STRATEGIC COMPENSATION A Human Resource Management Approach Chapter

STRATEGIC COMPENSATION A Human Resource Management Approach Chapter 5 Incentive Pay 1 Prentice Hall, Inc. © 2006 Prepared by David Oakes

Incentive Pay Ø Compensation fluctuates according to ² A pre-established formula ² Individual or group goals ² Company earnings Ø Adds to base pay Ø Controls costs Ø Motivates employees 2 Prentice Hall, Inc. © 2006

Incentive Pay Categories Ø Individual Ø Group Ø Company-wide 3 Prentice Hall, Inc. © 2006

Performance Measures Ø Individual incentive plans ² Quantity of work output ² Quality of work output ² Monthly sales ² Work safety record ² Work attendance 4 Prentice Hall, Inc. © 2006

Group Incentive Performance Measures Ø Group incentive plans ² Customer satisfaction ² Labor cost savings ² Materials cost savings ² Reduction in accidents ² Services cost savings 5 Prentice Hall, Inc. © 2006

Company-Wide Performance Measures Ø Company-wide incentive plans ² Company profits ² Cost containment ² Market share ² Sales revenue 6 Prentice Hall, Inc. © 2006

Types of Individual Incentive Plans Ø Piecework plans Ø Management incentive plans Ø Behavior encouragement plans Ø Referral plans 7 Prentice Hall, Inc. © 2006

Piecework Plans Ø Awards based on individual production v. objective standards Ø Awards based on individual performance standards using objective & Subjective criteria Ø Quantity and / or quality goals 8 Prentice Hall, Inc. © 2006

Individual Incentive Plan Advantages Ø Helps relate pay to performance Ø Promotes equitable distribution of compensation Ø Helps retain best performers Ø Compatible with America’s individualistic culture 9 Prentice Hall, Inc. © 2006

Disadvantages Ø May promote inflexibility Ø Unrealistic standards may hamper employee motivation Ø Setting performance standards is time consuming Ø Factors beyond employee’s control may affect outcomes Ø Factors not rewarded may be overlooked 10 Prentice Hall, Inc. © 2006

Group Incentive Plans Ø Rewards employees for their collective performance Ø Use has increased in industry Ø 2 types ² Team - based or small group ² Gain sharing 11 Prentice Hall, Inc. © 2006

Allocation Methods Ø Equal incentive payments Ø Differential payments based on contribution to goals Ø Differential payments according to base pay 12 Prentice Hall, Inc. © 2006

Gain Sharing Ø Incentives based on company’s improved productivity Ø Based on open leadership Ø Involves employee participation Ø Includes bonuses 13 Prentice Hall, Inc. © 2006

Gain Sharing Plans 3 Common Forms Ø Scanlon Plan Ø Rucker Plan Ø Improshare 14 Prentice Hall, Inc. © 2006

Scanlon Plan Ø Joseph Scanlon, 1935 Ø Emphasis on teamwork Ø Two - tiered cost savings suggestion system Ø Production - level committees Ø Screening committees Ø Rewards = labor costs / SVOP 15 Prentice Hall, Inc. © 2006

Rucker Plan Ø Allan W. Rucker, 1933 Ø Emphasizes employee involvement Ø Uses a value - added formula ² Value of sales price ² Value of materials used ² Total labor costs 16 Prentice Hall, Inc. © 2006

Improshare Ø Mitchell Fein, 1973 Ø Improved productivity through sharing Ø Incentive to finish products Ø Bonus based on a labor ratio Ø Includes a buy - back provision 17 Prentice Hall, Inc. © 2006

Company - Wide Incentive Plans Ø Rewards employees when company meets performance standards Ø 2 Types ² Profit sharing plans ² Employee stock option plans 18 Prentice Hall, Inc. © 2006

Profit Sharing Plans Ø Current profit sharing plans Ø Deferred profit sharing plans 19 Prentice Hall, Inc. © 2006

Profit Sharing Formulas Ø Fixed-first-dollar-of-profits Ø Graduated first-dollar-of profits Ø Probability threshold formula 20 Prentice Hall, Inc. © 2006

Distribution Methods Ø Equal payments Ø Proportional payments based on annual salary Ø Proportional payments based on contribution to profits 21 Prentice Hall, Inc. © 2006

Incentive Pay Considerations Ø Based on individual or group performance? Ø Acceptable level of risk? Ø Replace traditional pay? Ø Performance criteria evaluated? Ø Appropriate time horizon? 22 Prentice Hall, Inc. © 2006

Competitive Strategies Ø Lowest - cost ² Lower output costs per employee ² Individual & group incentive plans ² Behavioral encouragement plans Ø Differentiation ² ² Unique product or services Creative, risk - taking employees Long - term focus Team - based incentives 23 Prentice Hall, Inc. © 2006