ADMN2230 Chapter 10: Pay for Performance

Pay for Performance: Incen.ve Rewards CHAPTER 10  Learning Objec-ves Basic requirements for successful implementation of incentive programs. Three levels of incentive plans:  Individual level incentive plans and appropriate conditions individual incentives.  Pr...

Pay for Performance: Incen.ve Rewards CHAPTER 10  Learning Objec-ves Basic requirements for successful implementation of incentive programs. Three levels of incentive plans:  Individual level incentive plans and appropriate conditions individual incentives.  Principal methods used to compensate salespeople.  Team and group-level pay-for-performance plans.  Organization level profit-sharing plans and stock ownership plans and the advantages and disadvantages of these programs. 2 Type of Incen-ve Plans 3 Incen-ve Plans as Links to Organiza-onal Objec-ves 4  Do Incen-ve Plans Work? Requirements for a Successful Incentive Plan: Identify important organizational metrics that encourage employee behaviour. Involve employees. Find the right incentive payout. Establish a clear link between performance and payout. Set performance measures. Research suggests that incentive plan can contribute organizational performance if certain conditions are met. Copyright © 2020 by Nelson Education Ltd. 5 Dos and Don’ts of Measuring Performance for Incen-ves Copyright © 2020 by Nelson Education Ltd. 6  Successful Incen-ve Plans Employees have a desire for an incentive plan. Employees are encouraged to participate. Employees see a clear connection between the incentive payments they receive and their job performance. Employees are committed to meeting the standards. Standards are challenging but achievable. Payout formulas are simple and understandable. Payouts are a separate, distinct part of compensation. Copyright © 2020 by Nelson Education Ltd. 7  Individual Incen-ve Plans Straight Piecework An incentive plan under which employees receive a certain rate for each unit produced Differential Piece Rate A 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 Copyright © 2020 by Nelson Education Ltd. 8  Compu-ng the Piece Rate 60 minutes (per hour) = 5 units per hour 12 minutes (standard time per unit) $12.75 (hourly rate) = $2.55 per unit 5 units (per hour) Copyright © 2020 by Nelson Education Ltd. 9  Individual Incen-ve Plans Standard Hour Plan An incentive plan that sets pay rates based on the completion of a job in a predetermined standard time Copyright © 2020 by Nelson Education Ltd. 10  Individual Incen-ve Plans Bonus Incentive payment that is supplemental to the base wage Spot Bonus Unplanned bonus given for employee effort unrelated to an established performance measure Often offered by supervisors Merit Pay Program (Merit Raise) Links an increase in base pay to how successfully an employee achieved some objective performance standard Copyright © 2020 by Nelson Education Ltd. 11  Problems with Merit Raises 1. Money for merit increases may be inadequate to satisfactorily raise all employees’ base pay. 2. Managers may have no guidance in how to define and measure performance. 3. Employees may not believe that their compensation is tied to effort and performance. 4. Employees and their managers may hold different views of the factors that contribute to job success. 5. Merit pay plans may create feelings of pay inequity. Copyright © 2020 by Nelson Education Ltd. 12  Merit Pay Merit Guidelines Guidelines for awarding merit raises that are tied to performance objectives Lump-Sum Merit Program Program under which employees receive a year-end merit payment, which is not added to their base pay Copyright © 2020 by Nelson Education Ltd. 13  Incen-ve Awards and Recogni-on Awards Often used to recognize productivity gains, special contributions or achievements Noncash Incentive Award Most effective as motivators when the award is combined with a meaningful employee recognition program Copyright © 2020 by Nelson Education Ltd. 14  Sales Incen-ves Types of Sales Incentive Plans Straight Salary Straight Commission Combined Salary and Commission Copyright © 2020 by Nelson Education Ltd. 15  Incen-ve Plans for Sales Employees Straight 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 enough motivation for maximizing sales volume Copyright © 2020 by Nelson Education Ltd. 16  Incen-ve Plans for Sales Employees Straight Commission Plan Compensation plan based upon a percentage of sales – Disadvantages: Salespeople will stress high-priced products. Customer service is likely to be neglected. Earnings tend to fluctuate widely between good and poor periods of business. Salespeople are tempted to grant price concessions. Copyright © 2020 by Nelson Education Ltd. 17  Incen-ve Plans for Sales Employees Combined Salary and Commission Plan A compensation plan that includes a straight salary and a commission component (“leverage”) Most widely used plan in organizations – Advantages: Combines the advantages of straight salary and straight commission forms of compensation Offers greater design flexibility Motivates sales force to achieve specific company marketing objectives in addition to sales volume Copyright © 2020 by Nelson Education Ltd. 18  Incen-ves for Execu-ves The Executive Pay Package Base salary Short-term incentives or bonuses Long-term incentives or stock plans Benefits Perquisites (perks) Special nonmonetary benefits given to executives; often referred to as perks CEO pays are decided by the board of directors Copyright © 2020 by Nelson Education Ltd. 19 Incen-ves for Execu-ves Copyright © 2020 by Nelson Education Ltd. 20 Incen-ves for Execu-ves Copyright © 2020 by Nelson Education Ltd. 21  Incen-ves for Execu-ves Justifications Large financial incentives reward superior performance. Business competition is pressure-filled and demanding. Good executive talent is in great demand. Effective executives create shareholder value. Peter Drucker, the management expert, suggested that CEO pay should not be more than 20 times that of the rank-and-file employee Copyright © 2020 by Nelson Education Ltd. 22  Group Incen-ve Plans Team Incentive Plans A compensation plan in which all team members receive an incentive bonus payment when production or service standards are met or exceeded All organizational levels embrace the program Copyright © 2020 by Nelson Education Ltd. 23  Team Incen-ve Plans Gainsharing Plans Programs 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. Copyright © 2020 by Nelson Education Ltd. 24  Enterprise Incen-ve Plans Profit Sharing Any 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 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 Copyright © 2020 by Nelson Education Ltd. 25  Enterprise Incen-ve Plans Rewards and Risks of ESOPS Advantages Disadvantages Retirement benefits Share price fluctuation Pride of ownership Not insured Deferred taxes Copyright © 2020 by Nelson Education Ltd. 26