Pay for performance

1. Aizell A. Bernal
BSBA 4
HRM 5
Dr. R. Robledo

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. 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. EXHIBIT 10.2 BASE VERSUS VARIABLE PAY
Percent of Total Compensation Today
2004 2005 2009 (projected)
Variable pay as percentage of payroll 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. • 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. • Merit Pay
• Lump-Sum Bonuses
• Individual Spot Awards
• Individual Incentive Plans
• Individual Incentive Plans:
Advantages and Disadvantages
• Individual Incentive Plans: Examples

7. • Merit Pay
 a system links increases
in base pay to how highly
employees are rated on
an performance
evaluation.
Well Above Above Below Well Below
Average Average Average Average Average
Performance rating 1 2 3 4 5
Merit pay increase 5% 4% 3% 1% 0%

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.

10. • 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.

11. • 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.

13. 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.

14. 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.

15. 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

16. 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.

18. • 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.

19. • 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.

20. • Individual Incentive Plans: Examples

21. • 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

22. 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
5) Communication
3 C’s

23. • Comparing Group and Individual Incentive Plans

24. • Large Group
Incentive Plans
 Two Types of Plans
1) Gain-Sharing
Plans – use
operating
measures
2) Profit-Sharing
Plans – use
financial
measures

25. • 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

26. • 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.

28. • 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.

29. • 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.

30. • 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.

31. • 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.

32. • 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.

33. • 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

35. • Employee Stock Ownership Plans (ESOPs)
• Performance Plans (Performance Share and
Performance Unit)
• Broad-Based Option Plans (BBOPs)
• Combination Plans: Mixing Individual and
Group

36. • 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.

37. • 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.

38. • 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.

39. • 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).