation is computed as a percentage of sales in units or dollars.sales in units or dollars.

The draw system make advance payments against The draw system make advance payments against future commissions to salesperson.future commissions to salesperson.

Salary-Plus-Commission or BonusesSalary-Plus-Commission or BonusesCompensation is part salary for income stability Compensation is part salary for income stability

and part commission for incentive.and part commission for incentive.


FIGURE 13-7 Sales Metric Possibilities


Effectiveness of Sales Incentive Plans Effectiveness of Sales Incentive Plans

Frequent changes in sales plans

An “entitlement” culture

Pay without performance

Poor quota setting

Small differences in pay for top and bottom performers

Causes of Ineffectiveness

in Incentive Plans


Executive CompensationExecutive Compensation

Executive Salaries

Executive Benefits

Executive Perquisites(Perks)

Annual Executive Incentives and Bonuses

Performance Incentives: Long Term vs. Short Term

Elements of Executive

Compensation

Executive Perquisites (Perks)Executive Perquisites (Perks) – – Perquisites (perks)Perquisites (perks) are special are special benefits for executives that are usually non-cash items. Perquisites benefits for executives that are usually non-cash items. Perquisites have status value to executives as they imply that the executives have status value to executives as they imply that the executives are very important. Perks can offer substantial tax savings because are very important. Perks can offer substantial tax savings because some perks are not taxed as incomesome perks are not taxed as income


HR On-the-Job: Are They Worth It?HR On-the-Job: Are They Worth It? A primary question is if any single CEO is really deserving of A primary question is if any single CEO is really deserving of compensation totaling over $50 million when stock option profits, compensation totaling over $50 million when stock option profits, retirement bonuses, and other payments are included. On top of retirement bonuses, and other payments are included. On top of large annual amounts, executives have negotiated “departure large annual amounts, executives have negotiated “departure agreements.” “Departure-and-consulting agreements” for agreements.” “Departure-and-consulting agreements” for executives are another area of concern. Of course, these figures executives are another area of concern. Of course, these figures might be justifiable to stockholders if the company is doing well and might be justifiable to stockholders if the company is doing well and performing above competitors and expectations. The question that performing above competitors and expectations. The question that still must be addressed by Boards of Directors, stockholders, and still must be addressed by Boards of Directors, stockholders, and executives is: How realistic and ethical is it to provide such huge executives is: How realistic and ethical is it to provide such huge amounts to one person? amounts to one person? Questions for Discussion: Questions for Discussion: 1. Do you think an executive should be paid over $50 million a 1. Do you think an executive should be paid over $50 million a year? Why or why not?year? Why or why not?2. Why do some companies pay larger executive compensation 2. Why do some companies pay larger executive compensation packages than other companies? packages than other companies? 3. Should companies be concerned about how much more the CEO 3. Should companies be concerned about how much more the CEO gets paid compared to the lowest paid worker? Why or why not?gets paid compared to the lowest paid worker? Why or why not?© 2008 Thomson/South-Western. All rights reserved. 13–31


““Reasonableness” of Executive Reasonableness” of Executive CompensationCompensation

Executive Compensatio

n Consideration

sand

Concerns

Would another company hire this

person as an executive?

How does the executive’s

compensation compare with that for executives in similar

companies?

What would an investor pay for the level of performance

of the executive?

Is the executive’s pay consistent with

pay for other employees within the

company?


FIGURE 13-8 Common Executive Compensation Criticisms

HR Headline: McDonald’s Global Rewards StrategyHR Headline: McDonald’s Global Rewards Strategy McDonald’s employs over 400,000 managers and senior-level McDonald’s employs over 400,000 managers and senior-level employees. In 2004 it implemented a new global rewards program employees. In 2004 it implemented a new global rewards program called Plan to Win that focuses on key business success areas. In called Plan to Win that focuses on key business success areas. In each country, managers select three to five factors to ensure each country, managers select three to five factors to ensure success in their local markets, such as implementing a new menu. success in their local markets, such as implementing a new menu. The rewards program includes base pay and benefits. In addition The rewards program includes base pay and benefits. In addition annual incentive pools are linked to meeting regional, country, annual incentive pools are linked to meeting regional, country, business unit, and operating income targets. The program also business unit, and operating income targets. The program also considers individual performance based on annual performance considers individual performance based on annual performance ratings. The Plan to Win program has led to decreases in turnover ratings. The Plan to Win program has led to decreases in turnover and an increase in the number of managers who understand the and an increase in the number of managers who understand the linkages to their rewards and how they contribute to McDonald’s linkages to their rewards and how they contribute to McDonald’s global success..global success.. Questions for DiscussionQuestions for Discussion1.How do you think the Plan to Win rewards program will affect 1.How do you think the Plan to Win rewards program will affect McDonald’s recruitment for managers and senior-level employees? McDonald’s recruitment for managers and senior-level employees? Explain.Explain.2.What do you think might be some problems with managers from 2.What do you think might be some problems with managers from different countries selecting different factors to be evaluated on? different countries selecting different factors to be evaluated on? What are the advantages of managers selecting these factors? What are the advantages of managers selecting these factors? 3.What are some potential problems when incentives are tied to 3.What are some potential problems when incentives are tied to operating income targets? What are some outside influences that operating income targets? What are some outside influences that could impact income targets? could impact income targets?


Procedural justiceProcedural justice is the perceived is the perceived fairness of the process and fairness of the process and procedures used to make decisions procedures used to make decisions about employees, including their pay. about employees, including their pay.

Distributive justiceDistributive justice refers to refers to perceived fairness to the distribution perceived fairness to the distribution of outcomes and essentially examines of outcomes and essentially examines how pay relates to performance.how pay relates to performance.


The The balance-sheet approachbalance-sheet approach is a compensation plan that is a compensation plan that equalizes cost differences between identical international equalizes cost differences between identical international and home-country assignments. and home-country assignments.

The The global market approachglobal market approach is a compensation plan that is a compensation plan that attempts to be more comprehensive in providing base pay, attempts to be more comprehensive in providing base pay, incentives, benefits, and relocation expenses regardless of incentives, benefits, and relocation expenses regardless of the country to which the employee is assigned. the country to which the employee is assigned.

Many international compensation systems attempt to protect Many international compensation systems attempt to protect expatriates from negative tax consequences by using a expatriates from negative tax consequences by using a tax tax equalization planequalization plan. A tax equalization plan helps ensure that . A tax equalization plan helps ensure that U.S. expatriates will not pay any more or less in taxes than if U.S. expatriates will not pay any more or less in taxes than if they were working in the U.S. Because of the variation in tax they were working in the U.S. Because of the variation in tax laws and rates from country to country, tax equalization is laws and rates from country to country, tax equalization is very complex to determine. very complex to determine.


TheThe ranking method ranking method requires that entire jobs, rather than job requires that entire jobs, rather than job components, be arrayed in the order of value to the organization. A components, be arrayed in the order of value to the organization. A small organization, or one with few jobs, may find the ranking small organization, or one with few jobs, may find the ranking system to be reasonably suitable.system to be reasonably suitable. In the In the classification methodclassification method descriptions of each class of jobs are descriptions of each class of jobs are written, and then each job in the organization is put into a grade written, and then each job in the organization is put into a grade according to the class description it matches best. The major according to the class description it matches best. The major difficulty with these method is that subjective judgments re needed difficulty with these method is that subjective judgments re needed to develop the class descriptions and to place jobs accurately in to develop the class descriptions and to place jobs accurately in them. them. The The factor-comparison method factor-comparison method is a quantitative and quite complex is a quantitative and quite complex combination of the ranking and point methods. The major combination of the ranking and point methods. The major advantage of the factor-comparison method is that it is tailored to advantage of the factor-comparison method is that it is tailored to one organization. The major disadvantages are that it is difficult to one organization. The major disadvantages are that it is difficult to use and time-consuming to establish and develop. use and time-consuming to establish and develop.


HR Online: Responding to Internet Pay Survey Data Questions HR Online: Responding to Internet Pay Survey Data Questions It is becoming common for employees who are dissatisfied with their pay to bring It is becoming common for employees who are dissatisfied with their pay to bring Internet data to HR professionals or their managers and ask why their current pay is Internet data to HR professionals or their managers and ask why their current pay is different from the pay in that Internet data. Even different from the pay in that Internet data. Even Salary.comSalary.com includes explanations on includes explanations on its Web site. Points to be made in discussing employee concerns include the following:its Web site. Points to be made in discussing employee concerns include the following: Job titles and responsibilitiesJob titles and responsibilities: Comparison should be made against the full job : Comparison should be made against the full job description not just the job title or a brief job summary.description not just the job title or a brief job summary.Experience, KSAs, and performanceExperience, KSAs, and performance: Individuals in different organizations may have : Individuals in different organizations may have jobs with similar descriptions but vary significantly in their experience levels, KSAs, and jobs with similar descriptions but vary significantly in their experience levels, KSAs, and performance.performance.Geographic differencesGeographic differences: Many pay survey sites on the Internet use geographic index : Many pay survey sites on the Internet use geographic index numbers, not actual data from employers in a particular area.numbers, not actual data from employers in a particular area.Company size and industryCompany size and industry: Pay levels may vary significantly by company size and in : Pay levels may vary significantly by company size and in different industries. different industries. Base pay vs. total compensationBase pay vs. total compensation: Internet data usually reflects only base pay amounts.: Internet data usually reflects only base pay amounts. Questions for Discussion:Questions for Discussion:1. If employees finds that their salary is lower than the salary shown on an Internet 1. If employees finds that their salary is lower than the salary shown on an Internet pay survey, do you think they should ask their managers why their pay is different? pay survey, do you think they should ask their managers why their pay is different? Why or why not?Why or why not?2. Can you think of any other factors that may explain why an employee’s salary is 2. Can you think of any other factors that may explain why an employee’s salary is less than the average salary shown on an Internet pay survey?less than the average salary shown on an Internet pay survey?3. Do you think the HR staff or an employee’s manager should be the one to answer an 3. Do you think the HR staff or an employee’s manager should be the one to answer an employee’s questions about their salary compared to Internet survey data? Why?employee’s questions about their salary compared to Internet survey data? Why?


HR Best Practices: Pay-for-Performance at First Merit Bank HR Best Practices: Pay-for-Performance at First Merit Bank The effectiveness of using metrics and pay-for-performance are The effectiveness of using metrics and pay-for-performance are illustrated in the experience at First Merit Bank based in Akron, illustrated in the experience at First Merit Bank based in Akron, Ohio. The company has focused on reducing turnover of proof Ohio. The company has focused on reducing turnover of proof operations and has been successful. First Merit developed a pay-for-operations and has been successful. First Merit developed a pay-for-performance system based on two measurements: speed and performance system based on two measurements: speed and accuracy. Using the computer system, operators are rewarded on accuracy. Using the computer system, operators are rewarded on key strokes per hour and accuracy rates. Additionally, the amount key strokes per hour and accuracy rates. Additionally, the amount of money that employees could earn was uncapped. Thus, while the of money that employees could earn was uncapped. Thus, while the base rate was $9 per hour, 22 of 27 employees at one located base rate was $9 per hour, 22 of 27 employees at one located earned over $15 per hour. The success of the system has been earned over $15 per hour. The success of the system has been extended to other jobs throughout the bank using different extended to other jobs throughout the bank using different performance metrics and pay amounts. performance metrics and pay amounts. Questions for Discussion:Questions for Discussion: 1. Do you see any problems or concerns with the pay-for-1. Do you see any problems or concerns with the pay-for-performance plan for proof operations at First Merit Bank? performance plan for proof operations at First Merit Bank? 2. Do you think a pay-for-performance plan will work for all 2. Do you think a pay-for-performance plan will work for all workers at a bank? Why or why not?workers at a bank? Why or why not?3. What would be the factors that you would use to develop a 3. What would be the factors that you would use to develop a pay-for-performance plan for bank tellers? Would speed and pay-for-performance plan for bank tellers? Would speed and accuracy be important factors for tellers?accuracy be important factors for tellers?


HR Headline:HR Headline: Pay for Performance in Public Schools Pay for Performance in Public Schools “Pay for Performance” has made inroads in business, but has “Pay for Performance” has made inroads in business, but has remained a hard sell in public school systems. There are some remained a hard sell in public school systems. There are some successful examples where teacher pay has been linked to student successful examples where teacher pay has been linked to student test scores. In Minnesota some districts have stopped giving test scores. In Minnesota some districts have stopped giving automatic raises for seniority and base 60% of all pay increases on automatic raises for seniority and base 60% of all pay increases on performance. In Denver, unions and school districts designed an performance. In Denver, unions and school districts designed an incentive program where teachers receive bonuses for student incentive program where teachers receive bonuses for student achievement and for earning national teaching certificates. achievement and for earning national teaching certificates. However, some plans have not worked. For example, Cincinnati However, some plans have not worked. For example, Cincinnati teachers voted against a merit pay proposal and Philadelphia teachers voted against a merit pay proposal and Philadelphia teachers gave their bonus checks to charity rather than cashing teachers gave their bonus checks to charity rather than cashing them. It appears that having teachers involved in planning the them. It appears that having teachers involved in planning the incentive system is one key factor to success. The same can be said incentive system is one key factor to success. The same can be said for all incentive plans – if employees don’t buy into them, they will for all incentive plans – if employees don’t buy into them, they will not work. not work. Questions for DiscussionQuestions for Discussion::1.1. How could an organization measure the effectiveness of How could an organization measure the effectiveness of their pay-for-performance plans? their pay-for-performance plans? 2.2. From an employee’s perspective, what are the From an employee’s perspective, what are the disadvantages of using a pay-for-performance plan?disadvantages of using a pay-for-performance plan?3. From an employer’s perspective, what are the disadvantages 3. From an employer’s perspective, what are the disadvantages of using a pay-for-performance plan?of using a pay-for-performance plan?


HR Perspective: Using Slot Machines as IncentivesHR Perspective: Using Slot Machines as Incentives The “Snowfly System” is an incentive program aimed at front-line The “Snowfly System” is an incentive program aimed at front-line workers than offer smaller rewards more frequently so employees workers than offer smaller rewards more frequently so employees can see the link between their performance and rewards. Managers can see the link between their performance and rewards. Managers give employees tokens when they display desired behaviors and the give employees tokens when they display desired behaviors and the tokens are used to win “points” that can be cashed in for money or tokens are used to win “points” that can be cashed in for money or other prizes. LDF Sales and Distributing in Kansas used Snowfly and other prizes. LDF Sales and Distributing in Kansas used Snowfly and gave employees tokens every time they double checked a gave employees tokens every time they double checked a shipment. Inventory losses fell by half saving $31,000 per year. shipment. Inventory losses fell by half saving $31,000 per year. First Interstate Bank successfully used Snowfly to encourage First Interstate Bank successfully used Snowfly to encourage employees to sign up customers for credit cards. The system cost employees to sign up customers for credit cards. The system cost more than the old system but generated more profits. more than the old system but generated more profits. Questions for Discussion:Questions for Discussion: Why do you think the Snowfly system is successful? Why do you think the Snowfly system is successful? What do you think would be some disadvantages of using Snowfly?What do you think would be some disadvantages of using Snowfly?The system is aimed at front-line workers. Can you think of other The system is aimed at front-line workers. Can you think of other employee groups that might be motivated by this type of system? employee groups that might be motivated by this type of system? Can you think of other employee groups where this system would Can you think of other employee groups where this system would not be successful? Explain why.not be successful? Explain why.


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