1. Chapter Fifteen
Incentive Plans

2. Learning Objectives
Outline various incentive plans used to motivate production workers, sales personnel, and professional and managerial employees on an individual basis
Discuss the problems associated with individual incentive plans
Describe the conditions under which group incentive plans are particularly effective
List the objectives of productivity, gainsharing and profit-sharing plans
Describe the suggestion plan system and indicate some of the problems involved in implementing such plans
Identify the incentives that may be used in a positive reinforcement program

3. Figure 15.1 Four major types of incentive plans tie financial rewards to performance

4. Individual Incentive Plans
Provide financial or nonfinancial rewards to employees who make substantial contributions to organizational effectiveness. There are many kinds of incentive plans, offering various rewards on different bases:
Incentives for Production
Employee Stock Ownership Plans
Sales Personnel Incentive Plans
Incentives for Managerial and Professional Employees

5. Incentive for production
Piece-rate plan: compensation is based on the number of units produced.
a. Under straight piece‑rate plans, the worker is paid an additional set amount for each unit produced above the standard.
b. Under differential piece‑rate plans, the worker who exceeds standard production is compensated at a higher rate for all work than are those workers who satisfy only the minimum standard.

6. Incentive for production
Under production‑bonus systems, workers who surpass minimum production standards are given a bonus payment.
a. The bonus payments are based on cost savings associated with higher productivity.
b. An example is the standard‑hour plan, under which the worker is paid the standard rate even on completing a task in less than standard time.

7. Incentive for production
Under the measured day‑rate plan, employees are periodically rated on several factors and pay is raised or lowered accordingly and remains constant until the next rating.
Overall, individual incentive plans are declining in use, due to the rise in popularity of productivity gainsharing plans.

8. Individual Incentive Plans (cont’d)
Other Types of Incentive Plans:
Commissions: for sales personnel, based on the number of volume sold.
Spot bonuses: for managerial and professional employees, that are cash awards
Royalty compensation: for scientists and inventors

9. Individual Incentive Plans (cont’d)
Employee Stock Ownership: employee can buy a certain number of shares of company stock at a given price by a specified date.

10. Team incentive plans
Are individual plans applied to small groups of workers The purpose of group incentive plans is to encourage teamwork and cooperation needed to attain high productivity or performance.

11. Productivity Gainsharing Plans
Attempt to stimulate production efficiency by allowing employees to share labor and production cost savings through bonuses. They may be applied to a wide variety of businesses and are usually found in some hybrid version.
Improshare
The Scanlon plan

12. Improshare
Focuses on the number of hours saved for a given number of units produced. It subtracts the actual hours needed to produce them from the originally allocated hours.
1. The savings realized by producing in a shorter period of time than expected are shared by the firm and the workers.

13. Scanlon plan
SP is a gainsharing plan that allows employees to share the savings of labor costs during periods of high productivity.

14. Profit-Sharing Plans
Is an incentive system in which some portion of the organization’s earnings is distributed to employees to supplement their pay.
Current distribution (or cash) plans: some percentage of profits is distributed in cash at regular intervals.
Deferred distribution: some percentage of profits is deposited in a trust made available to the employee at retirement or termination.
Combined plans

15. Other Types of Plans
Suggestion Plans: rewards employees who offer useful ideas for improving organizational effectiveness (the rewards are usually cash payments but sometimes merchandise or travel).
Positive Reinforcement Programs: rely primarily on nonfinancial incentives or reinforcers (such as praise, recognition, and avoidance of punishment) to shape desired worker behavior.

16. External Influences State laws
Laws set forth rules for computing base and overtime pay and specify the records that must be kept
Profit-sharing plans must be approved by the Treasury Department to comply with State income tax laws

17. Internal Influences Contemporary thought about incentive
Management philosophy and organizational culture and climate. It is currently felt that these variables are important in determining the “fit” between a given incentive system and a particular organization
Size of the unit for which performance gains are measured (individual, group, organization)
Participation employees in designing plans

18. Role of the HR Department
Play a key role in the training and communications necessary for long-term success of these plans.
Communicate with employees about the purposes and philosophy underlying any incentive program.

19. Key Terms Incentive plan Variable pay Individual incentive plan
Piece-rate plan
Differential piece-rate plan
Production bonus
Standard-hour plan
Measured day-rate plan
Commission
Spot bonus
Royalty compensation
Esops
Stock option plan
Stock appreciation rights
Team incentive plan
Productivity gainsharing
Improshare
Scanlon plan
Spot gainsharing
Profit-sharing
Suggestion plan
Positive reinforcement program