Pay for performance
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Transcript of Pay for performance
Pay for performance plans signal a movement away from entitlements, sometimes a very slow movement toward pay that varies with some measure of individual or organizational performance.
Pay will vary with some measure of individual, team, or organizational performance.
EXHIBIT 10.1 Uses of Different Variable Pay Plan Types
Percent of Companies With Plan
Type of Plan 1996 1998 1999 2002 2007
Special-recognition plans 44 51 59 34 72
Stock option plans 21 46 43 40
Individual incdntive plans 17 35 39 38 49
Cash profit sharing 22 22 23 18 16
Gainsharing plans 16 20 18 11 10
Team awards 13 17 15 8 32
EXHIBIT 10.2 BASE VERSUS VARIABLE PAY
Percent of Total Compensation Today
2004 2005 2009 (projected)
Variable pay as percentage of payroll 9.50% 11.40% 11.30%
• The greater interest in variable pay probably
can be traced to two trends:
1. The increasing competition from foreign
producers forces American firms to cut costs
and/or increase productivity.
2. Today’s fast-paced business environment
means that workers must be willing to adjust
what they do and how they do it.
Pay-for-performance, those that introduce variability into the level of
pay you receive, seem to have a positive impact on performance if
designed well. Notice that we have qualified out statement that
variable-pay plans can be effective if they are designed well.
Merit Pay
Lump-Sum Bonuses
Individual Spot Awards
Individual Incentive Plans
Individual Incentive Plans:
Advantages and Disadvantages
Individual Incentive Plans: Examples
Merit Pay
a system links
increases in base pay
to how highly
employees are rated
on an performance
evaluation. Well Above Above Below Well Below
Average Average Average Average Average
Performance rating 1 2 3 4 5
Merit pay increase 5% 4% 3% 1% 0%
Lump-Sum Bonuses
are thought to be a
substitute for merit pay.
are earned at the end
of a specified time
period, such as
monthly, quarterly, or
annually, when an
employee achieves a
specific level of his
work or quota.
Individual Spot Awards/Spot
Awards
An immediate recognition to
reward an employee for
exceptional performance
beyond the prescribed
expectation of the
employee’s job. Spot awards
are given after the event has
been completed, usually without pre‐determined goals
or set performance levels and paid as a one‐time bonus.
Individual Incentive Plans
Incentive plans are part of an employee's compensation or
pay. The incentive plan gives an employee the opportunity
to increase his annual pay
based upon either company
performance or individual
performance. Incentive plans
are a way for companies to keep employees motivated to
perform to the best of their
abilities, thus increasing company profit.
There are four general categories of
plan:1. Cell 1
The most frequently implemented incentive system is a straight
piecework system.
Rate determination is based on units of production per time period, and
wages vary directly as a function of production level.
The major advantages of this type of system are that it is easily
understood by workers and, perhaps consequently, is more readily
accepted than some of the other incentive systems.
There are four general categories of
plan:2. Cell 2
Two relatively common plans set standards
based on time per unit and tie incentives
directly to level of output:
a. Standard hour plan is a generic term for plans setting the incentive rate based on completion of a task in some expected time period.
b. Bedeaux plan provides a variation on straight piecework and standard hour plans. It requires division of a task into simple actions and determination of the time required by an average skilled worker to complete each action.
There are four general categories of
plan:3. Cell 3
The two plans included in cell 3 provide for variable
incentives as a function of units of production per time
period:
a. Taylor Plan – establishes two piecework rates:
1) Goes into effect when a worker exceeds the
published standard for a given time period.
2) Established for production below standard, and
this rate is lower than the regular wage.
b. Merrick Plan – operates in the same way, except
that three piecework rates are set:
1) High for production exceeding 100% of standard
2) Medium for production between 83 and 100% of
standard
3) Low for production less than 83% of standard
There are four general categories of
plan:4. Cell 4
The three plans included in cell 4 provide for variable
incentives linked to a standard expressed as a time
period per unit of production:
a. Halsey 50-50 method – derives its name from the
shared split between worker and employer of any
savings in direct cost.
b. Rowan Plan – similar to the Halsey plan in that an
employer and employee both share in savings
resulting from work completed in less than standard
time.
c. Gantt Plan – differs from both the Halsey and the
Rowan plans in that the standard time for a task is
purposely set at a level requiring high effort to
Individual Incentive Plans: Advantages
Substantial impact that raises productivity, lowers
production costs, and increases earnings of
workers.
Less direct supervision is required to maintain
reasonable levels of output than under payment
by time.
In most cases, systems of payments by results, if
accompanied by improved organizational and
work measurement, enable labor costs to be
estimated more accurately than under payment
by time. This helps costing and budgetary control.
Individual Incentive Plans: Disadvantages
Greater conflict may emerge between employees seeking to maximize output and managers concerned about deteriorating quality levels.
Attempts to introduce new technology may be resisted by employees concerned about the impact on production standards.
Reduced willingness of employees to suggest new production methods for fear of subsequent increases in production standards.
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-
Comparing Group and Individual Incentive
Plans
Large Group Incentive Plans
Gain-Sharing Incentive Plans
Profit-Sharing Incentive Plans
Earnings-at-Risk Plans
Group Incentive Plans: Advantages and
Disadvantages
Group Incentive Plans: Examples
Failures of team incentives schemes can
be attributed to at least 5 causes:
1) Teams come in many varieties
2) Level problem
3) Complexity
4) Control
5) Communication
3 C’s
Large Group
Incentive Plans
Two Types of Plans
1) Gain-Sharing
Plans – use
operating
measures
2) Profit-Sharing Plans – use
financial
measures
Gain-Sharing Plans
looks at cost components of the
income ledger and identifies savings
over which employees have more
impact.
Key elements in designing a gain-
sharing plan:
1) Strength of reinforcement
2) Productivity standards
3) Sharing the gains split between
management and workers
4) Scope of the formula
5) Great care must be exercised with
such alternative measures
6) Perceived fairness of the formula
Gain-Sharing Plans
Three Gain-Sharing Formulas
1) Scanlon Plan – are designed
to lower labor costs without
lowering the level of a firm’s activity.
2) Rucker Plan – involves more
complex formula than a
Scanlon plan for
determining worker
incentive bonuses.
3) Improshare (Improved
Productivity through
Sharing) – is gain-sharing plan that has proved easy
to administer and to
Implementation of the Scanlon/Rucker Plans
Two major components are vital to the implementation and
success of a Rucker/Scanlon Plan:
1) a productivity norm
2) effective worker committees
Similarities and Contrasts Between Scanlon and Rucker Plans
They differ from individual incentive plans which focus on
using wage incentives to motivate higher.
There are two important differences between the two plans:
1) Rucker plans tie incentives to a wide variety of savings not
just the labor savings focused on Scanlon plans.
2) This greater flexibility may help explain why Rucker plans
are more amenable to linkages with individual incentive
Profit-Sharing Plans
Profit sharing
continues to be
popular because
the focus is on the
measure that
matters most to be
people, a
predetermined
index of
profitability.
Earnings-at-Risk Plans
Two categories:
1) Success sharing plans
- employee base wages
are constant and
variable pay adds on
during successful years.
2) Risk sharing plans
- base pay is reduced by
some amount relative to
the level that would be
offered in a success-
sharing plan.
Group Incentive Plans: Advantages
1) Positive impact on organization and individual performance of about 5 to 10 percent per year.
2) Easier to develop performance measure than it is for individual plans.
3) Signals that cooperation, both within and across groups, is a desires behavior.
4) Teamwork meets with enthusiastic support from most employees.
5) May increase participation of employees in decision-making process.
Group Incentive Plans: Disadvantages
1) Line-of-sight may be lessened, that
is employees may find it more
difficult to see how their individual
performance affects their
incentive payouts.
2) May lead to increased turnover
among top individual performers
who are discouraged because
they must share with lesser
contribution.
3) Increases compensation risk to
employees because of lower
income stability. May influence
some applicants to apply for jobs
in firms where base pay is a larger
compensation component.
Group Incentive Plans:
Examples
Can be described by
common features:
1) the size of the group that participates in the plan
2) the standard against which performance is compared
3) the payout schedule
Employee Stock Ownership Plans
(ESOPs)
Performance Plans (Performance Share
and Performance Unit)
Broad-Based Option Plans (BBOPs)
Combination Plans: Mixing Individual
and Group
Employee Stock Ownership Plans
(ESOPs)
It is a benefit or retirement-
type plan for employees of a
company. In an ESOP,
employees receive regular
shares of the company’s stock
as a benefit for working at the
company. All employees are
eligible to participate in the
ESOP after a certain period of
time employed, usually one to
two years depending on the
Plan.
Performance Plans
(Performance Share and
Performance Unit)
Performance plans
typically features
corporate performance
objectives for a time three
years in the future. They
are driven by financial
earnings or return
measures, and they pay
out for meeting or
exceeding specific goals.
Broad-Based Option Plans (BBOPs)
BBOPs are stock grants. The company gives employees
shares of stock over a
designated time period. The
strength of BBOPs id their
versatility. Depending on the
way they are distributed to
employees, they can either
reinforce a strong emphasis on performance (performance
culture) or inspire greater
commitment and retention (ownership culture) of
employees.
Combination Plans: Mixing Individual and Group
It’s not uncommon for companies to use both
individual and group incentives. The goal is to
both motivate individual behavior and to insure
that employees work together, where needed,
to promote team and corporate goals. These
combination programs start with standard
individual (e.g., performance appraisal,
quantity of output) and group measures (e.g.,
profit, operating income).