Managing Employee Performance and Reward Concepts, Practices, Strategies 2nd edition

Managing Employee Performance and Reward Concepts, Practices, Strategies 2nd edition

Collective short-term incentives • Collective short-term incentives (STIs) and management culture • Profit-sharing • Gainsharing • Goal-sharing • Team incentives • Strategic alignment and collective STIs

Who and when? How? Behaviour Results Individual STIs • Merit raises/increments • Merit bonuses • Recognition awards • Piece rates • Sales commissions • Goal-based/management by objectives (MBO) bonuses • Recognition awards Group STIs • Team incentives • Recognition awards • Profit-sharing • Gainsharing • Goal-sharing • Team incentives Organisational LTIs • Share bonus plans • Share purchase plans • Share option plans Performance-related pay – options

Management culture revisited ‘Traditional’ • Detailed division of labour • Vertical communications • Strong technical or bureaucratic control systems • Hierarchical/top-down decision-making • Labour as a ‘factor of production’ • Task compliance • Internal labour market/promotion/training • Commitment to employer • Unionised • Relational psychological contract

Management culture revisited ‘High involvement’ • Fluid division of labour • Lateral communications • Shared decision-making • Devolved/consultative • External recruitment • Employees as high-value ‘contributors’ • Commitment to profession • Non-unionised • Transactional psychological contract

Profit-sharing Definition: A profit-sharing plan typically involves a formal arrangement under which bonus payments additional to base pay are made to some or all employees on a regular (usually annual) basis, based on a formula which links the size of the total bonus pool to some measure of organisational profitability.

Profit-sharing ‘Profit’: • Net income/revenue = total income less total operating costs • Net operating profit after tax (NOPAT) • Economic value added (EVA) = NOPAT less (total capital x expected % return on capital)

Profit-sharing Plan types: • Current distribution plans • Annual payout in cash or shares • Short-term reinforcement of task motivation • Payments may vary greatly from year to year • Deferred payment plans • Bonus held in trust until departure or retirement • Long-term impact on staff retention • Equalisation effect • Superannuation top-up • May have tax benefits • Combination plans • Part current/part deferred • Short-term and long-term effects

Profit-sharing Advantages: • Self-funding; total labour costs vary with organisational ‘capacity to pay’ • Can contribute to employment stability by reducing the need for retrenchments in times of downturn • Can reduce supervision costs • Can increase employee understanding of organisational finances • Can improve labour-management relations and reduce industrial conflict, since all parties perceive a common interest in organisational success • Can be used as a retirement/superannuation plan • Compared to other collective plans such as gainsharing, it is relatively easy to set up and maintain

Profit-sharing Disadvantages: • Applicable to profit-making private sector organisations only • The ‘line of sight’ between individual performance and reward is likely to be weak because profitability is influenced by many non-controllable variables • A run of low profitability can cause significant employee dissatisfaction and actually compound the organisation’s troubles • Can cause ‘free-loading’/‘social loafing’ • May attract union opposition; seen as a de-unionisation device

Gainsharing – general features Definition: STI for a large workgroup (e.g. business unit or product division) in which management shares with all employees in the group or unit the financial gains associated with specific measures of improvement in the cost performance of that workgroup.

Gainsharing – general features Key features: • A focus on measurable results which are within employees’ collective control, such as labour productivity, unit labour costs or reduced materials wastage. The focus on cost-based measures means that most gainshare schemes are wholly self-funded • The specification of an historical baseline of financial performance against which subsequent financial gains can be determined (i.e. ‘lag’ measures) • The use of a predetermined formula for sharing the monetary gains between the organisation and the participating employees (e.g. 50/50)

Scanlon Plan gainsharing Developed by Joe Scanlon, US steelworker and local union leader, in late 1930s. Performance focus: • Improvements in labour costs relative to value of sales Principles: • Employee involvement in decision-making (suggestion schemes; joint consultative committees) • Reward equity: recognising and rewarding employee contribution to improvement in business performance • High competence and high trust

Benchmark period: • Sales value normally • Labour costs normally = $10M = $2M (=20% of sales value) • Subsequent period: • Sales value • Labour costs • Standard labour costs • Gain • Distribution of gain (3:1 formula) = $12M = $2M (i.e. unchanged) = $2.4M (i.e. 20% of sales value) = $2.4M less $2M = $400,000 $300,000 to employees $100,000 to firm Scanlon Plan gainsharing Example:

Rucker Plan gainsharing Performance focus: • Improvements in payroll costs relative to ‘value added’ to materials used in the production process • Assumes payroll costs should = 40% of value added (US historical data)

Benchmark period: • Output/sales value normally • Cost of materials used • Thus, benchmark value added • Benchmark payroll cost = $10M = $5M (= 50% of sales value) = $5M = $2M (i.e. 40% of value added) • Subsequent period: • Sales value • Cost of materials used • Added value • Benchmark payroll costs • Actual payroll costs • Total bonus pool size for period • Distribution of gain = $12M = $6M = $6M = $2.4M (i.e. 40% of value added) = $2.1M $2.4M less $2.1M = $300,000 $200,000 paid out in bonuses $100,000 retained in equalisation fund Rucker Plan gainsharing Example:

Improshare Plan gainsharing Performance focus: • Improvement in labour productivity (units produced per hour of labour time expended) • Physical rather than dollars measure (hence factors out the impact of exogenous price movements/inflation)

Productivity benchmark: • Over the previous year the workgroup has taken an average of 4 hours of labour time to produce each unit,i.e. 4 hours per unit Subsequent gainshare period: • Workgroup produces 1,300 units in 4,080 hours • Benchmark time for this output is 1,300 x 4.0 = 5,200 hours • Productivity gain is therefore 1,120 hours • Gain split 50/50, so total bonus pool for workgroup = 560 hours x the standard hourly rate of pay • Equal dollars bonus payment to each member of the workgroup Improshare Plan gainsharing Example:

Gainsharing – key design issues • Workgroup compatibility: • Work interdependence • Group must have ‘ownership’/control over results • The larger the group, the weaker the ‘line of sight’ • Performance criteria: • Single dollar factor • Multi dollar factors • Multi dollar and no-dollar factors • Performance benchmarks: • Avoid historical anomalies (too easy/too hard)

Gainsharing – key design issues • Timing and size of bonus payout: • Monthly, quarterly, annual • Payout cap • Pool limit • Equalisation • Method of payment distribution: • Equal dollars bonus • Equal percentage of individual base pay • Unequally by individual appraisal

Gainsharing Advantages: • Can be tailored for particular plants, departments or divisions, or to discrete business units within the wider organisation • Can be applied in public sector and other non-profit organisations • Rewards only those performance outcomes that are within the group’s control • Makes employees more accepting of technological change • Reduces supervision costs by instituting group self-monitoring • Supports a high-involvement culture • Encourages organisational citizenship behaviour (OCB) • Is compatible with a unionised workforce

Gainsharing Disadvantages: • Costly to establish and administer • Can encounter resistance from middle managers • Poor alignment in situations where technology and products are constantly changing • Traditional plans ignore non-financial or ‘soft’ measures of group performance • Multifactor plans not self-funding • May still encourage ‘free-riders’ and ‘social loafing’

SIMPLE FLAT SCALE* PROGRESSIVE SLIDING SCALE GOAL ACHIEVEMENT RATE OF BONUS PAYMENT $ BONUS TO EACH GROUP MEMBER RATE OF BONUS PAYMENT $ BONUS TO EACH GROUP MEMBER 130% 100% $1,000 300% $3,000 120% 100% $1,000 200% $2,000 110% 100% $1,000 150% $1,500 100% 100% $1,000 100% $1,000 90% 0% $0 60% $600 80% 0% $0 30% $300 70% 0% $0 0% $0 60% 0% $0 0% $0 Goal-sharing:simple and sliding scale schemes Bonuses are paid out only if the performance target is achieved, which means the organisation retains 100% of under-target performance improvement.

Measures Weight  50 60 70 80 90 100 110 120 130 140 Points   Controllable expenses – as % of budget 30% 110% 105% 100% 98% 95% 93% 90% 88%  86% 84% 36 On-time delivery – % meeting due date 30% 60% 65% 70% 75% 80% 85% 88%  90% 92% 96% 33 Net revenue – $ thousand 20% $900 $950 $1000 $1050 $1100 $1200  $1300 $1400 $1500 $1600 20 Customer satisfaction score – average survey score 10% 70 75 80 85 87  90 93 96 98 100 9 Product quality – quality index point score 10% 10 15 20 24 28 32  36 40 43 45 10 TOTAL POINTS SCORE: 108 Multi-measure (‘hard’ and ‘soft’) sliding scale goal-share scheme TARGET

Bonus table Total score Payout (as % of base pay) 0–69 0 70–79 2% 80–89 3% 90–99 4% 100–109 5% 110–119 7% 120–129 9% 130–140 12% Multi-measure (‘hard’ & ‘soft’) sliding scale goal-share scheme

Goal-sharing Advantages: • Forward-looking • Simple to develop, flexible and has wide application • Can incorporate non-financial or ‘soft’ measures • Goals are strategically aligned • Can be targeted at small workgroups within business units

Goal-sharing Disadvantages: • Plans using ‘soft’/non-financial measures not self-funding • Goal fixation may cause employees to focus on rewarded goals only • Free-riders can impair goal attainment and demotivate other workers • No objective basis for determining a payment level for meeting each goal, so employees may see bonus levels as inadequate and inequitable • Employees who fall just short of the goal may not receive any reward at all (though this can be overcome by using sliding bonus scales) • Some groups may feel their goals are unfairly demanding compared to those of other groups

Teamworking What is a team? ‘… a small number of people with complementary skills who are committed to a common purpose, set of performance goals, and approach for which they hold themselves mutually accountable.’ Katzenback & Smith, 1993

Teamworking Dimensions of teamworking: • Time frame: • Time commitment: full-time or part-time • Time horizon: long-term or short-term • Work flow: • Group autonomy • Internal interdependence/collectivism

Characteristics: Examples: • Full-time commitment • Long-term/permanent • Process-based production or service provision • Moderate–high autonomy (‘self-managed’) • Moderate–high interdependence • Vehicle assembly • Insurance claim processing • Public utilities maintenance • Hospital emergency room Types of teams • Process teams

Characteristics: Examples: • Part-time commitment • Short-term/temporary (teamwork is additional to ‘normal’ job assignment) • Cross-functional membership • Low autonomy • Moderate interdependence • Quality improvement committees • Safety committees • Job evaluation committees Types of teams Parallel teams

Characteristics: Examples: • Full-time but short-term/temporary • Produce tangible results • Frequently cross-functional • Moderate autonomy (‘coordinated’) • High interdependence • New product development • IT development • Policy development and implementation Types of teams Project teams

Team-based pay/team incentives – key design issues Team incentives: Reward team members for the results achieved by the team. • Why use team incentives at all? • Work flow: task interdependence primarily within but not between groups • Why choose team incentives rather than another form of PRP?

Team-based pay/team incentives – key design issues • How will team performance be measured? • Quantity; productivity • Quality • Timeliness • Multi-measure

Team-based pay/team incentives – key design issues • What are the options for team incentives? • Team incentives based on an equal dollar payment to each team member • Team incentives based on a percentage of individual base pay • Team recognition awards • Individual bonuses based on individual performance appraisal (typically involving peer and 360-degree appraisal) • How can pay best align with team type? • Process teams (gainsharing) • Project teams (goal-setting/goal-sharing/group bonuses) • Parallel teams (base pay as per main job/role; group recognition awards)

Team incentives Advantages: • Micro-focus: targets performance of small workgroups • Provides incentives for improving team performance • Encourages cooperative behaviour • Helps to clarify team goals • Integrates organisational and team objectives • Enhances flexible working through multi-skilling • Brings peer pressure to bear on underperformers

Team incentives Disadvantages: • Employees may feel that team pay undervalues their individual contribution • ‘Free-rider’ problem • Teamwork can give rise to conflict over peer surveillance and peer pressure to perform • Perverse sorting: everyone will want to belong to the team which gets the highest rewards • Team performance measures can easily fall out of alignment with business unit or organisational goals • Without appropriate cultural change and full communication team incentives may be dysfunctional (e.g. Hewlett Packard experience)

Organisational type: What aligns? Traditional mechanistic cost defender • Profit-sharing (managers only) • Cost-focused gainsharing Traditional mechanistic quality defender • Profit-sharing (managers only) • Quality-focused gainsharing • Team recognition awards High involvement organic analyser • Profit-sharing (all employees) • Multifactor gainsharing/goal-sharing • Incentives and recognition for self-managing work teams • Recognition for parallel teams • Goal-sharing for project teams High involvement organic prospector • Profit-sharing (all employees) • Project team bonuses • Multifactor goal-sharing for business units • Project team goal-sharing and recognition Strategic alignment and collective STIs

Managing Employee Performance and Reward Concepts, Practices, Strategies 2nd edition