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© 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
© 2010 McGraw Hill Ryerson
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
© 2010 McGraw Hill Ryerson
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
© 2010 McGraw Hill Ryerson
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
© 2010 McGraw Hill Ryerson
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
© 2010 McGraw Hill Ryerson
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
© 2010 McGraw Hill Ryerson
11-8
Team / Group Incentive Plans
Gain-Sharing Plans
Profit Sharing Plans
Earnings-at-Risk Plans
© 2010 McGraw Hill Ryerson
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
© 2010 McGraw Hill Ryerson
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
© 2010 McGraw Hill Ryerson
11-11
Different Types of Variable Pay Plans
Cash Profit Sharing Stock Ownership
or Options
Balanced Scorecard
Productivity / Gain- Sharing
Team / Group Incentives
© 2010 McGraw Hill Ryerson
11-12
Gain-Sharing Plans
under gain-sharing plans, employees share in cost-savings or productivity gains
© 2010 McGraw Hill Ryerson
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
© 2010 McGraw Hill Ryerson
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
© 2010 McGraw Hill Ryerson
11-15
Profit-Sharing Plans
variable pay plans requiring a corporate profit target to be met before any payouts occur
© 2010 McGraw Hill Ryerson
11-16
Earnings-at-Risk Plans
incentive plans sharing profits in successful years and reducing base pay in unsuccessful years
© 2010 McGraw Hill Ryerson
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
© 2010 McGraw Hill Ryerson
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
© 2010 McGraw Hill Ryerson
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)
© 2010 McGraw Hill Ryerson
11-20
Special Groups in Compensation Management
supervisors top management corporate directors professional employees sales staff contingent workers
© 2010 McGraw Hill Ryerson
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
© 2010 McGraw Hill Ryerson
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
© 2010 McGraw Hill Ryerson
11-23
Pay Components for Professional Employees
dual career ladders maturity curves performance bonuses
attaining professional licenses
perks flexible work schedulesCampus-like environment
© 2010 McGraw Hill Ryerson
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
© 2010 McGraw Hill Ryerson
11-25
Key Issues in Contingent Workforce Compensation
equity/fairness relative to permanent employees
boundaryless careers
© 2010 McGraw Hill Ryerson
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