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Chapter 10 Pay-for-Performance : Incentive Rewards. Learning Outcomes. Implement a strategic incentive program Detect when and what types of individual incentives are appropriate
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Learning Outcomes • Implement a strategic incentive program • Detect when and what types of individual incentives are appropriate • Differentiate how gains may be shared with employees under different group incentive plans like the Scanlon and Improshare gainsharing systems
Learning Outcomes • Differentiate between profit sharing plans and explain advantages and disadvantages of these programs as an alternative to individual and group incentive systems • Understand how to apply different incentive systems designed for professionals and executives
Strategic Reasons for Incentive Plans • Variable pay programs: Tying pay to some measure of individual, group, or organizational performance • Incentive pay plans • Establish a performance threshold for employees to qualify for incentive payments • Emphasize a shared focus on organizational objectives • Creates an operating environment supporting shared commitment
Incentive Plans as Links to Organizational Objectives • Purpose of incentive plan • Encourages employees to assume ownership of their jobs, thereby improving effort and job performance • Motivates employees to expend more effort than under hourly and/or seniority-based compensation systems • Supports a compensation strategy to attract and retain top-performing employees
Requirements for a Successful Incentive Plan • Identify important organizational metrics encouraging employee behavior • Involve employees • Incentive programs should seem fair to employees • Find the right incentive payout • Payout formulas should be simple and understandable • Establish a clear link between performance and payout
Individual Incentive Plans Piecework • Straight piecework: Employees receive a certain rate for each unit produced • Differential piece rate: Employees whose production exceeds the standard amount of output receive a higher rate for all of their work Standard hour plan • Sets rates based on the completion of a job in a predetermined standard time Bonus • Supplemental to the base wage
Individual Incentive Plans Merit pay • Links an increase in base pay to how successfully an employee performs his or her job Incentive awards and recognition • Awards - Used to recognize productivity gains, special contributions or achievements, and service to the organization • Recognition - Conduit that shows employees that the company appreciates their efforts, their unique gifts, and their contributions Sales incentive • Performance standards for sales employees are difficult to develop because performance is affected by external factors • Types - Straight salary plan, straight commission plan, Combination salary and commission plan, and Sales plus bonus plan
Group Incentive Plans - Team Compensation • Team incentive plans: All team members receive an incentive bonus payment when production or service standards are met or exceeded • Gainsharing incentive plan: Both employees and the organization share financial gains by a predetermined formula • Scanlon plan • Improshare
Group Incentive Plans • Profit sharing - Employer makes available to all regular employees, special current or deferred sums based on the organization’s profits • Stock options - Organizations allow employees to buy stocks to increase productivity and assume partnership role in the organization • This in turn leads to the increase in stock prices • Employee Stock Ownership Plans (ESOPs): Stock plans in which an organization contributes shares of its stock to an established trust for the purpose of stock purchases by its employees
Incentives for Professional Employees • Professional employees • Motivation is influenced by their increased mobility across companies • Can receive compensation beyond base pay
Executive Pay Package Base salary Short-term incentives or bonuses Long-term incentives or stock plans Benefits Perks
Executive Compensation: Ethics and Accountability • Justification of bonuses • Large financial incentives are a way to reward superior performance • Business competition is pressure-filled and demanding • Good executive talent is in great demand • Effective executives create shareholder value • Fact of business life, reflecting market compensation trends
Executive Compensation Reform • Internal Revenue Service (IRS) makes executive pay a part of every corporate audit • Securities and Exchange Commission issued pay disclosure rules requiring companies listed on the New York Stock Exchange and NASDAQ to disclose the true size of their top executive pay packages
Executive Compensation Reform • Financial Accounting Standards Board (FASB) requires stock options to be recognized as an expense on income statements • Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub. L. 111-203) was signed into effect giving share holders say on pay • Voting shareholders of a company must ultimately approve of its executive salaries
