Pay-for-Performance: Incentive Rewards - PowerPoint Presentation

Slide1

Pay-for-Performance:

Incentive Rewards

1–1

The Challenges of Human Resources Management

Slide2

Linking Pay to Performance

Slide3

Pay for Performance12–

3

Slide4

How Incentives Sometimes “Work”

Slide5

Employee Opposition to Incentive Plans

Production standards are set unfairly. Incentive plans are really “work speedup.”Incentive plans create competition among workers.

Increased earnings result in tougher standards.Payout formulas are complex and difficult to understand.Incentive plans cause friction between employees and management.

Slide6

Incentive Plans as Links toOrganizational Objectives

Incentive Plan Purposes Encourage employees to assume “ownership” of their jobs, thereby improving effort and job performance.Motivate employees to expend more effort than under hourly and/or seniority-based compensation systems.

Support a compensation strategy to attract and retain top-performing employees.

Incentive Plan EffectivenessThere is evidence of a relationship between incentive plans and

improved organizational performance.

Slide7

Requirements for a Successful Plan

Identify important organizational metrics that encourage 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.

Slide8

Why Incentive Plans Fail

They fail to meet employee expectations for pay

gains.There is confusion about incentive payment calculations due to poor design and implementation of the plan.Employees do not have the capability to change

their performance levels.The organization environment does not support plan.

Slide9

Incentive Plans as Links to Organizational Objectives

Contemporary arguments for incentive plans focus on linking compensation rewards, both individual and group, to organizational goals.

Slide10

Individual Incentive Plans

Straight PieceworkAn incentive plan under which employees receive a certain rate for each unit produced.Differential Piece RateA compensation rate under which employees whose production exceeds the standard amount of output receive a higher rate for all of their work than the rate paid to those who do not exceed the standard amount.

Slide11

Computing the Piece Rate

hour

per

units

5

unit)per

time

(standard

minutes

12

hour)

(per

minutes

60

=

unit

per

$2.55

hour)

(per

units

5

rate)

(hourly

$12.75

=

Slide12

12–

12

Pros and Cons of Piecework

Easily understandable, equitable, and powerful incentives

Employee resistance to changes

in standards or work processes affecting output

Quality problems caused by an overriding output focusPossibility of violating minimum wage standardsEmployee dissatisfaction when incentives either cannot be earned or are withdrawn

May conflict with organizational culture and/or group norms

Slide13

Norms: A Group’s Unspoken Rules

Slide14

Individual Incentive Plans (cont’d.)

Standard Hour PlanAn incentive plan that sets pay rates based on the completion of a job in a predetermined “standard time.”If employees finish the work in less than the expected time, their pay is still based on the standard time for the job multiplied by their hourly rate.

Slide15

Individual Incentive Plans (cont.)

BonusIncentive payment that is supplemental to the base wage for cost reduction, quality improvement, or other performance criteria.

Spot bonusUnplanned bonus given for employee effort unrelated to an established performance measure.

Slide16

Merit PayMerit Pay Program (Merit Raise)

Links an increase in base pay to how successfully an employee achieved some objective performance standard.Merit GuidelinesGuidelines for awarding merit raises that are tied to performance objectives.

Slide17

Merit Pay and MotivationEvidence suggests that merit raises of 10-15% motivate changes in behavior.

Typical merit raises range from 2-6%Rewards are more motivating if:They are timely

They are public rather than secretThey are scarce rather than common

Slide18

Example of Merit Increase Grid

Slide19

Lump-Sum Merit PayLump-Sum Merit Program

Program under which employees receive a year-end merit payment, which is not added to base pay.

Advantages:Provides financial control by maintaining annual salary expenses and not escalating base salary levels.Contains employee benefit costs for levels of benefits normally calculated from current salary levels.

Slide20

Problems with Merit Raises

Money for merit increases may be inadequate to satisfactorily raise all employees’ base pay.Managers may have no guidance in how to define and measure performance; there may be vagueness regarding merit award criteria.

Employees may not believe that their compensation is tied to effort and performance; they may be unable to differentiate between merit pay and other types of pay increases.

Employees and their managers may hold different views of the factors that contribute to job success.

Merit pay plans may create feelings of pay inequity.

Slide21

Sales Incentives

Straight Commission

Straight Salary

Salary and Commission

Combinations

Sales

Incentive Plans

Slide22

Incentive Plans for SalespersonsStraight Salary Plan

Compensation plan that permits salespeople to be paid for performing various duties that are not reflected immediately in their sales volume.Advantages:Encourages building customer relationships.

Provides compensation during periods of poor sales.Disadvantage:May not provide sufficient motivation for maximizing sales volume.

Slide23

Incentive Plans for Salespersons (cont.)

Straight Commission PlanCompensation plan based upon a percentage of sales. Draw

is a cash advance that must be paid back as commissions are earned.Disadvantages:Salespeople will stress high-priced products.Customer service after the sale is likely to be neglected.

Earnings tend to fluctuate widely between good and poor periods of business, an turnover of trained sales employees tends to increase in poor periods.Salespeople are tempted to grant price concessions.

Slide24

Incentive Plans for Salespersons (cont.)

Combined Salary and Commission PlanA compensation plan that includes a straight salary and a commission component (“leverage”).

Advantages:Combines the advantages of straight salary and straight commission forms of compensation.Offers greater design flexibility

Can be used to develop the most favorable ratio of selling expense to sales.Motivates sales force to achieve specific company marketing objectives in addition to sales volume.

Slide25

Group/Team Incentive PlansTeam Incentive PlansCompensation plans where all team members

receive an incentive bonus payment when production or service standards are met or exceeded.Establishing Team Incentive PaymentsSet performance measures upon which incentive payments are based

Determine the size of the incentive bonus.Create a payout formula and fully explain to employees how payouts will be distributed.

Slide26

Team Incentive PlansAdvantagesTeam incentives support group planning and problem solving, thereby building a team culture.

The contributions of individual employees depend on group cooperation.Team incentives can broaden the scope of the contribution that employees are motivated to make.

Team bonuses tend to reduce employee jealousies and complaints over “tight” or “loose” individual standards.Team incentives encourage cross-training and the acquiring of new interpersonal competencies.

Slide27

Team Incentive Plans (cont.)

DisadvantagesIndividual team members may perceive that “their” efforts contribute little to team success or to the attainment of the incentive bonus.

Intergroup social problems—pressure to limit performance and the “free-ride” effect may arise.Complex payout formulas can be difficult for team members to understand.

Slide28

Team Incentive Plans (cont.)

Gainsharing PlansPrograms under which both employees and the organization share the financial gains according to a predetermined formula that reflects improved productivity and profitability.

Increase in productivity is gained when:Greater output is obtained with less or equal input.Equal production output is obtained with less input.

Slide29

Gainsharing Incentive Plans

Scanlon Plan

Rewards come from employee participation in improving productivity and reducing costs.

Improshare

Gainsharing based on increases in productivity of the standard hour output of work teams.

Slide30

Gainsharing Plans

Philosophy of cooperation

Involvement system

Identity

Scanlon Plan Components

Competence

Benefits sharing formula

Slide31

Scanlon Plan Suggestion Process

Slide32

Improved Productivity through Sharing (Improshare): An ExampleA standard of the number of person-hours required to produce an expected level of output is developed

5000 hours of labor to produce 1000 units each week (5 hours per unit)In a given week 5000 labor hours produced 1300 units1500 hours have been saved (300 x 5)50-50 split between firm and employees; employees get 750 hour bonus

750/5000 = 15% bonusEmployees receive a 15% bonus for the week

Slide33

Enterprise Incentive Plans

Profit SharingAny procedure by which an employer pays, or makes available to all regular employees, in addition to their base pay, current or deferred sums based upon the profits of the enterprise.Deferred profit-sharing plans

A predetermined portion of profits based on the employee’s contribution to the firm’s profits is placed in each employee’s retirement account under a trustee’s supervision.Employees’ income taxes on the distributions are deferred, often until the employee retires.

Slide34

Enterprise Incentive Plans

Profit Sharing Challenges

Agreement over the percentages of shared of profits and the forms of distribution (cash or deferred) of profits between company and employees

Annual variations and possibility of no payout due to financial condition of company

Maintaining motivational connection of profit-sharing to performance of employees

Slide35

Enterprise Incentive Plans (cont.)

Stock OptionsGranting employees the right to purchase a specific number of shares of the company’s stock at a guaranteed price (the option price) during a designated time period.

The value of an option is subject to stock market conditions at the time that option is exercised.

Slide36

Enterprise Incentive Plans (cont.)

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.

The employer establishes an ESOP trust that qualifies as a tax-exempt employee trust under Section 401(a) of the Internal Revenue CodeStock bonus plans are funded by direct employer contributions of its stock or cash to purchase its stock.Leveraged plans are funded by employer borrowing to purchase its stock for the ESOP.

Slide37

Slide38

Enterprise Incentive Plans (cont.)

Rewards and Risks of ESOPS

Advantages

Disadvantages

Liquidity and value

Pride of ownership

Deferred taxes

Single funding basis

Not insured

Retirement benefits

Slide39

12–

39

Advantages of ESOPs

For the Company

Can take a tax deduction equal to the fair market value

of the shares transferred to the ESOP trustee

Gets an income tax deduction for dividends paid on ESOP-owned stockCan borrow against ESOP in trust and then repay the loan in pretax rather than after-tax dollarsFor the Employees

Develop a sense of ownership in and commitment to the firm.Do not pay taxes on ESOP earnings until they receive a distribution.For the Shareholders of Closely-Held CorporationsCan place assets into an ESOP trust which will allow them to purchase other marketable securities to diversify their holdings

Slide40

Incentives for Executives (cont.)

JustificationsLarge financial incentives reward superior performance.

Business competition is pressure-filled and demanding.Good executive talent is in great demand.Effective executives create shareholder value.

Slide41

Incentives for ExecutivesThe Executive Pay PackageBase salary

Short-term incentives or bonusesLong-term incentives or stock plansBenefitsPerquisites (perks)

Slide42

Types of Long-Term Incentive Plans

Slide43

The “Sweetness” of Executive Perks

Slide44

Executive Compensation ReformCurrent Reform Measures

The Internal Revenue Service (IRS) is looking for tax-code violations in executive pay packages and will make executive pay a part of corporate audits.The Securities and Exchange Commission issued pay disclosure rules which require companies listed on the New York Stock Exchange and NASDAQ to disclose the true size of their top executive pay packages.

The Financial Accounting Standards Board (FASB) now requires that stock options be recognized as an expense on income statements.

Slide45

Executive Compensation Reform (cont.)

Other Reform Measures:The adoption of performance formulas that peg executive compensation to organizational benchmarks other than stock priceShareholder resolutions that allow shareholders the right to vote on executive pay packages

Greater accountability by compensation committees to justify large executive pay awards or severance or retirement packages

Slide46

Pay for Performance???Give Me a Break: Big Bucks for Execs as Companies FlounderNardelli

out at Home Depot

Slide47

Nonfinancial and Recognition Awards

Effects of Recognition-Based Awards

Recognition has a positive impact on performance, either alone or in conjunction with financial rewards.Day-to-day recognition from supervisors, peers, and team members is important.Ways to Use Recognition

Social recognitionPerformance-based recognition

Performance feedback

Slide48

1501 Ways to Reward Employees (2012)

Slide49

Social Recognition and Related Positive Reinforcement Managers Can Use

Challenging work assignments

Freedom to choose own work activity

Having fun built into work

More of preferred task

Role as boss’s stand-in when he or she is away

Role in presentations to top management

Job rotation

Encouragement of learning and continuous improvement

Being provided with ample encouragement

Being allowed to set own goals

Compliments

Expression of appreciation in front of others

Note of thanks

Employee-of-the-month award

Special commendation

Bigger desk

Bigger office or cubicle

Slide50

Customize Your Noncash Incentive Awards

Slide51

Punished by Rewards (1999)

Punished by Rewards

Intrinsic v. extrinsic motivation

Slide52

Intrinsic Motivation and CreativityThe issue of whether reward decreases or increases intrinsic interest and creativity is relevant to organizations

because creative contributions help organizations become more efficient, adapt to change, and develop new products and serviceshttp

://www.psychology.uh.edu/faculty/Eisenberger/IMC.html

12–52