Pay-for-Performance: Incentive Rewards Managing Human Resources Belcourt * Bohlander * Snell 5th Canadian edition PowerPoint Presentation by Copyright © 2008 by Nelson, a division of Thomson Canada Limited All rights reserved Monica Belcourt, York University and Charlie Cook, The University of West Alabama Objectives After studying this chapter, you should be able to: Discuss the basic requirements for successful implementation of incentive programs Identify the types of, and reasons for implementing, individual incentive plans Explain why merit raises may fail to motivate employees adequately and discuss ways to increase their motivational value Indicate the advantage of each of the principal to compensate Copyright © 2008methods by Nelson,used a salespeople division of Thomson Canada Ltd 10–2 Objectives (cont’d) After studying this chapter, you should be able to: Differentiate how gains may be shared with employees under the Scanlon, Rucker, and Improshare gainsharing systems Differentiate between profit-sharing plans and explain advantages and disadvantages of these programs Describe the main types of ESOP plans and discuss the advantages of ESOP to employers and employees Copyright © 2008 by Nelson, a division of Thomson Canada Ltd 10–3 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 Copyright © 2008 by Nelson, a division of Thomson Canada Ltd 10–4 Types of Incentive Plans INDIVIDUAL GROUP ENTERPRISE Piecework Team compensation Profit sharing Standard hour plan Scanlon Plan Stock options Bonuses Rucker Plan Merit pay Improshare Lump-sum merit pay Earnings-at-risk plans Employee stock ownership plans (ESOPs) Incentive awards Sales incentives Incentives for professional employees Executive compensation Copyright © 2008 by Nelson, a division of Thomson Canada Ltd Figure 10.1 10–5 Incentive Plans as Links to Organizational 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 Copyright 2008improved by Nelson, a plans©and organizational performance division of Thomson Canada Ltd 10–6 Advantages of Incentive Pay Programs • Incentives focus employee efforts on specific performance targets They provide real motivation that produces important employee and organizational gains • Incentive payouts are variable costs linked to the achievement of results Base salaries are fixed costs largely unrelated to output • Incentive compensation is directly related to operating performance If performance objectives (quantity and/or quality) are met, incentives are paid If objectives are not achieved, incentives are withheld • Incentives foster teamwork and unit cohesiveness when payments to individuals are based on team results • Incentives are a way to distribute success among those responsible for producing that success • Incentives are a means to reward or attract top performers when salary budgets are low Copyright © 2008 by Nelson, a division of Thomson Canada Ltd Figure 10.3 10–7 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 Copyright © 2008 by Nelson, a division of Thomson Canada Ltd 10–8 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 Copyright © 2008 by Nelson, a division of Thomson Canada Ltd 10–9 Highlights in HRM Assessing Incentive Program Effectiveness Copyright © 2008 by Nelson, a division of Thomson Canada Ltd Source: Christian M Ellis and Cynthia L Paluso, “Blazing a Trail to Broad-Based Incentives,” WorldatWork Journal 9, no (Fourth Quarter 2000): 33–41 Used with permission, WorldatWork, Scottsdale, Arizona Highlights 10.1 10–10 Types of Long-Term Incentive Plans Stock options Stock appreciation rights (SARs) Stock purchase Phantom stock Restricted stock Performance units Copyright © 2008 by Nelson, a Performance shares division of Thomson Canada Ltd 10–31 Figure 10.5 Executive Compensation: Ethics and Accountablility • 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 not relate closely to individual Copyright © 2008 by Nelson, a performance division of Thomson Canada Ltd 10–32 Highlights in HRM 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 Copyright © 2008 by Nelson, a division of Thomson Canada Ltd Highlights 10.4 10–33 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 Copyright © 2008 by Nelson, a division of Thomson Canada Ltd 10–34 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 Copyright © 2008 by Nelson, a division of Thomson Canada Ltd 10–35 The Pros and Cons of Team Incentive Plans PROS • Team incentives support group planning and problem solving, thereby building a team culture • The contributions of individual employees depend on group cooperation • Unlike incentive plans based solely on output, team incentives can broaden the scope of the contribution that employees are motivated to make • Team bonuses tend to reduce employee jealousies and complaints over “tight” or “loose” individual standards • Team incentives encourage cross-training and the acquiring of new interpersonal competencies Copyright © 2008 by Nelson, a division of Thomson Canada Ltd Figure 10.6 10–36 The Pros and Cons of Team Incentive Plans (cont’d) CONS • Individual team members may perceive that “their” efforts contribute little to team success or to the attainment of the incentive bonus • Intergroup social problems—pressure to limit performance (for example, team members are afraid one individual may make the others look bad) and the “free-ride” effect (one individual puts in less effort than others but shares equally in team rewards)—may arise • Complex payout formulas can be difficult for team members to understand Copyright © 2008 by Nelson, a division of Thomson Canada Ltd Figure 10.6 10–37 Employee Bonus and Gainsharing Plans Rewards come from employee participation in Rewards Rewards come come from from employee employee participation participation in in Scanlon Plan Scanlon Plan improving improvingproductivity productivityand andreducing reducingcosts costs Rucker RuckerPlan Plan (SOP) (SOP) Shared Sharedrewards rewardscome comefrom fromthe thedifference differencebetween between labour labourcosts costsand andsales salesvalue valueof ofproduction production Improshare Improshare Gainsharing Gainsharingbased basedon onincreases increasesininproductivity productivityof of the standard hour output of work teams the standard hour output of work teams Copyright © 2008 by Nelson, a division of Thomson Canada Ltd 10–38 Scanlon Plan Suggestion Process Copyright © 2008 by Nelson, a division of Thomson Canada Ltd Figure 10.7 10–39 Highlights in HRM Lessons Learned: Designing Effective Gainsharing Programs • Enlist total managerial support for the gainsharing effort • When developing new programs, include representatives from all groups affected by the gainsharing effort—labour, management, employees • Prevent political games in which involved parties are more interested in preserving their self-interests than in supporting the group effort • Bonus payout formulas must be seen as fair, must be easy for employees to calculate, must offer payouts on a frequent basis, and must be large enough to encourage future employee effort • Establish effective, fair, and precise measurement standards • Be certain that employees are predisposed to a gainsharing reward Copyright © 2008 by Nelson, a system division of Thomson Canada • Launch the plan during a favorable business period Ltd 10–40 Highlights 10.5 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 Copyright © 2008 by Nelson, a division of Thomson Canada Ltd 10–41 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 Copyright © 2008 by Nelson, a division of Thomson Canada Ltd 10–42 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 Copyright © 2008 by Nelson, a division of Thomson Canada Ltd 10–43 Employee Stock Ownership Plans Rewards Rewards and and Risks Risks of of ESOPS ESOPS Advantages Advantages Disadvantages Disadvantages Retirement Retirementbenefits benefits Liquidity Liquidityand and value value Pride Pride of ofownership ownership Single Single funding fundingbasis basis Incentive to work Incentive Copyright © 2008to bywork Nelson, a division of Thomson Canada Ltd Falling Fallingstock stock 10–44 Key Terms • bonus • combined salary and commission plan • differential piece rate • employee stock ownership plans (ESOPs) • gainsharing plans • Improshare • lump-sum merit program merit guidelines perquisites Copyright â 2008 by Nelson, a division of Thomson Canada Ltd • • • • • • • • • • profit sharing Rucker Plan Scanlon Plan spot bonus standard hour plan straight commission plan straight piecework straight salary plan team incentive plan variable pay 10–45 ... principal to compensate Copyright © 2008methods by Nelson,used a salespeople division of Thomson Canada Ltd 10 2 Objectives (cont’d) After studying this chapter, you should be able to: Differentiate... for professional employees Executive compensation Copyright © 2008 by Nelson, a division of Thomson Canada Ltd Figure 10. 1 10 5 Incentive Plans as Links to Organizational Objectives • Incentive... attract top performers when salary budgets are low Copyright © 2008 by Nelson, a division of Thomson Canada Ltd Figure 10. 3 10 7 Employee Opposition to Incentive Plans • Production standards are