Despite the challenges they present to managers, rewards based on individual performance can be highly motivating. Individual-based pay-for-performance plans are most likely to be successful under the conditions listed here.
Although managers need to be aware of the potential disadvantages of team-based plans, they should also be on the lookout for situations conducive to their successful use. These plans are most likely to succeed under the conditions listed here.
Listed here are a number of factors that affect the successful implementation of gain sharing programs.
Listed here are a number of factors that influence the successful implementation of corporate wide pay-for-performance plans.
The assumptions of a pay-for-performance system seem straightforward and acceptable. However, it is widely recognized that incentive systems can create negative consequences for firms. These next two illustrations outline some of the most common challenges facing organizations that want to adopt an incentive system.
Properly designed pay-for-performance systems present managers with an excellent opportunity to align employees’ interests with those of the organization. The recommendations in the next two illustrations can help enhance the success of performance programs and avoid the pitfalls we just discussed.
Introduction strategic to Strategic Compensation Management Part II
Introduction to Strategic Compensation Management: Part IIDr. G C Mohanta, BE(Mech), MSc(Engg), MBA, PhD(Mgt) Professor
WAGE PLANS• TIME WAGE PLAN• PIECE WAGE PLAN• BALANCED WAGE PLAN• SKILL BASED PAY• COMPETENCY BASED PAY• BROADBANDING• VARIABLE PAY
WAGE PLANS• Time Wage Plan – paid based on time worked: hourly, daily, weekly, monthly• Jobs for which output within specified period not measurable• Piece Wage Plan - paid wages based on number of units produced or completion of a job• Balanced Wage Plan – paid based on combination of time wage & piece wage
Merits of Time Wage• Easy to understand and calculate wages• Illiterate worker can understand it• Employers and workers know in advance wages payable and adjust budgets• Payment made regularly specific wages, beneficial from social point of view• Product/service quality high, workers not in hurry to produce more
Demerits of Time Wage• Workers not motivated for higher performance - generate inefficiency• Performance and wages not linked, employee take it easy• Efficient and inefficient workers not differentiated; inefficiency percolates• De-motivates efficient workers for putting at par with inefficient ones.• Production labour cost difficult to determine• Productivity not criteria for fixing wages, wrong employees placed on job
Time Wage Plan Environment• Output cannot be measured precisely• Individual employees not have direct control on outputs• Quality of work more pronounced needing creative imagination• Machine, materials sophisticated requiring handling with utmost care• Work highly varied, and standard outputs cannot be ascertained• Supervision good and fair days work can be estimated
Merits of Piece Wage• Output and wages linked, acts as motivating factor to produce more.• Differentiates efficient and inefficient workers, provides incentives to become more efficient• Fair and equitable for utilization of HR• Requires less supervision for in-built quality control in product.• Cost of production can be estimated in advance.
Demerits of Piece Wage• Fixing piece rate difficult if no standardized procedure• Employer tries to cut piece rate if workers earnings very high• Minimum wages not assured where factors beyond control of worker• Quality & machine conditions suffers as workers concentrate on quantity• Jealousy and interpersonal conflict among workers for uneven earnings
Piece Wage Plan Environment worker can be• Output of individual measured precisely.• Quantity of output result of skills and efforts• Flow of work regular and no work interruptions• Production methods standardized, job repetitive.• Workmanship not required
Merits of Balanced Wage• Worker is guaranteed for fixed wage and also provision for piece wage• Worker produces more quantity, earns more than time wage• Given credit for additional output to compensate for short falls in future• Provides a sense of security• Motivate worker to produce more
Competency Based Pay• Competency-based pay – Where the company pays for the employee’s range, depth, and types of skills and knowledge, rather than for the job title he or she holds.• Competencies – Demonstrable characteristics of a person, including knowledge, skills, and behaviors, that enable performance.
Broad banding– Consolidating salary grades and ranges into just a few wide levels or “bands,” each of which contains a relatively wide range of jobs and salary levels. • Wide bands provide for more flexibility in assigning workers to different job grades. • Lack of permanence in job responsibilities can be unsettling to new employees.
Variable PayTying pay to somemeasure of individual,group, ororganizationalperformance.
Factors Affecting Wages• Demand for and supply of labour - short supply increases wages, more supply decreases wages• Labour unions - strong trade unions can demand higher rates of wages, un-organised workers get low wages• Cost of living - strong influence on rate of wages
Factors Affecting Wages (Contd)• Prevailing wage rates - Prevailing wages taken into account for deciding wage• Ability to pay - ability of company to pay• Job requirements – Jobs with specialized knowledge or skill are priced higher• State regulation - State regulates wage rates of labourers• Increment system - wages increase annually at a prescribed rate
Types of Incentive PlansINDIVIDUAL GROUP ENTERPRISEPiecework Team Plan Profit sharingStandard hour Gain sharing Stock optionsBonusesMerit paySales incentives
Conditions for Success of Individual Based Plans• When the contributions of individual employees can be accurately isolated.• When the job demands autonomy.• When cooperation is less critical to successful performance or when competition is to be encouraged.
Conditions for Success of Team Based Plans• When work tasks are so intertwined that it is difficult to single out who did what.• When the firm’s structure and systems facilitate the implementation of team- based incentives.• When the objective is to foster entrepreneurship in self-managed work groups.
Conditions Favoring Gain sharing Plans• Gain sharing is most appropriate in situations where the demand for the firm’s product or service is relatively stable.• If a firm has multiple plants with varying levels of efficiency, the plan must take this variance into account so that efficient plants are not penalized and inefficient plants rewarded.• Less likely to work well when technology limits improvements in efficiency.
Conditions Favoring Profit sharing Plans• Most attractive to firms facing highly cyclical ups and downs in the demand for their product.• When used in conjunction with other incentives, corporate wide programs can promote greater commitment to the organization by creating common goals and a sense of partnership among managers and workers.
Pay for Performance: The Challenges• “Do Only What You Get Paid For” Syndrome• Negative Effects on the Spirit of Cooperation• Difficulties in Measuring Performance• The Credibility Gap• Job Dissatisfaction and Stress• Potential Reduction of Intrinsic Drives
Meeting Challenges of Pay for Performance Systems• Link Pay and Performance Appropriately• Use Pay for Performance as Part of a Broader HRM System• Build Employee Trust• Use Multiple Layers of Rewards• Increase Employee Involvement• Use Motivation and Nonfinancial Incentives
FEATURES OF FRINGE BENEFITS• An employee enjoys them in addition to the salary he/she receives.• They are not given for specific jobs performed but to make jobs more attractive.• They are not linked to productivity so do not reward performance in any way, criteria used is other than performance.• They have an indirect impact on workers’ efficiency. If impact is direct, it is not a fringe benefit.
Types of Fringe Benefits• Pay for time not worked• Employee security• Safety and health• Welfare and recreation• Old age and retirement
Flexible Benefits Plans• Benefit plans that enable individual employees to choose the benefits that are best suited to their particular needs
Flexible Benefit Plans• Advantages – more appreciation of benefits offered – better match between benefits and employee preference• Disadvantages – increased design and administrative costs