Pay for Performance: Incentive Rewards

1. Pay for Performance: Incentive Rewards Chapter10 MGT351 (Mhb)

2. Strategic Reasons for Incentive Plan • Incentive plan or variable pay is steadily growing as part of strategic compensation management. • Incentive plans emphasize a shared focus on organizational objective. • Incentive rewards are based entirely on a pay- for-performance philosophy. • Variable Pay: tying pay to some measure of individual, group or organizational performance.

3. Types of Incentive Plan • Individual Incentive Plan • Team Incentive Plan • Enterprise Incentive Plan

4. Advantages of Incentive Pay Programs • Incentives focus employee efforts on specific performance targets. • Incentive payouts are variable costs linked to the achievement of results. • Incentive compensation is directly related to operating performance. • Incentives foster teamwork and unit cohesiveness when payments to individuals are based on team results. • Incentives are way to distribute success among those responsible for producing that success.

5. Requirements of a Successful Incentive Plan • For an incentive plan to succeed, employees must have some desire for the plan. • Employees must be able to see a clear connection between the incentive payments they receive and their job performance. Characteristics of a successful incentive plan: • Financial incentives are linked to valued behaviour • The incentive program seems fair to employees • Productivity and quality standards are challenging but achievable. • Payout formulas are simple and understandable.

6. Some Individual Incentive Plan Piecework -straight piecework - differential piecework Drawbacks • difficult to develop for many types of jobs • can work against organizational culture of promoting workforce cooperation, creativity, etc. • It may not be always be an effective motivator, if employees believe that an increase in output will provoke disapproval from fellow workers.

7. Some Individual Incentive Plan • Standard Hour Plan: incentive plan that sets rates based on the completion of a job in a predetermined standard time. • Bonuses: Incentive payment that is supplemental to the base wages - bonuses may be determined based on the basis of cost reduction, quality improvement or other performance criteria established by the organization - at executive level performance criteria may include earnings growth or company specific agreed upon objectives. - When some special employee contribution is to be rewarded a spot bonus is used.

8. Some Individual Incentive Plan • Merit Pay: the merit increase is normally given on the basis of an employee’s having achieved some performance standard. • Merit raises can serve to motivate if employees perceive the raise to be related to the performance required to earn them. • Increase granted on the basis of merit should be distinguishable from any cost-of-living or other general increases. • Unlike bonus, merit raise may be perpetuated year after year even when performance declines. • One of the major weaknesses of merit raises lies in the performance appraisal system.

9. Some Individual Incentive PlanSales Incentive • The enthusiasm and drive required in most type of sales work demand that sales employees be highly motivated. That is why financial incentives are widely used for sales people. Types of Sales Incentive Plan: • Straight salary plan • Straight commission plan • Combined salary and commission plan.

10. Some Individual Incentive Plan Executive Compensation • One significant feature of executive compensation is that they receive large incentive rewards. • Large amount (in millions) of money they receive for their performance. Four basic components of executive compensation • Base pay • Short-term incentives or bonuses • Long-term incentives or stock plans • Perquisites Hank Swartout- Precision Drilling, Canada – 74,824,335 (2005)

11. Some Group Incentive Plans • Team Compensation Plan : Compensation plan in which all team members receive an incentive bonus payment when production or service standards are met or exceeded. • Gainsharing Incentive Plan: Programs under which both employees and the organization share financial gains according to a predetermined formula that reflects improved productivity and profitability.

12. Some Individual Incentive PlanEnterprise Incentive Plans • Profit Sharing : any procedure by which an employer pays, or makes available to all regular employees, in addition to base pay, special current or deferred sums based on the profits of the enterprise. • Stock Options : Stock option plans grant to 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. • Employee Stock Ownership Plans (ESOP): Stock plans in which an organization contributes shares of its stock to an established trust for the purpose of stock purchases by its employees.