Incentive Pay Systems Chapter 14

Incentive Pay Plans Pay plans designed to relate pay directly to performance or productivity Used in conjunction with a base wage and salary system Incentive pay plans attempt to strengthen the performance –reward relationship Motivate employees Incentive systems can be categorized on the basis of individual, group, or organizational level Advantage Not permanent and must be earned each year 14-2

Individual Incentives All types of individual incentives tied in some measure to performance of individual Advantage Employees can readily see relationship between what they do and what they get With group- and organization-based plans, relationship is often not so clear Drawback Competition among employees may produce negative results 14-3

Piece Rate Plans Simplest and most common type of incentive plan Employer pays employee a certain amount for every unit he or she produces Differential piece rate plan – Devised by Frederick W. Taylor Pays one rate for all acceptable units produced up to some standard and a higher rate for all pieces produced if output exceeds standard 14-4

Plans Based on Time Saved Standard hour plans Similar to piece rate plans; a standard time is set in terms of time it should take to complete a particular job Incentive plans based on time saved give an employee a bonus for reaching a given level of production or output in less than standard time 14-5

Plans Based on Commissions Incentive plan that rewards employees, at least in part, based on their sales volume Many salespeople work under this type of plan Straight commission basis – Pay is entirely determined by their volume of sales Combination of salary plus commission – A guaranteed base salary plus a commission on sales 14-6

Individual Bonuses Bonus – Reward that is offered on a one-time basis for high performance May be in cash or in some other form (trips etc.) Advantage – Must be earned each year and organization is not obligated over long run Drawback – Can become an extension of salary and occurs When awarding bonus becomes practically guaranteed since it is not tied to profits or some other measure of performance Merit pay increase – Reward based on performance but also perpetuated year after year 14-7

Suggestion Systems Systems that usually offer cash incentives for employee suggestions that result in either increased profits or reduced costs Can provide means for Making employees feel more a part of the organization Improving communications between management and employees The systems involve specific procedures for submitting ideas and utilize committees to review and evaluate suggestions 14-8

Incentives for Managerial Personnel Generally take the form of Annual bonuses Some type of stock option 14-9

Annual Bonus Most plans provide a year-end bonus based on that year’s performance, usually measured In terms of profits Sometimes measured by other means Annual cash bonus – Most common type of incentive Typically, bonus is paid in cash as a lump sum soon after end of performance year 14-10

Stock Options for Managerial Personnel Designed to give managers an option to buy company stock at a predetermined, fixed price If price of stock goes up – Individual exercises option to buy stock at the fixed price and realizes a profit If price of stock goes down – Stock option is said to be “underwater,” and the manager does not purchase the stock Intent is to provide incentive for managers to work hard and increase company profits, thus increasing price of the stock Drawbacks Some executives become concerned with pumping up short-term value of the stock to increase their personal wealth It dilutes the holdings of current shareholders 14-11

Group Incentives Incentives based on group rather than individual performance – Recommended where jobs are interdependent Based on such factors as profits or reduction in costs of operations Encourages employees to exert peer pressure on group members to perform Drawback Members may not perceive direct relationship between individual performances and that of the group Different groups can become overly competitive with one another to the detriment of the entire organization

Organizationwide Incentives Incentives that reward all members of the organization based on the performance of the entire organization Common organizationwide incentive plans include Gain-sharing plans Scanlon-type plans Employee stock ownership plans (ESOPs)