Pay-for-Performance Plan


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Pay-for-Performance Plan

  1. 1. Aizell A. Bernal BSBA 4 HRM 5 Dr. R. Robledo
  2. 2. • Pay for performance plans signal a movement away from entitlements, sometimes a very slow movement toward pay that varies with some measure of individual or organizational performance. • Pay will vary with some measure of individual, team, or organizational
  3. 3. EXHIBIT 10.1 Uses of Different Variable Pay Plan Types Percent of Companies With Plan Type of Plan 1996 1998 1999 2002 2007 Special-recognition plans 44 51 59 34 72 Stock option plans 21 46 43 40 Individual incdntive plans 17 35 39 38 49 Cash profit sharing 22 22 23 18 16 Gainsharing plans 16 20 18 11 10 Team awards 13 17 15 8 32
  4. 4. EXHIBIT 10.2 BASE VERSUS VARIABLE PAY Percent of Total Compensation Today 2004 Variable pay as percentage of payroll 2005 2009 (projected) 9.50% 11.40% 11.30% • The greater interest in variable pay probably can be traced to two trends: 1. The increasing competition from foreign producers forces American firms to cut costs and/or increase productivity. 2. Today’s fast-paced business environment means that workers must be willing to adjust what they do and how they do it.
  5. 5. • Pay-for-performance, those that introduce variability into the level of pay you receive, seem to have a positive impact on performance if designed well. Notice that we have qualified out statement that variable-pay plans can be effective if they are designed well.
  6. 6. • Merit Pay • Lump-Sum Bonuses • Individual Spot Awards • Individual Incentive Plans • Individual Incentive Plans: Advantages and Disadvantages • Individual Incentive Plans: Examples
  7. 7. • Merit Pay  a system links increases in base pay to how highly employees are rated on an performance evaluation. Well Above Average Above Below Average Average Average Well Below Average Performance rating 1 2 3 4 5 Merit pay increase 5% 4% 3% 1% 0%
  8. 8. • Lump-Sum Bonuses  are thought to be a substitute for merit pay.  are earned at the end of a specified time period, such as monthly, quarterly, or annually, when an employee achieves a specific level of his work or quota.
  9. 9. • Individual Spot Awards/Spot Awards  An immediate recognition to reward an employee for exceptional performance beyond the prescribed expectation of the employee’s job. Spot awards are given after the event has been completed, usually without pre‐determined goals or set performance levels and paid as a one‐time bonus.
  10. 10. • Individual Incentive Plans  Incentive plans are part of an employee's compensation or pay. The incentive plan gives an employee the opportunity to increase his annual pay based upon either company performance or individual performance. Incentive plans are a way for companies to keep employees motivated to perform to the best of their abilities, thus increasing company profit.
  11. 11. There are four general categories of plan: 1. Cell 1  The most frequently implemented incentive system is a straight piecework system.  Rate determination is based on units of production per time period, and wages vary directly as a function of production level.  The major advantages of this type of system are that it is easily understood by workers and, perhaps consequently, is more readily accepted than some of the other incentive systems.
  12. 12. There are four general categories of plan: 2. Cell 2  Two relatively common plans set standards based on time per unit and tie incentives directly to level of output: a. Standard hour plan is a generic term for plans setting the incentive rate based on completion of a task in some expected time period. b. Bedeaux plan provides a variation on straight piecework and standard hour plans. It requires division of a task into simple actions and determination of the time required by an average skilled worker to complete each action.
  13. 13. There are four general categories of plan: 3. Cell 3  The two plans included in cell 3 provide for variable incentives as a function of units of production per time period: a. Taylor Plan – establishes two piecework rates: 1) Goes into effect when a worker exceeds the published standard for a given time period. 2) Established for production below standard, and this rate is lower than the regular wage. b. Merrick Plan – operates in the same way, except that three piecework rates are set: 1) High for production exceeding 100% of standard 2) Medium for production between 83 and 100% of standard 3) Low for production less than 83% of standard
  14. 14. There are four general categories of plan: 4. Cell 4  The three plans included in cell 4 provide for variable incentives linked to a standard expressed as a time period per unit of production: a. Halsey 50-50 method – derives its name from the shared split between worker and employer of any savings in direct cost. b. Rowan Plan – similar to the Halsey plan in that an employer and employee both share in savings resulting from work completed in less than standard time. c. Gantt Plan – differs from both the Halsey and the Rowan plans in that the standard time for a task is purposely set at a level requiring high effort to complete.
  15. 15. • Individual Incentive Plans: Advantages  Substantial impact that raises productivity, lowers production costs, and increases earnings of workers.  Less direct supervision is required to maintain reasonable levels of output than under payment by time.  In most cases, systems of payments by results, if accompanied by improved organizational and work measurement, enable labor costs to be estimated more accurately than under payment by time. This helps costing and budgetary control.
  16. 16. • Individual Incentive Plans: Disadvantages  Greater conflict may emerge between employees seeking to maximize output and managers concerned about deteriorating quality levels.  Attempts to introduce new technology may be resisted by employees concerned about the impact on production standards.  Reduced willingness of employees to suggest new production methods for fear of subsequent increases in production standards.  Increased complaints that equipment is poorly maintained, hindering employee efforts to earn larger incentives.  Increased turnover among new employees discouraged by the unwillingness of experienced workers to cooperate in on-the-job training.  Elevated levels of mistrust between workers and management.
  17. 17. • Individual Incentive Plans: Examples
  18. 18. • Comparing Group and Individual Incentive Plans • Large Group Incentive Plans • Gain-Sharing Incentive Plans • Profit-Sharing Incentive Plans • Earnings-at-Risk Plans • Group Incentive Plans: Advantages and Disadvantages • Group Incentive Plans: Examples
  19. 19. Failures of team incentives schemes can be attributed to at least 5 causes: 1) Teams come in many varieties 2) Level problem 3) Complexity 4) Control 3 C’s 5) Communication
  20. 20. • Comparing Group and Individual Incentive Plans
  21. 21. • Large Group Incentive Plans  Two Types of Plans 1) Gain-Sharing Plans – use operating measures 2) Profit-Sharing Plans – use financial measures
  22. 22. • Gain-Sharing Plans  looks at cost components of the income ledger and identifies savings over which employees have more impact.  Key elements in designing a gain-sharing plan: 1) Strength of reinforcement 2) Productivity standards 3) Sharing the gains split between management and workers 4) Scope of the formula 5) Great care must be exercised with such alternative measures 6) Perceived fairness of the formula 7) Ease of administration 8) Production variability
  23. 23. • Gain-Sharing Plans  Three Gain-Sharing Formulas 1) Scanlon Plan – are designed to lower labor costs without lowering the level of a firm’s activity. 2) Rucker Plan – involves more complex formula than a Scanlon plan for determining worker incentive bonuses. 3) Improshare (Improved Productivity through Sharing) – is gain-sharing plan that has proved easy to administer and to communicate.
  24. 24. • Implementation of the Scanlon/Rucker Plans  Two major components are vital to the implementation and success of a Rucker/Scanlon Plan: 1) a productivity norm 2) effective worker committees • Similarities and Contrasts Between Scanlon and Rucker Plans  They differ from individual incentive plans which focus on using wage incentives to motivate higher.  There are two important differences between the two plans: 1) Rucker plans tie incentives to a wide variety of savings not just the labor savings focused on Scanlon plans. 2) This greater flexibility may help explain why Rucker plans are more amenable to linkages with individual incentive plans.
  25. 25. • Profit-Sharing Plans  Profit sharing continues to be popular because the focus is on the measure that matters most to be people, a predetermined index of profitability.
  26. 26. • Earnings-at-Risk Plans  Two categories: 1) Success sharing plans - employee base wages are constant and variable pay adds on during successful years. 2) Risk sharing plans - base pay is reduced by some amount relative to the level that would be offered in a success-sharing plan.
  27. 27. • Group Incentive Plans: Advantages 1) Positive impact on organization and individual performance of about 5 to 10 percent per year. 2) Easier to develop performance measure than it is for individual plans. 3) Signals that cooperation, both within and across groups, is a desires behavior. 4) Teamwork meets with enthusiastic support from most employees. 5) May increase participation of employees in decision-making process.
  28. 28. • Group Incentive Plans: Disadvantages 1) Line-of-sight may be lessened, that is employees may find it more difficult to see how their individual performance affects their incentive payouts. 2) May lead to increased turnover among top individual performers who are discouraged because they must share with lesser contribution. 3) Increases compensation risk to employees because of lower income stability. May influence some applicants to apply for jobs in firms where base pay is a larger compensation component.
  29. 29. • Group Incentive Plans: Examples  Can be described by common features: 1) the size of the group that participates in the plan 2) the standard against which performance is compared 3) the payout schedule
  30. 30. • Employee Stock Ownership Plans (ESOPs) • Performance Plans (Performance Share and Performance Unit) • Broad-Based Option Plans (BBOPs) • Combination Plans: Mixing Individual and Group
  31. 31. • Employee Stock Ownership Plans (ESOPs)  It is a benefit or retirement-type plan for employees of a company. In an ESOP, employees receive regular shares of the company’s stock as a benefit for working at the company. All employees are eligible to participate in the ESOP after a certain period of time employed, usually one to two years depending on the Plan.
  32. 32. • Performance Plans (Performance Share and Performance Unit)  Performance plans typically features corporate performance objectives for a time three years in the future. They are driven by financial earnings or return measures, and they pay out for meeting or exceeding specific goals.
  33. 33. • Broad-Based Option Plans (BBOPs)  BBOPs are stock grants. The company gives employees shares of stock over a designated time period. The strength of BBOPs id their versatility. Depending on the way they are distributed to employees, they can either reinforce a strong emphasis on performance (performance culture) or inspire greater commitment and retention (ownership culture) of employees.
  34. 34. • Combination Plans: Mixing Individual and Group  It’s not uncommon for companies to use both individual and group incentives. The goal is to both motivate individual behavior and to insure that employees work together, where needed, to promote team and corporate goals. These combination programs start with standard individual (e.g., performance appraisal, quantity of output) and group measures (e.g., profit, operating income).