Chapter 10 ADMN2230

Incentive Rewards

• Incentive programs aim to motivate employees and improve organizational performance.
• Incentive plans operate at three levels: individual, team/group, and organizational.
• Successful implementation of incentive programs requires specific employee characteristics.
• Compensation methods vary greatly depending on the level (individual, team/group, or organization).
• Individual plans include piecework, standard hour plans, bonuses, merit pay, and lump-sum merit pay.
• Group incentives may involve team compensation, Scanlon Plan, Improshare, and profit-sharing.
• Organizational incentives utilize stock options and employee stock ownership plans (ESOPs).

Learning Objectives

• Incentive programs' core requirements for effective implementation are listed, including various essential employee characteristics.
• Individual-level incentives, team/group-level plans, and organizational profit-sharing and stock plans are covered, along with the advantages and disadvantages of each.

Types of Incentive Plans

• Individual incentives include piecework, standard hour plans, bonuses, merit pay, lump-sum merit pay, incentive awards, and sales incentives.
• Group incentives include team compensation, Scanlon Plans, and Improshare.
• Company-level incentives involve profit-sharing and stock options/ESOPs.

Incentive Plans as Links to Organizational Objectives

• Incentives focus employee efforts on specific performance goals, motivating significant organizational gains.
• Incentive compensation directly correlates with performance; if objectives are met, incentives are paid, and if goals are not met, incentives are withheld.
• Incentive payouts are variable costs, differing from fixed-cost base salaries, and tied to performance.
• Teamwork and unit cohesiveness increase if incentives are linked to team achievements.
• Top performers are rewarded when incentives are implemented to fill salary budget gaps.

Do Incentive Plans Work?

• A successful incentive plan requires identifying key organizational metrics to encourage desired employee behavior.
• Employee involvement is crucial for the plan's success.
• Determining the correct incentive payout is necessary.
• Establishing a clear link between performance and payout is essential for the plan.
• Defining and measuring performance accurately is critical.
• Research suggests incentive plans improve organizational performance under certain conditions.

Dos and Don'ts of Measuring Performance for Incentives

• Individual pay: Measure quantifiable, independent work and contribution. Reflect the relationship between labor and productivity. Avoid measurements based on preferences, personalities, or politics. Avoid ignoring peer contributions.
• Group pay: Evaluate group-dependent work to display its connection to performance. Consider team contributions. Have clear mechanisms to address underperforming group members.
• Enterprise pay: Measure results that employees have control over. Establish connection between work and overarching performance. Consider external factors (e.g., economic downturns).

Successful Incentive Plans

• Employees desire incentive plans.
• Employees participate in incentive programs.
• Employees recognize the link between payment and performance.
• Employees are dedicated to meeting set standards.
• Standards should be demanding but reachable.
• Payout formulas must be simple and transparent.
• Incentives should be a separate part of overall compensation.

Individual Incentive Plans (Specific Examples)

• Straight Piecework: Employees earn a fixed rate per unit produced.
• Differential Piece Rate: Higher pay rate for those exceeding a standard production amount.
• Standard Hour Plan: Pay is based on completing a job within a predefined timeframe.
• Bonus: Additional compensation apart from base wages, potentially for exceptional effort or meeting specific goals.
• Spot Bonus: Unplanned bonuses for employee performance not related to formal standards.
• Merit Pay Program (Merit Raise): Base pay increases are tied to the success of meeting predetermined performance standards.

Problems with Merit Raises

• Merit increase amounts may be inadequate.
• Management may lack guidance in defining and measuring performance.
• Employees may doubt the connection between compensation and effort.
• Managers and employees may hold contrasting views of success factors.
• Feel of pay inequality among employees.

Merit Pay (Guidelines, Lump-Sum, etc)

• Merit Guidelines: Provide standards for merit raise amounts related to performance objectives.
• Lump-Sum Merit Program: Employees receive year-end merit payments not affecting base pay.

Incentive Awards and Recognition

• Awards recognize productivity gains, special contributions, or achievements.
• Noncash incentives are most effective when combined with a meaningful employee recognition program.

Sales Incentives

• Types of sales incentive plans: straight salary, straight commission, combined salary and commission.

Incentive Plans for Sales Employees (Specific Examples)

• Straight Salary: Compensation for all duties, regardless of immediate sales volume.
• Advantages: Encourages customer relations, provides compensation during poor sales times.
• Disadvantages: May not motivate high sales.
• Straight Commission: Compensation based on a percentage of sales.
• Disadvantages: May focus on high-priced items, neglect customer service, and may vary greatly based on fluctuating sales cycles; may lead sales representatives to grant unfavorable concessions.
• Combined Salary and Commission: Straight salary plus commission; balance and flexibility.
• Advantages: Combination offers balance, flexibility in compensation structure, and motivates achieving company marketing objectives in addition to sales.

Incentives for Executives (The Executive Pay Package)

• Base salary: Fixed compensation.
• Short-term incentives/bonuses: Variable compensation linked to short-term performance.
• Long-term incentives/stock plans: Stock options, purchase programs, etc.
• Benefits: Health insurance, retirement plans, etc.
• Perquisites (perks): Special non-monetary benefits (e.g., company car).
• CEO pay is set by the board of directors

Incentives for Executives (Types of Long-Term Incentive Plans)

• Stock options: Rights to purchase company shares at a predetermined price.
• Stock appreciation rights (SARs): Cash or stock awards based on stock price gains.
• Stock purchase: Opportunities to purchase company shares.
• Phantom stock: Rights to a value tied to company share appreciation.
• Restricted stock: Stock that cannot be sold until a specific date.
• Performance units: Stock grants tied to performance over a period exceeding one year.
• Performance shares: Stock or phantom stock units with values tied to predetermined performance objectives.

Incentives for Executives (CEO Pay)

• Data displays CEO compensation levels.
• Relevant data helps one understand the compensation trends to the various executives from various companies.

Incentives for Executives (Justifications)

• Large financial incentives are justified to reward superior performance in competitive and demanding markets.
• Highly skilled executives are frequently in high demand. They contribute to company value.
• Drucker suggested CEO compensation should be a limited amount (20x) relative to rank-and-file compensation.

Group Incentive Plans (Specific Examples)

• Team Incentive Plans: All team members receive bonuses if production or service standards are met or exceeded.
• Gainsharing Plans: Both employees and the organization share financial gains based on improved productivity formulas. Factors affecting productivity include greater output with less/equal input, or equal output with less input.
• Enterprise Incentive Plans (Profit Sharing): A process whereby employers either pay or make profits-based payments or deferred sums available to regular employees.
• Employee Stock Ownership Plans (ESOPs): Stock ownership programs in which companies contribute stock to a trust for employee purchase.

Enterprise Incentive Plans (ESOPs, etc) (Advantages and Disadvantages)

• Advantages: Retirement benefits, pride of ownership, deferred taxes.
• Disadvantages: Stock price fluctuation, lack of guarantee of compensation, and lack of insurance.

Test your knowledge on employee incentive plans including gainsharing, profit sharing, and Employee Stock Ownership Plans (ESOPs). This quiz covers key features, advantages, and risks associated with various incentive strategies. Perfect for students and professionals in human resources and management.