NWU HRMA 221 Performance Management PDF

HRMA 221 PERFORMANCE MANAGEMENT AND REWARDS  STUDY UNIT 4B PAY FOR PERFORMANCE AND FINANCIAL INCENTIVES Dr. K. Paadi Building A3A – Room G30 018 – 389 2391  EMPLOYEE INCENTIVE PLANS - Pay-for- Performance Plans...

HRMA 221 PERFORMANCE MANAGEMENT AND REWARDS  STUDY UNIT 4B PAY FOR PERFORMANCE AND FINANCIAL INCENTIVES Dr. K. Paadi Building A3A – Room G30 018 – 389 2391  EMPLOYEE INCENTIVE PLANS - Pay-for- Performance Plans - Individual Employee Incentive and Recognition Programs Sales Compensation Programs Team/Group-based Variable Pay Programs Organizationwide Incentive Programs Executive Incentive Compensation Programs  TYPES OF INCENTIVE PLANS Pay-for-performance plans  Variable pay (organizational focus)  A team or group incentive plan that ties pay to some measure of the firm’s overall profitability.  Variable pay (individual focus)  Any plan that ties pay to individual productivity or profitability, usually as one- time lump payments.  TYPES OF INCENTIVE PLANS  Pay-for-performance plans  Individual incentive/recognition programs  Sales compensation programs  Team/group-based variable pay programs  Organization wide incentive programs  Executive incentive compensation programs  INDIVIDUAL INCENTIVE PLANS  Piecework Plans ▪ The worker is paid a sum (called a piece rate) for each unit he or she produces. Straight piecework: A fixed sum is paid for each unit the worker produces under an established piece rate standard. An incentive may be paid for exceeding the piece rate standard. Standard hour plan: The worker gets a premium equal to the percent by which his or her work performance exceeds the established standard.  INDIVIDUAL INCENTIVE PLANS  Pros of piecework  Easily understandable, equitable, and powerful incentives.  Employee resistance to changes in standards or work processes affecting output.  Cons of piecework  Quality problems caused by an overriding output focus.  Possibility of violating minimum wage standards.  Employee dissatisfaction when incentives either cannot be earned due to external factors or are withdrawn due to a lack of need for output.  INDIVIDUAL INCENTIVE PLANS  Merit pay  A permanent cumulative salary increase the firm awards to an individual employee based on his or her individual performance.  Merit pay options  Annual lump-sum merit raises that do not make the raise part of an employee’s base salary.  Merit awards tied to both individual and organizational performance.  INDIVIDUAL INCENTIVE PLANS  Incentives for professional employees  Professional employees are those whose work involves the application of learned knowledge to the solution of the employer’s problems.  Lawyers, doctors, economists, engineers, Industrial Psychologists, teachers, HR specialists.  Possible incentives  Bonuses, stock options and grants, profit sharing  Vacations, more flexible work hours  improved pension plans  Equipment for home offices  INDIVIDUAL INCENTIVE PLANS  Recognition-based awards  Recognition has a positive impact on performance, either alone or in conjunction with financial rewards.  Combining financial rewards with nonfinancial ones produced performance improvement in service firms almost twice the effect of using each reward alone.  Day-to-day recognition from supervisors, peers, and team members is important.  INDIVIDUAL INCENTIVE PLANS  Online award programs  Programs offered by online incentives firms that improve and expedite the awards process.  Broader range of awards  More immediate rewards  Information technology and incentives  Enterprise incentive management (EIM)  Software that automates the planning, calculation, modeling and management of incentive compensation plans, enabling companies to align their employees with corporate strategy and goals.  INCENTIVES FOR SALES PEOPLE  Salary plan  Commission plan  Straight salaries  Pay is only a percentage of sales  Best for: prospecting  Keeps sales costs proportionate to sales (finding new clients), revenues. account servicing, training  May cause a neglect of non-selling duties. customer’s salesforce, or  Can create wide variation in salesperson’s participating in national and local trade shows. income.  Likelihood of sales success may be linked to external factors rather than to salesperson’s performance.  Can increase turnover of salespeople.  INCENTIVES FOR SALES PEOPLE  Combination plan  Pay is a combination of salary and commissions, usually with a sizable salary component.  Plan gives salespeople a floor (safety net) to their earnings.  Salary component covers company-specified service activities.  Plans tend to become complicated, and misunderstandings can result.  SPECIALIZED COMBINATION PLANS  Commission-plus-drawing-account plan  Commissions are paid but a draw on future earnings helps the salesperson to get through low sales periods.  Commission-plus-bonus plan  Pay is mostly based on commissions.  Small bonuses are paid for directed activities like selling slow-moving items.  TEAM / GROUP INCENTIVE PLANS  Team (or Group) Incentive Plans  Incentives are based on team’s performance.  How to Design Team Incentives  Set individual work standards.  Set work standards for each team member and then calculate each member’s output.  Members are paid based on one of three formulas:  All receive the same pay earned by the highest producer.  All receive the same pay earned by the lowest producer.  All receive the same pay equal to the average pay earned by the group.  HOW TO DESIGN TEAM INCENTIVES  Use an engineered production standard based on the output of the group as a whole.  All members receive the same pay, based on the piece rate for the group’s job.  This group incentive can use the piece rate or standard hour plan, but the latter is more prevalent.  Tie rewards to goals based on an overall standard of group performance  If the firm reaches its goal, the employees share in a percentage of the improvement (in labor costs saved).  TEAM / GROUP INCENTIVE PLANS  Cons  Pros  Pay is not proportionate to an  Reinforces team planning and individual’s effort problem solving.  Rewards “free riders”  Helps ensure collaboration.  Encourages a sense of cooperation.  Encourages rapid training of new members.  ORGANISATIONWIDE VARIABLE PAY PLANS  Profit-sharing plans  Cash plans  Employees receive cash shares of the firm’s profits at regular intervals.  The Lincoln incentive system  Profits are distributed to employees based on their individual merit rating.  Deferred profit-sharing plans  A predetermined portion of profits is placed in each employee’s account under a trustee’s supervision.  ORGANISATIONWIDE VARIABLE PAY PLANS  Employee stock ownership plan (ESOP)  A corporation annually contributes its own stock—or cash (with a limit of 15% of compensation) to be used to purchase the stock—to a trust established for the employees.  The trust holds the stock in individual employee accounts and distributes it to employees upon separation from the firm if the employee has worked long enough to earn ownership of the stock.  ORGANISATIONWIDE VARIABLE PAY PLANS Advantages and disadvantages of ESOP Conflict of interest in times of wage negotiations or retrenchments, when employee representatives on the board may be required to make decisions that contradict the desires of the rest of the workforce. Employees must have some form of representation on the company's board. Spread wealth more broadly Better align employee and shareholder interests, recruit employees and reduce staff turnover, improve the overall relationship with employees, positive effect on employee motivation. Its success relies largely on business performance  ADVANTAGES OF ESOP  Employees  ESOPs help employees develop a sense of ownership in and commitment to the firm, and help to build teamwork.  No taxes on ESOPs are due until employees receive a distribution from the trust, usually at retirement when their tax rate is lower.  Shareholders of closely held corporations  Helps to diversify their assets by placing their shares of company stock into an ESOP trust and allowing them to purchase other marketable securities for themselves in their place.  ADVANTAGES OF ESOP  The company  A tax deduction equal to the fair market value of the shares transferred to the trustee.  An income tax deduction for dividends paid on ESOP-owned stock.  The Employee Retirement Income Security Act (ERISA) allows a firm to borrow against employee stock held in trust and then repay the loan in pretax rather than after-tax dollars.  Firms offering ESOP had higher shareholder returns than did those not offering ESOPs.  INDIVIDUAL TASK  Research on any South African Company / Business that has done or still exercises (ESOP).  Find out what they did and if it works or not.  GAINSHARING PLANS An incentive plan that engages many or all employees in a common effort to achieve a company’s productivity objectives.  Scanlon plan (Joseph Scanlon, 1937)  Philosophy of cooperation  No “us” and “them” attitudes that inhibit employees from developing a sense of ownership in the company.  Identity  Employees understand the business’s mission and how it operates in terms of customers, prices, and costs.  Competence  The plan depends a high level of competence from employees at all levels.  Sharing of benefits formula  Employees share in 75% of the savings (reduction in payroll expenses divided by total sales).  IMPLEMENTING A GAINSHARING PLAN STEP1: Establish general plan objectives. STEP2: Choose specific performance measures. STEP3: Decide on a funding formula. STEP4: Decide on a method for dividing and distributing the employees’ share of the gains. STEP5: Choose the form of payment. STEP6: Decide how often to pay bonuses. STEP7: Develop the involvement system. STEP8: Implement the plan  AT-RISK VARIABLE PAY PLANS  At-risk variable pay plans are pay plans that put some portion of the employee’s weekly pay at risk.  If employees meet or exceed their goals, they earn incentives.  If they fail to meet their goals, they forgo some of the pay they would normally have earned.  SHORT-TERM INCENTIVES FOR MANAGERS AND EXECUTIVES  Annual bonus  Plans that are designed to motivate short-term performance of managers and are tied to company profitability.  Eligibility basis: job level, base salary, and impact on profitability  Fund size basis : nondeductible formula (net income) or deductible formula (profitability)  Individual awards: personal performance/contribution  LONG -TERM INCENTIVES FOR MANAGERS AND EXECUTIVES  Stock option ❖ The right to purchase a specific number of shares of company stock at a specific price during a specific period of time.  Nonqualified stock option  Indexed option  Premium priced option ❖ Options have no value (go “underwater”) if the price of the stock drops below the option’s strike price (the option’s stock purchase price).  LONG -TERM INCENTIVES FOR MANAGERS AND EXECUTIVES LONG-TERM INCENTIVES FOR MANAGERS AND EXECUTIVES OTHER EXECUTIVE INCENTIVES (CONT’D) GOLDEN PARACHUTES Payments companies make to OTHER PLANS departing executives in connection Key employee program with a change in ownership or control Stock appreciation rights of a company. Performance achievement plan Restricted stock plans Phantom stock plans GUARANTEED LOANS TO DIRECTORS PERFORMANCE PLANS Loans provided to buy company Plans whose payment or value is stock. contingent on financial performance A highly risky and now frowned upon measured against objectives set at practice. the start of a multi-year period.  CREATING AN EXECUTIVE COMPENSATION PLAN ❖ Define the strategic context for the executive compensation program. ❖ Shape each component of the package to focus the manager on achieve the firm’s strategic goals. ❖ Create a stock option plan to meet the needs of the executives and the company and its strategy. ❖ Check the executive compensation plan for compliance with all legal and regulatory requirements and for tax effectiveness. ❖ Install a process for reviewing and evaluating the executive compensation plan whenever a major business change occurs.  WHY INCENTIVE PLANS FAIL Performance pay can’t replace good management. You get what you pay for. “Pay is not a motivator.” Rewards punish. Rewards rupture relationships. Rewards can have unintended consequences. Rewards may undermine responsiveness. Rewards undermine intrinsic motivation.  IMPLEMENTING EFFECTIVE INCENTIVE PLANS Ask: Is effort clearly instrumental in obtaining the reward? Link the incentive with your strategy. Make sure effort and rewards are directly related. Make the plan easy for employees to understand. Set effective standards. View the standard as a contract with your employees. Get employees’ support for the plan. Use good measurement systems. Emphasize long-term as well as short-term success. Adopt a comprehensive, commitment-oriented approach.  HR ACTIVITIES THAT BUILD COMMITMENT Clarifying and communicating the goals and mission of the organization. Guaranteeing organizational justice. Creating a sense of community by emphasizing teamwork and encouraging employees to interact. Supporting employee development by emphasizing promotion from within, developmental activities, and career-enhancing activities. Generally committing to “people-first values.” WHEN YOU DON’T DESIGN GOOD INCENTIVE PLANS ANALYSE THE SCENARIO BELOW