Performance Based Pay Strategic implications of pay for

Performance Based Pay • Strategic implications of pay for performance • Assumptions of incentive plans • Individual and group incentive systems • Managing merit pay systems

Strategic Implications of Merit Pay • Global need for positive push • Rewarding the right behaviors

Assumptions of Incentives • Why pay individuals differently – Pay ranges – Broad banding • • Ability, expectancy, instrumentality Performance variation Performance measurement The trust factor

Individual Plans • • Merit pay Awards and bonuses Piece rates Commissions

Group Plans • Profit sharing – Advantage: Employee involvement – Disadvantage: The risk factor, lack of control, sense of inequity • Gain sharing – Advantage: Employee involvement – Disadvantage: Trust essential, union opposition, not useful in piece work

Gain Sharing & Profit Sharing • Gain Sharing – Based on local productivity – Benefit comes close in time to actual performance • Profit Sharing – Based on total firm financial performance – Benefit is deferred to annual administration or even put into pension system

Employee Stock Ownership Plans • Every employee a part owner • Works better when done for reasons of management commitment than for financial reasons • It does not automatically improve employee performance, attitudes or sense of control

Incentive System Failure • Hardly noticeable rewards • Inadequate performance appraisal • Ambiguous links between performance and reward • Higher union wages • Adaptation problem

Incentive System Success • Clearly noticeable rewards • Accurate appraisal • Managers adept in appraising and feedback • Visible link between performance and reward • Wide range of increases

Administrative Issues • • Concerns: Fairness, Risk, Efficiency Communication Pay Secrecy Pay satisfaction

Merit Pay Systems Adapted From Hills, Bergmann, & Scarpello, Compensation Decision Making, 2 Ed.

Backwards & Forwards • Summing up: Today are topics began with the strategic implications of pay for performance, we then examined assumptions underlying incentive systems and several individual and group merit pay plans. We concluded with a look at the management issues in applying the incentive systems. What makes some plans fail, why do they work • Looking Ahead: Next time we dig into the topic of benefits — health, holidays and pension at our next session.