SHORT - TERM & LONG TERM INCENTIVES chapter 14

INCENTIVES Incentives are extra compensation for extra-ordinary work ,normally considered burden-some, hazardous, distasteful or inconvenient. Performance based incentives are given to those who contribute output beyond pre-determined standards. chapter 14

INCENTIVES Praise and recognition are important but there is no substitute for money Underpaid employees are in danger of becoming “ex-employees” very quickly if another firm is willing to pay more Employees at all levels who do more work or add more value should always ear more money than their peers in similar jobs One of the biggest mistakes a company can make is to pay everyone equally. Average performers will see no benefit to improving their work. Also, when good employees know a mediocre peer is equally compensated, the understanding is that the company either doesn’t notice or value their good work. Such perceptions are always counter-productive. chapter 14

Incentive Pay Plans Attempt to relate pay to performance Two basic requirements to be effective Procedures and methods used to rate employee performance must be accurate Incentives must be based on true performance chapter 14

INCENTIVES Incentive are: pay plans pay for extra output. Bonuses for individual innovation and creativity. Awards for achieving all kinds of desired results. Attainment of specific organizational goals. Payments for employees who work in unusual situations. chapter 14

Types of Group Incentive Plans Gain sharing or Profit sharing Plan Scanlon-Type Plans Employee Stock Ownership Plans (ESOPs) Variable Pay chapter 14

SHORT TERM INCENTIVES Short-term incentives are additions to base pay provided to employees within the operating year. Can take a few variety of forms as: Separate amounts provided weekly, monthly , quarterly etc. Granted upon achievement of a certain event or result. chapter 14

SHORT - TERM INCENTIVES All organizations can offer short-term incentive opportunities to its employees, keeping in view four different perspectives: As individual contributor As member of a team As member of a work unit As member of the organization chapter 14

Short Term Incentives Overtime on working days beyond fixed working hours. Shift, Weekend & Holiday work. Reporting odd hrs. Call back. Standby. Cleanup time . chapter 14

CALL-BACK employees who have a certain skill that may be needed at any hour receive a call-back or call-in premium. this worker is on standby and must be available for a work assignment at any time outside normal working hours. once called in to work, they receive their regular pay and other earned premiums or differentials. chapter 14

STANDBY standby or idle time payments provide an employee a guaranteed amount of pay even when there is no work to perform (most common reason including a machine breakdown or shortage of raw materials etc.) chapter 14

CLEANUP TIME workers who perform assignments requiring changing clothing, shower or perform other such activities receive their regular rate of pay for a certain amount of cleanup time. cleanup requirement may come from dirty working conditions, strenuous work activities or conditions dangerous to health. employees who work in areas where it takes an extended period of time to reach the work site may receive a travel premium. chapter 14

PAY FOR UNITS PRODUCED DESIGNING PAY-FOR-UNITS-PRODUCED PROGRAMS. When implementing a pay-for-units-produced program, industrial engineers first study the entire operation and develop the most efficient flow of work, processes and methods for performing assignments. in the process of standardization, simplification and specialization many jobs evolve requiring employees doing the same thing day in and day out. it becomes possible to train individuals to perform these repetitive assignments and to measure the total time required for the completion of the assignment or each of its steps. chapter 14

PAY FOR UNITS PRODUCED Three building blocks provide the foundation for many pay-for-units-produced incentive plans: Establishing the time required for an employee to produce a unit of output Determining what should be considered an acceptable level of performance in a standard work period Establishing an acceptable level of pay for an employee performing an assigned job in the specified time period chapter 14

PATENT AWARDS Employers must tap the intellectual capabilities of each employee. Most jobs require employees to think about a variety of things and then relate these things to work situations. For most creative employee whose inventions result in patents, organizations provide patent awards. for the professional who works in the research and development field, awards are usually provided for filed and issued patents. chapter 14

SUGGESTION PLANS Suggestion system has been a major element in any employer plan to encourage greater employee involvement.Many systems fail because of the following factors: Management lacks interest and fails to support the system There has been insufficient time to review and analyze the suggestion Those developing suggestions fear the impact of suggestions on co-workers Supervisors consider suggestions a personal threat Some creative individuals are unable to describe or articulate their ideas accurately chapter 14

AGREGATING EMPLOYEES FOR INCENTIVE OPPORTUNITIES Amount of bonus is normally established as a percentage of base pay. This percentage is usually called target award. Some organizations currently combine senior management performance with corporate performance in determining the amount of the short-term bonus. chapter 14

ORGANIZATION-WIDE SHORT-TERM INCENTIVES “ Profit sharing and cost reduction are both an opportunity and the responsibility of every member of the organization” Productivity gain sharing programs ( sharing gains with employees for improvements through increased productivity. Some of variables influencing operation of a gain sharing plans are: Technological changes. Change in methods, procedures, processes. Product mix. Raw material availability, quality & cost. Labour cost. Customer services requirements. Delivery procedure. Inventory policy. Sales price of goods or services. Financing & funding patterns. chapter 14

AGREGATING EMPLOYEES FOR INCENTIVE OPPORTUNITIES Measures used to determine the amount of the short-term incentive pool vary by organization: Profit before taxes Profit after taxes Return on equity: profit after taxes/ stock Return on invested capital: profit after taxes/ all paid-in capital plus all retained earning chapter 14

PROFIT SHARING Profit sharing is an approach similar to the concept of democracy and dignity of labour, which was first introduced by Albert Gallatin in his glass factory in 1974. M.Le Claire, owner of house painting& decorating business in Paris has been credited as father of profit sharing concept. He introduced his plan in 1842. Today profit sharing is considered as a fundamental part of compensation program in many organizations . chapter 14

PROFIT SHARING Profit sharing has been defined as any procedure under which an employer pays or makes available to regular employees, subject to reasonable eligibility rules, in addition to prevailing rates of pay, special current or deferred sums based on the profits of business. chapter 14

PROFIT SHARING Three different types of profit-sharing plans in existence today: Cash or current payment plan  provides for the distribution of profits relative to some predetermined division by either cash or company stock, or both, within a short period following the earning of the profit and the determination of the proportionate shares. Deferred plan  provides for the placement of earned funds into an escrow account for distribution at a future date Combined plan  has the features of both. A major weakness of many profit-sharing plans is that once they have been incorporated into the compensation system, they become institutionalized, accepted as permanent, un changing fixtures and have little or no motivational influence in improving work performance chapter 14

SCANLON PLAN Basic elements of Scanlon plan are: Union management cooperation plan. To reward employees for those constructive efforts, ideas and suggestions used by the company for improving profitability. The original plan developed by Scanlon required good management, mutual respect, integrity and trust. Labour force recognized it’s responsibility for making business strong and competitive. Every member of the organization was included in it’s variations. Compensation was based on the concept of Pay for performance. Basic elements of Scanlon plan are: The ratio The bonus The production committee The screening committee chapter 14

RATIO Ratio or norm is the standard that serves as a measure for judging business performance. Ratio is: Total labor cost / sales value of production. The amount of bonus depends on the reduction in costs below the preset ratio. chapter 14

PRODUCTION COMMITTEE Consists of two to five worker representatives and one representative of management Purpose is to use the imagination and ingenuity of the workers. Develops employee suggestions to increase productivity, improve quality, reduce waste, and improve methods of organizational operations. It develops understanding off all production costs and disseminates this information throughout the business. Meets twice a month chapter 14

SCREENING COMMITTEE Consists of top five members of the plant management and worker representatives (usually 8 – 12 members) It reviews the monthly bonus, discusses current production problems and considers all suggestion for organizational improvement. It discusses all aspects of business trends relative to the enterprise, for competitors, for product and labor, to sales and shipment policies, orders, quality, customer problems, to the general business outlook. Meets once a month chapter 14

THE SCANLON PLAN-- TODAY Today the Scanlon plan is recognized as system of total organization development consisting of : Assumptions about human behaviour. Set of principles for the management of organizations. Participative process of implementation. It is a demanding process to achieve organizational productivity and human self-fulfillment. chapter 14

THE SCANLON PLAN-- TODAY Four principles have been validated that both define the Scanlon plan and serve as conditions of Scanlon plan success: Identity  the continual process of clarifying and understanding the organization’s “mandate”. Includes recognition and affirmation by the majority of employees of the need to change in order to manage more effectively all the organization’s resources: market place, financial, physical and human. Participation  acceptance by all employees of the responsibility for the mandate and the opportunity to responsibly influence the decision-making process. Equity  assurance of a fair and balanced return to the customers, owners and employees. Managerial competence  the unequivocal requirement of leadership to define the ‘right job’ to be open to influence, and to create a climate for productivity improvement. The identity, participation and equity processes are demanding tests of managerial attitudes, abilities and performance. chapter 14

Lincoln’s Incentive Plan James Lincoln established an incentive plan in 1914 which exist even today. it’s principal features are : Job Guaranty. Standard Job Evaluation Procedure. Majority of employees on piece rate working plan. Employees may participate in suggestion program except management & Engineering employees. Twice a year merit rating program for performance evaluation. After 1st year of service, option to purchase limited number of company shares. Employees elect members on advisory board. Independent work groups or subcontractor shop operations. All profit of business split three ways: Share for capital investment. Dividend for share holders. Remaining profit for employees distribution. Annual cash bonus. chapter 14

Types of Individual Incentives Incentives for Managerial personnel Annual bonuses Long-term performance plans Stock options Qualified vs Non-qualified Incentive stock options Other chapter 14

INDIVIDUAL BASED BONUSES AND AWARDS Employee behaviors that lead to improved organizational performance are almost limitless. however, some behaviors are critical and it is on those behaviors that incentive designers focus. chapter 14

INDIVIDUAL BASED BONUSES AND AWARDS Attendee bonus Length-of-service and Seniority rewards Referral awards Patent awards Suggestion plans Special achievement awards Contest bonuses chapter 14

Types of Individual Incentives Piece rate plans – simplest, most common Straight piece rate Differential piece rate Plans based on time saved Commission plans Straight percentage of sales Guaranteed base plus percentage Monthly draw from commissions chapter 14

Advantages of Incentive Pay Programs Employee efforts are focused on important topics Rewards are variable costs linked to results Incentives directly related to improved performance Incentives reward those responsible for higher performance Can foster teamwork chapter 14

Piece Rate Plans Individual bonuses Suggestion systems Merit pay Cash prizes Other prizes Disadvantage is that they may become expected. Suggestion systems chapter 14

Status of Executive Pay Average more than average employee Going up rapidly Stock options try to link pay to performance, but often do not Very controversial Controversy over reporting chapter 14

Group Incentives Good when jobs are interdependent May lead to excessive compensation Self-directed work teams Organization-wide incentives chapter 14

Gain Sharing or Profit Sharing Plans Organization and employees share Use of predetermined formula Target improved productivity or profitability Based on total organizational performance Profit-sharing most common chapter 14

Employee Opposition to Incentive Plans Production standards set unfairly Incentive plans are really “work speed-up” Competition created among employees Increased earnings = tougher standards Payout formulas, complex difficult to understand Friction caused between employees and management chapter 14

Six Components of Effective Incentives Plans Incentives based on “true” performance Adequate financial resources to reward Clearly defined and acceptable performance standards Easily understood payout formula Reasonable administrative costs Wide coverage of employees chapter 14

Making Incentive Plans Work Must communicate clearly Trust is an extremely important issue chapter 14

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LONG TERM INCENTIVES & WEALTH BUILDING chapter 14

LONG TERM INCENTIVES & WEALTH BUILDING Everyone thinks about future. About job. About occupational / professional opportunities. Growing age as barrier for job change. About security when no job / not able to work. About Income loss due to retirement. chapter 14

DESIGNING LONG TERM INCENTIVES & DEFFERED COMPENSATION Tax factor. Fixed and variable long term incentives are intended to provide employees with the best set of retirement benefits. Deferral of certain amount of current pay until retirement-PF / Gratuity / funded gratuity. Social security. Pension. Stock options / stock bonus plan. Profit sharing plans. These programs are based on : The kind of organization. Kind of benefits / compensation package, Basic needs, characteristics and demand of employees. chapter 14

CONSIDERATIONS Employer benefits. Employer’s cost. Employee benefits. Employee cost. chapter 14

LONG TERM INCENTIVE PLANS Saving or thrift plan- which encourage employees to save part of income to have more secure and happier retirement. Cash or Differed Arrangement Plan ( CODA). The amount deducted from salary and invested . The deferred amount and accumulated earnings on investment are taxed only when distributed- gratuity / PF. Simplified pension plans. Age & % of salary etc. Equity based capital accumulation program. Providing employees an opportunity to acquire stocks in their employer’s corporation. Long term bonuses. Length of service based - phased . Death benefits. Benefits to beneficiaries. Insurance. To provide additional benefits / coverage. Severance packages. chapter 14

INCENTIVES In the long run, a firm puts more of an investment in a person than it does any of its equipment. If management doesn’t make a corresponding effort to ensure employees are satisfied and motivated, nothing will work as well as it should or could. chapter 14

ESOPs Stock plans in which an organization contributes share of its stock to an established trust for the purpose of stock purchases by its employees Employee ownership results in potential for employee share in success of company Allows for employee voice in company Tax advantages Often used to rescue distressed companies chapter 14

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EMOTIONAL REWARDS AS INCENTIVES praise for accomplishments Employees feel appreciated Recognize quality work with plaques, trophies, awards, commendations in the company newsletter, employee of the month parking spaces, etc Human beings crave praise and recognition to boost their confidence and make them feel good about their work. That doesn’t mean anyone should dole out kudos in-discriminately, but there should always be room for acknowledgement of special accomplishments. It has been said good management is the art of showing average people how to do the work of superior people. People who hear nothing but criticism inevitably feel inadequate and resentful. chapter 14