A Human Resource Management Approach STRATEGIC COMPENSATION A Human Resource Management Approach Chapter 5 Incentive Pay Prentice Hall, Inc. © 2006 Prepared by David Oakes

Incentive Pay Compensation fluctuates according to Adds to base pay A pre-established formula Individual or group goals Company earnings Adds to base pay Controls costs Motivates employees Prentice Hall, Inc. © 2006

Incentive Pay Categories Individual Group Company-wide Prentice Hall, Inc. © 2006

Performance Measures Individual incentive plans Quality of work output Quantity of work output Quality of work output Monthly sales Work safety record Work attendance Prentice Hall, Inc. © 2006

Group Incentive Performance Measures Group incentive plans Customer satisfaction Labor cost savings Materials cost savings Reduction in accidents Services cost savings Prentice Hall, Inc. © 2006

Company-Wide Performance Measures Company-wide incentive plans Company profits Cost containment Market share Sales revenue Prentice Hall, Inc. © 2006

Types of Individual Incentive Plans Piecework plans Management incentive plans Behavior encouragement plans Referral plans Prentice Hall, Inc. © 2006

Piecework Plans Awards based on individual production v. objective standards performance standards using objective & Subjective criteria Quantity and / or quality goals Prentice Hall, Inc. © 2006

Individual Incentive Plan Advantages Helps relate pay to performance Promotes equitable distribution of compensation Helps retain best performers Compatible with America’s individualistic culture Prentice Hall, Inc. © 2006

Disadvantages May promote inflexibility Unrealistic standards may hamper employee motivation Setting performance standards is time consuming Factors beyond employee’s control may affect outcomes Factors not rewarded may be overlooked Prentice Hall, Inc. © 2006

Group Incentive Plans Rewards employees for their collective performance Use has increased in industry 2 types Team - based or small group Gain sharing Prentice Hall, Inc. © 2006

Allocation Methods Equal incentive payments Differential payments based on contribution to goals Differential payments according to base pay Prentice Hall, Inc. © 2006

Gain Sharing Incentives based on company’s improved productivity Based on open leadership Involves employee participation Includes bonuses Prentice Hall, Inc. © 2006

Gain Sharing Plans 3 Common Forms Scanlon Plan Rucker Plan Improshare Prentice Hall, Inc. © 2006

Scanlon Plan Joseph Scanlon, 1935 Emphasis on teamwork Two - tiered cost savings suggestion system Production - level committees Screening committees Rewards = labor costs / SVOP Prentice Hall, Inc. © 2006

Rucker Plan Allan W. Rucker, 1933 Emphasizes employee involvement Uses a value - added formula Value of sales price Value of materials used Total labor costs Prentice Hall, Inc. © 2006

Improshare Mitchell Fein, 1973 Improved productivity through sharing Incentive to finish products Bonus based on a labor ratio Includes a buy - back provision Prentice Hall, Inc. © 2006

Company - Wide Incentive Plans Rewards employees when company meets performance standards 2 Types Profit sharing plans Employee stock option plans Prentice Hall, Inc. © 2006

Profit Sharing Plans Current profit sharing plans Deferred profit sharing plans Prentice Hall, Inc. © 2006

Profit Sharing Formulas Fixed-first-dollar-of-profits Graduated first-dollar-of profits Probability threshold formula Prentice Hall, Inc. © 2006

Distribution Methods Equal payments Proportional payments based on annual salary Proportional payments based on contribution to profits Prentice Hall, Inc. © 2006

Incentive Pay Considerations Based on individual or group performance? Acceptable level of risk? Replace traditional pay? Performance criteria evaluated? Appropriate time horizon? Prentice Hall, Inc. © 2006

Competitive Strategies Lowest - cost Lower output costs per employee Individual & group incentive plans Behavioral encouragement plans Differentiation Unique product or services Creative, risk - taking employees Long - term focus Team - based incentives Prentice Hall, Inc. © 2006