Prentice Hall, Inc. © 2006 5-1 A Human Resource Management Approach STRATEGIC COMPENSATION Prepared...
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Prentice Hall, Inc. © 2006 5-1 A Human Resource A Human Resource Management Approach Management Approach STRATEGIC STRATEGIC COMPENSATION COMPENSATION Prepared by David Oake Chapter 5 Chapter 5 Incentive Pay Incentive Pay
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Transcript of Prentice Hall, Inc. © 2006 5-1 A Human Resource Management Approach STRATEGIC COMPENSATION Prepared...
Prentice Hall, Inc. © 2006
5-1
A Human Resource A Human Resource Management ApproachManagement Approach
STRATEGIC STRATEGIC COMPENSATIONCOMPENSATION
Prepared by David Oakes
Chapter 5Chapter 5
Incentive PayIncentive Pay
Prentice Hall, Inc. © 2006
5-2
Incentive PayIncentive Pay
Compensation fluctuates according to A pre-established formula Individual or group goals Company earnings
Adds to base pay Controls costs Motivates employees
Prentice Hall, Inc. © 2006
5-3
Incentive Pay CategoriesIncentive Pay Categories
Individual
Group
Company-wide
Prentice Hall, Inc. © 2006
5-4
Performance MeasuresPerformance Measures
Individual incentive plans
Quantity of work output
Quality of work output
Monthly sales
Work safety record
Work attendance
Prentice Hall, Inc. © 2006
5-5
Group Incentive Group Incentive Performance MeasuresPerformance Measures
Group incentive plans Customer satisfaction
Labor cost savings
Materials cost savings
Reduction in accidents
Services cost savings
Prentice Hall, Inc. © 2006
5-6
Company-WideCompany-WidePerformance MeasuresPerformance Measures
Company-wide incentive plans
Company profits
Cost containment
Market share
Sales revenue
Prentice Hall, Inc. © 2006
5-7
Types of Individual Types of Individual Incentive Plans Incentive Plans
Piecework plans
Management incentive plans
Behavior encouragement plans
Referral plans
Prentice Hall, Inc. © 2006
5-8
Piecework PlansPiecework Plans
Awards based on individual production v. objective standards
Awards based on individual performance standards using objective & Subjective criteria
Quantity and / or quality goals
Prentice Hall, Inc. © 2006
5-9
Individual Incentive Plan Individual Incentive Plan AdvantagesAdvantages
Helps relate pay to performance
Promotes equitable distribution of compensation
Helps retain best performers Compatible with America’s individualistic culture
Prentice Hall, Inc. © 2006
5-10
DisadvantagesDisadvantages May promote inflexibility Unrealistic standards may hamper employee motivation
Setting performance standards is time consuming Factors beyond employee’s control may affect outcomes Factors not rewarded may be overlooked
Prentice Hall, Inc. © 2006
5-11
Group Incentive PlansGroup Incentive Plans
Rewards employees for their collective performance Use has increased in industry
2 types Team - based or small group Gain sharing
Prentice Hall, Inc. © 2006
5-12
Allocation MethodsAllocation Methods
Equal incentive payments
Differential payments based on
contribution to goals
Differential payments according
to base pay
Prentice Hall, Inc. © 2006
5-13
Gain SharingGain Sharing
Incentives based on company’s improved productivity
Based on open leadership
Involves employee participation
Includes bonuses
Prentice Hall, Inc. © 2006
5-14
Gain Sharing PlansGain Sharing Plans
3 Common Forms
Scanlon Plan
Rucker Plan
Improshare
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5-15
Scanlon PlanScanlon Plan
Joseph Scanlon, 1935 Emphasis on teamwork Two - tiered cost savings suggestion system
Production - level committees Screening committees Rewards = labor costs / SVOP
Prentice Hall, Inc. © 2006
5-16
Rucker PlanRucker Plan
Allan W. Rucker, 1933
Emphasizes employee involvement
Uses a value - added formula Value of sales price Value of materials used Total labor costs
Prentice Hall, Inc. © 2006
5-17
ImproshareImproshare
Mitchell Fein, 1973
Improved productivity through sharing
Incentive to finish products
Bonus based on a labor ratio
Includes a buy - back provision
Prentice Hall, Inc. © 2006
5-18
Company - Wide Incentive PlansCompany - Wide Incentive Plans
Rewards employees when company meets performance standards
2 Types Profit sharing plans Employee stock option plans
Prentice Hall, Inc. © 2006
5-19
Profit Sharing PlansProfit Sharing Plans
Current profit sharing plans
Deferred profit sharing plans
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5-20
Profit Sharing FormulasProfit Sharing Formulas
Fixed-first-dollar-of-profits Graduated first-dollar-of profits Probability threshold formula
Prentice Hall, Inc. © 2006
5-21
Distribution MethodsDistribution Methods
Equal payments
Proportional payments based
on annual salary
Proportional payments based
on contribution to profits
Prentice Hall, Inc. © 2006
5-22
Incentive Pay Considerations Incentive Pay Considerations
Based on individual or group performance?
Acceptable level of risk?
Replace traditional pay?
Performance criteria evaluated?
Appropriate time horizon?
Prentice Hall, Inc. © 2006
5-23
Competitive Strategies Competitive Strategies
Lowest - cost Lower output costs per employee Individual & group incentive plans Behavioral encouragement plans
Differentiation Unique product or services Creative, risk - taking employees Long - term focus Team - based incentives
