Snell bohlander-human resource management chapter 10
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Snell bohlander-human resource management chapter 10 Presentation Transcript

  • 1. Pay-for-Performance:Incentive Rewards Human ResourceManaging Human Resources ManagementBohlander • Snell 14 edition 14th edition Snell • Bohlander© 2007 Thomson/South-Western. PowerPoint Presentation by Charlie CookAll rights reserved. The University of West Alabama
  • 2. ObjectivesAfter studying this chapter, you should be able to: 1. Discuss the basic requirements for successful implementation of incentive programs. 2. Identify the types of, and reasons for implementing, individual incentive plans. 3. Explain why merit raises may fail to motivate employees adequately and discuss ways to increase their motivational value. 4. Indicate the advantage of each of the principal methods used to compensate salespeople.© 2007 Thomson/South-Western. All rights reserved. 10–2
  • 3. Objectives (cont’d)After studying this chapter, you should be able to: 5. Differentiate how gains may be shared with employees under the Scanlon, Rucker, and Improshare gainsharing systems. 6. Differentiate between profitsharing plans and explain advantages and disadvantages of these programs. 7. Describe the main types of ESOP plans and discuss the advantages of ESOP to employers and employees.© 2007 Thomson/South-Western. All rights reserved. 10–3
  • 4. Strategic Reasons for Incentive Plans• Variable Pay  Tying pay to some measure of individual, group, or organizational performance.• Incentive Pay Programs  Establish a performance “threshold” to qualify for incentive payments.  Emphasize a shared focus on organizational objectives.  Create shared commitment in that every individual contributes to organizational performance and success.© 2007 Thomson/South-Western. All rights reserved. 10–4
  • 5. Incentive Plans as Links toOrganizational Objectives• Incentive Plan Purposes  Encourage employees to assume “ownership” of their jobs, thereby improving effort and job performance.  Motivate employees to expend more effort than under hourly and/or seniority-based compensation systems.  Support a compensation strategy to attract and retain top-performing employees.• Incentive Plan Effectiveness  There is evidence of a relationship between incentive plans and improved organizational performance.© 2007 Thomson/South-Western. All rights reserved. 10–5
  • 6. Employee Opposition to Incentive Plans• Production standards are set unfairly.• Incentive plans are really “work speedup.”• Incentive plans create competition among workers.• Increased earnings result in tougher standards.• Payout formulas are complex and difficult to understand.• Incentive plans cause friction between employees and management.© 2007 Thomson/South-Western. All rights reserved. 10–6
  • 7. Successful Incentive Plans• Employees have a desire for an incentive plan.• Employees are encouraged to participate.• Employees see a clear connection between the incentive payments they receive and their job performance.• Employees are committed to meeting the standards.• Standards are challenging but achievable.• Payout formulas are simple and understandable.• Payouts are a separate, distinct part of compensation.© 2007 Thomson/South-Western. All rights reserved. 10–7
  • 8. Effective Incentive Plan Administration• Grant incentives based on individual performance differences.• Have the financial resources to reward performance.• Set clearly defined, accepted, and challenging yet achievable performance standards.• Use an easily understood payout formula• Keep administrative costs reasonable.• Do not “ratchet up” performance standards.© 2007 Thomson/South-Western. All rights reserved. 10–8
  • 9. Individual Incentive Plans• Straight Piecework  An incentive plan under which employees receive a certain rate for each unit produced.• Differential Piece Rate  A compensation rate under which employees whose production exceeds the standard amount of output receive a higher rate for all of their work than the rate paid to those who do not exceed the standard amount.© 2007 Thomson/South-Western. All rights reserved. 10–9
  • 10. Computing the Piece Rate 60 minutes (per hour) = 5 units per hour 12 minutes(standard time per unit) $7.50 (hourly rate) = $1.50 per unit 5 units (per hour)© 2007 Thomson/South-Western. All rights reserved. 10–10
  • 11. Piecework: The Drawbacks• Problems with piecework systems: Is not always an effective motivator Piecework standards can be difficult to develop. Individual contributions can be difficult measure. Not easily applied to work that is highly mechanized with little employee control over output. Piecework may conflict with organizational culture (teamwork) and/or group norms (“rate busting”). When quality is more important than quantity. When technology changes are frequent.© 2007 Thomson/South-Western. All rights reserved. 10–11
  • 12. Individual Incentive Plans:• Standard Hour Plan  An incentive plan that sets pay rates based on the completion of a job in a predetermined “standard time.”  If employees finish the work in less than the expected time, their pay is still based on the standard time for the job multiplied by their hourly rate.© 2007 Thomson/South-Western. All rights reserved. 10–12
  • 13. Bonuses• Bonus  Incentive payment that is supplemental to the base wage for cost reduction, quality improvement, or other performance criteria.• Spot bonus  Unplanned bonus given for employee effort unrelated to an established performance measure.© 2007 Thomson/South-Western. All rights reserved. 10–13
  • 14. Merit Pay• Merit Pay Program (merit raise)  Links an increase in base pay to how successfully an employee achieved some objective performance standard.• Merit Guidelines  Guidelines for awarding merit raises that are tied to performance objectives.© 2007 Thomson/South-Western. All rights reserved. 10–14
  • 15. Highlights in HRM 3 Merit Pay Guidelines Chart A merit pay guidelines chart is a “lookup” table for awarding merit increases on the basis of (1) employee performance, (2) position in the pay range, (3) time since the last pay increase. Concerns: What should unsatisfactory performers be paid? What should average performers be paid? How much should superior or outstanding performers be paid?© 2007 Thomson/South-Western. All rights reserved. 10–15
  • 16. Motivation Through Merit Raises• Develop employee confidence and trust in performance appraisal.• Establish job-related performance criteria.• Separate merit pay from regular pay.• Distinguish merit raises from cost-of-living raises.• Withhold merit payments when performance declines.© 2007 Thomson/South-Western. All rights reserved. 10–16
  • 17. Lump-Sum Merit Pay• Lump-sum Merit Program  Program under which employees receive a year-end merit payment, which is not added to their base pay.  Advantages  Provides financial control by maintaining annual salary expenses and not escalating base salary levels.  Contains employee benefit costs for levels of benefits normally calculated from current salary levels.  Provides a clear link between pay and performance.© 2007 Thomson/South-Western. All rights reserved. 10–17
  • 18. Incentive Awards and Recognition• Awards  Often used to recognize productivity gains, special contributions or achievements, and service to the organization.  Employees feel appreciated when employers tie awards to performance and deliver awards in a timely, sincere and specific way.• Noncash Incentive Awards  Are most effective as motivators when the award is combined with a meaningful employee recognition program.© 2007 Thomson/South-Western. All rights reserved. 10–18
  • 19. Sales Incentives Sales Incentive Plans Straight Salary Straight Commission Salary and Commission Combinations© 2007 Thomson/South-Western. All rights reserved. 10–19
  • 20. Incentive Plans for Salespersons• Straight Salary Plan  Compensation plan that permits salespeople to be paid for performing various duties that are not reflected immediately in their sales volume.  Encourages building customer relationships.  Provides compensation during periods of poor sales.  May not provide sufficient motivation for maximizing sales volume.© 2007 Thomson/South-Western. All rights reserved. 10–20
  • 21. Incentive Plans for Salespersons• Straight Commission Plan  Compensation plan based upon a percentage of sales.  Draw is a cash advance that must be paid back as commissions are earned.  Disadvantages of straight commission incentive  Emphasis is on sales volume rather than on profits.  Customer service after the sale is neglected.  Earnings tend to fluctuate widely between good and poor periods of business.  Temptation to grant price concessions to get sales.© 2007 Thomson/South-Western. All rights reserved. 10–21
  • 22. Incentive Plans for Salespersons• Combined Salary and Commission Plan  A compensation plan that includes a straight salary and a commission component (“leverage”).  Advantages  Combines the advantages of straight salary and straight commission forms of compensation.  Offers greater design flexibility  Can be used to develop the most favorable ratio of selling expense to sales.  Motivates sales force to achieve specific company marketing objectives in addition to sales volume.© 2007 Thomson/South-Western. All rights reserved. 10–22
  • 23. Incentives for Professional Employees Managerial and Executive Incentives Managerial and Executive Incentives Bonuses and merit increases Bonuses and merit increases Double-track wage systems Double-track wage systems Performance incentive bonuses Performance incentive bonuses Profit sharing and stock ownership Profit sharing and stock ownership Executive perquisites (perks) Executive perquisites (perks)© 2007 Thomson/South-Western. All rights reserved. 10–23
  • 24. Executive Compensation• The Executive Pay Package  Base salary  Short-term incentives or bonuses  Long-term incentives or stock plans  Perquisites (perks)© 2007 Thomson/South-Western. All rights reserved. 10–24
  • 25. Types of Long-Term Incentive Plans Stock Price Performance-Based Appreciation Plans Plans Stock Options Performance Units Stock Appreciation Performance Shares Rights (SARS) Formula-value Grants Stock Purchase Dividend Units Phantom Stock Restricted Stock/Cash Plans Restricted Stock Restricted Cash© 2007 Thomson/South-Western. All rights reserved. 10–25
  • 26. Executive Compensation: Ethics andAccountablility• Incentive payments are excessive compared with return to stockholders.• Time periods for judging and rewarding performance are too short.• Quarterly earnings growth is emphasized at the expense of research and development.• Emphasis is placed upon equaling or exceeding executive salary survey averages.• Benefits do not relate closely to individual performance.© 2007 Thomson/South-Western. All rights reserved. 10–26
  • 27. Highlights in HRM 4 The “Sweetness” of Executive Perks • Company car • Spouse travel • Company plane • Physical exams • Executive eating facilities • Mobile phones • Financial consulting • Large insurance policies • Company-paid parking • Income tax preparation • Personal liability insurance • Country club membership • Estate planning • Luncheon club membership • First-class air travel • Personal home repairs • Home computers • Loans • Chauffeur service • Legal counseling • Children’s education • Vacation cabins© 2007 Thomson/South-Western. All rights reserved. 10–27
  • 28. Executive Compensation Reform• Current Reform Measures  The Internal Revenue Service (IRS) is looking for tax- code violations in executive pay packages and will make executive pay a part of corporate audit.  The Securities and Exchange Commission ruled that companies on the New York Stock Exchange and NASDAQ must obtain shareholder approval before granting stock options and other equity compensation to executives and employees.  The Financial Accounting Standards Board (FASB) now requires that stock options be recognized as an expense on income statements.© 2007 Thomson/South-Western. All rights reserved. 10–28
  • 29. Executive Compensation Reform (cont’d)• Possible Future Reform Measures  Sophisticated formulas that peg executive compensation to organizational benchmarks other than stock price to align pay more closely with performance.  Corporate policy changes governing how compensation committees structure executive pay packages.  Restraints on stock options making it harder for executives to cash out and receive windfall cash sums.© 2007 Thomson/South-Western. All rights reserved. 10–29
  • 30. Group Incentive Plans• Team Incentive Plans  Compensation plans where all team members receive an incentive bonus payment when production or service standards are met or exceeded.• Establishing Team Incentive Payments  Set performance measures upon which incentive payments are based  Determine the size of the incentive bonus.  Create a payout formula and fully explain to employees how payouts will be distributed.© 2007 Thomson/South-Western. All rights reserved. 10–30
  • 31. Group Incentive Plans (cont’d)• Gainsharing Plans  Programs under which both employees and the organization share the financial gains according to a predetermined formula that reflects improved productivity and profitability.  Scanlon  Rucker  Improshare© 2007 Thomson/South-Western. All rights reserved. 10–31
  • 32. Employee Bonus and Gainsharing Plans Rewards come from employee participation in Scanlon Plan improvingcome from employee participation in Rewards come from employee participation in Rewards Scanlon Plan improvingproductivity and reducing costs. productivity and reducing costs. Rucker Plan Rucker Plan Shared rewards come from the difference between Shared rewards come from the difference between (SOP) (SOP) labor costs and sales value of production. labor costs and sales value of production. Gainsharing based on increases in productivity of Gainsharing based on increases in productivity of Improshare Improshare the standard hour output of work teams. the standard hour output of work teams.© 2007 Thomson/South-Western. All rights reserved. 10–32
  • 33. Enterprise Incentive Plans• Profit Sharing  Any procedure by which an employer pays, or makes available to all regular employees, in addition to their base pay, current or deferred sums based upon the profits of the enterprise.  Challenges:  Agreement over division of profits between company and employees.  Possibility of no payout due to financial condition of company.© 2007 Thomson/South-Western. All rights reserved. 10–33
  • 34. Enterprise Incentive Plans (cont’d)• Stock Options  Granting 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.  The value of an option is subject to stock market conditions at the time that option is exercised.© 2007 Thomson/South-Western. All rights reserved. 10–34
  • 35. Enterprise Incentive Plans (cont’d)• Employee Stock Ownership Plans (ESOPs)  Stock plans in which an organization contributes shares of its stock to an established trust for the purpose of stock purchases by its employees.  The employer establishes an ESOP trust that qualifies as a tax-exempt employee trust under Section 401(a) of the Internal Revenue Code  Stock bonus plans are funded by direct employer contributions of its stock or cash to purchase its stock.  Leveraged plans are funded by employer borrowing to purchase its stock for the ESOP.© 2007 Thomson/South-Western. All rights reserved. 10–35
  • 36. Employee Stock Ownership Plans Rewards and Risks of ESOPS Rewards and Risks of ESOPS Advantages Advantages Disadvantages Disadvantages Retirement benefits Retirement benefits Liquidity and value Liquidity and value Pride of ownership Pride of ownership Single funding basis Single funding basis Deferred taxes Deferred taxes Not insured Not insured© 2007 Thomson/South-Western. All rights reserved. 10–36