© 2010 McGraw Hill Ryerson 11-1 COMPENSATION Third Canadian Edition Milkovich, Newman, Cole

© 2010 McGraw Hill Ryerson

11-1

COMPENSATIONThird Canadian Edition

Milkovich, Newman, Cole

© 2010 McGraw Hill Ryerson

11-2

Pay-for-Performance Plans

pay that varies with some measure of individual or organizational performance

also called variable pay plans these plans have a positive impact on

performance if they are designed well

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11-3

Short Term Pay-for-Performance Plans

Merit Pay

Lump-Sum Bonuses

Individual Spot Awards

Individual Incentives

Merit Pay

Lump-Sum Bonuses

Individual Spot Awards

Individual Incentives

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11-4

Individual Incentive PlansMethod of Rate Determination

Units of production per time period

Time period per unit of production

(1) (2)

(4)(3)

Straight piecework plan Standard hour plan

Halsey 50 - 50 methodTaylor differential piece rate system

Merrick multiple piece rate system

Pay constant function of production level

Pay varies as function of production level

Relationship between production level and pay

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11-5

Advantages of Individualized Incentive Plans

substantial contribution to: increased productivity lower production costs increased earnings of workers

less direct supervision is required to maintain output than under pay for time

payment for results (if accompanied by improved organizational and work measurement) enable labour costs to be estimated more accurately than under pay for time helps costing and budgetary control

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11-6

Disadvantages of Individualized Incentive Plans (1 of 2)

conflict 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

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11-7

Disadvantages of Individualized Incentive Plans (2 of 2)

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

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11-8

Team / Group Incentive Plans

Gain-Sharing Plans

Profit Sharing Plans

Earnings-at-Risk Plans

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11-9

Sample Group/Team Performance Measures (1 of 2)

Customer-Focused Measures Time to Market Measures

On time delivery Cycle time New product introductions

Customer Satisfaction Measures Market share Customer satisfaction Customer growth and retention Account penetration

Financially-Focused Measures Value Creation

Revenue growth Resource yields Profit margins Economic value added

Shareholder Return Return on invested capital Return on sales / earnings Earnings per share Growth in profitability

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11-10

Sample Group/Team Performance Measures (2 of 2)

Capability-Focused Measures HR Capabilities

Employee satisfaction Turnover rates Total recruitment costs Rate of progress on

developmental plans Promotability index Staffing mix/head-count ratio

Other Asset Capabilities Patents and copyrights Distribution systems

Internal Process-Focused Measures

Resource Utilization Budget-to-actual expenses Cost allocation ratios Reliability / rework Accuracy / error rates Safety rates

Change Effectiveness Program implementation Teamwork effectiveness Service / quality index

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11-11

Different Types of Variable Pay Plans

Cash Profit Sharing Stock Ownership

or Options

Balanced Scorecard

Productivity / Gain- Sharing

Team / Group Incentives

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11-12

Gain-Sharing Plans

under gain-sharing plans, employees share in cost-savings or productivity gains

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11-13

Key Elements in Designing a Gain-Sharing Plan

strength of reinforcement

productivity standards

sharing the gains

scope of the formula

perceived fairness of the formula

ease of administration

production variability

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11-14

Three Gain-Sharing Formulas

Scanlon Plan(single ratio volume)

Rucker Plan Improshare

Numerator of ratio (input factor)

Payroll costs Labour cost Actual hours worked

Denominator of ratio (outcome factor)

Net sales (+/- inventories)

Value added Total standard value hours

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11-15

Profit-Sharing Plans

variable pay plans requiring a corporate profit target to be met before any payouts occur

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11-16

Earnings-at-Risk Plans

incentive plans sharing profits in successful years and reducing base pay in unsuccessful years

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11-17

Advantages of Group Incentive Plans

positive impact on organization and individual performance of about 5 – 10 percent per year

easier to develop performance measures than for individual plans

signals that cooperation, both within and across groups, is a desired behaviour

teamwork supported by most employees may increase participation of employees in

decision making process

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11-18

Disadvantages of Group Incentive Plans

line of sight may be lessenedemployees may find it more difficult to see how

their individual performance affects their incentive payouts.

may lead to increased turnover among top individual performers because they must share with lesser contributors

increases compensation risk to employees because of lower income stability

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11-19

Long-Term Incentive Plans

Employee Stock Ownership Employee Stock Ownership Plans (ESOPs)Plans (ESOPs)

Stock OptionsStock Options

Broad-Based Option Plans Broad-Based Option Plans (BBOP)(BBOP)

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11-20

Special Groups in Compensation Management

supervisors top management corporate directors professional employees sales staff contingent workers

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11-21

Components of an Executive Compensation Package

1. base salary

2. short-term (annual) incentives or bonuses

3. long-term incentives and capital appreciation plans

4. executive benefits

5. executive perquisites

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11-22

Examples of Long-Term Incentives for Executives

1. Appreciation-Based Plansstock optionsstock appreciation rights

2. Full-Share Plans restricted stock plans restricted stock units/phantom stock plansDeferred share units

3. Performance-Based Plansperformance share / unit plans

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11-23

Pay Components for Professional Employees

dual career ladders maturity curves performance bonuses

attaining professional licenses

perks flexible work schedulesCampus-like environment

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11-24

Key Factors in Designing a Sales Compensation Plan

the nature of the people who enter the sales profession

organizational strategy competitor practices product/service being sold

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11-25

Key Issues in Contingent Workforce Compensation

equity/fairness relative to permanent employees

boundaryless careers

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11-26

Conclusion

the design and effective administration of pay-for-performance plans is key to their success

special employee groupscompensation must address high

potential for conflict in these jobscompensation treatment differs from that

for other employees