Base Pay (Salary) Issues

1. Base Pay (Salary) Issues • Adjustments • Cost of living • Merit increases • Difficult to fairly differentiateand reward top performers in terms of base pay • Top performers: 6% increase (2% COLA, 4% merit) • Average performers: 4% increase (2% COLA, 2% merit) • Bottom performers: 2% increase (2% COLA, 0% merit) • Timing (performance - reward relationship) • Difficult to see the connection between your performance last year and your pay this year

2. Pay for Performance Objectives • Motivate performance • Reinforce strategic goals • Focus attention on specific goals • Recognize differential employee contributions

3. Pay & Organizational Strategy • Want to achieve a fit between strategy & pay practices • Pay is a key indicator of organizational strategy, objectives & culture • What behaviors do you reward & thereby encourage?

4. Pay for Performance • All or a portion of pay will vary with measures of individual, team, department, division, &/or organization performance • Turns a portion of fixed labor costs into a variable cost • When performance declines, so does labor costs • Signals a movement away from pay as an entitlement

5. Individual Incentives • All or a portion of an individual’s pay is tied to their performance • Piece-rate • Commissions • Specific goals

6. Team/Group Incentives • Examples of incentives: • Productivity improvements • Customer satisfaction measures • Financial performance • Quality of goods or services

7. Advantages Availability of measures Cooperation is valued Teamwork Disadvantages Compensation at risk Individual’s performance – reward link is stretched (“line of sight” is lessened relative to individual incentives –it’s more difficult to see) Receipt of rewards depends upon others Team/Group Incentive Plans

8. Gainsharing Plans • Employees earn bonuses based upon a predetermined gainsharing formula • Initially intended to focus attention on costs • Formula is tied to group or department performance measures • Based upon factors controllable by the group • Typically target a specific problem area • Supplies expense, quality concerns • Direct employee attention to the area/issue • Timing: Monthly or quarterly payouts • Reinforces the performance-reward link

9. GE Information Systems • Team-based incentive with links to individual payouts • Team and individual performance goals are set • If the team hits its goals, the team members earn their incentive only if they hit their individual goals • Incentive component is 12% to 15% of base pay and is paid monthly

10. Profit-Sharing Plans • Employees receive an annual bonus based upon company wide performance measures • Revenue minus expense = Profit • Disadvantages • “line of sight” is further stretched (performance-reward link is more difficult to see) • Less direct control • Advantages • Encourages employees to think about all aspects of the business and act accordingly

11. PepsiCo’s SharePower Program • What is the SharePower program and why did Pepsi implement it? • What are the pro’s and con’s of the SharePower plan?

12. Implications of Pay-for Performance • Employees will need more information • Sharing of financial information • Training to understand the financial information (SRC corp. example) • Heightened pressure for performance • Pay can go up or down • Potential for unintended consequences • Need for controls