2. Incentive Rewards 19 Matakuliah: J0124 – Manajemen Sumber Daya Manusia Tahun : 2010

3. Learning Outcomes After studying this chapter, the students should be able to : Identify the types of incentive plans Identify the reasons for implementing incentive plans Identify basic requirements for successful implementation of incentive programs Bina Nusantara University 3

4. Strategic Reasons for Incentive Plans Variable PayVariable Pay  Tying pay to some measure of individual, group, or organizational performance. Incentive Pay ProgramsIncentive Pay Programs  Establish a performance “threshold” to qualify for incentive payments.  Emphasize a shared focus on organizational objectives.  Create shared commitment in that every individual contributes to organizational performance and success. © 2010 South-Western, a part of Cengage Learning. All rights reserved

5. Types of Incentive Plans © 2010 South-Western, a part of Cengage Learning. All rights reserved

6. Administering Incentive Plans Incentive systems are effective:Incentive systems are effective:  When incentives are based on actual differences in individual, team, or organizational performance and not seen as entitlements.  When annual incentive budgets are large enough to reward and reinforce exceptional performance.  When overhead costs associated with plan implementation and administration are properly considered beforehand and are controllable. © 2010 South-Western, a part of Cengage Learning. All rights reserved

7. Successful Incentive Plans Employees have a desire for an incentive plan.Employees have a desire for an incentive plan. Employees are encouraged to participate.Employees are encouraged to participate. Employees see a clear connection between the incentive payments they receive and their job performance.Employees see a clear connection between the incentive payments they receive and their job performance. Employees are committed to meeting the standards.Employees are committed to meeting the standards. Standards are challenging but achievable.Standards are challenging but achievable. Payout formulas are simple and understandable.Payout formulas are simple and understandable. Payouts are a separate, distinct part of compensation.Payouts are a separate, distinct part of compensation. © 2010 South-Western, a part of Cengage Learning. All rights reserved

8. Individual Incentive Plans Straight PieceworkStraight Piecework  An incentive plan under which employees receive a certain rate for each unit produced. Differential Piece RateDifferential Piece Rate  A compensation rate under which employees whose production exceeds the standard amount of output receive a higher rate for all of their work than the rate paid to those who do not exceed the standard amount. © 2010 South-Western, a part of Cengage Learning. All rights reserved

9. Computing the Piece Rate hourper units 5 unit)per time(standard minutes 12 hour)(per minutes 60 = unitper $2.55 hour)(per units 5 rate)(hourly $12.75 = © 2010 South-Western, a part of Cengage Learning. All rights reserved

10. Piecework: The Drawbacks Problems with piecework systems:Problems with piecework systems:  Is not always an effective motivator  Piecework standards can be difficult to develop.  Individual contributions can be difficult measure.  Not easily applied to work that is highly mechanized with little employee control over output.  Piecework may conflict with organizational culture (teamwork) and/or group norms (“rate busting”).  When quality is more important than quantity.  When technology changes are frequent. © 2010 South-Western, a part of Cengage Learning. All rights reserved

11. Individual Incentive Plans (cont’d) Standard Hour PlanStandard Hour Plan  An incentive plan that sets pay rates based on the completion of a job in a predetermined “standard time.”  If employees finish the work in less than the expected time, their pay is still based on the standard time for the job multiplied by their hourly rate. © 2010 South-Western, a part of Cengage Learning. All rights reserved

12. Individual Incentive Plans (cont’d) BonusBonus  Incentive payment that is supplemental to the base wage for cost reduction, quality improvement, or other performance criteria. Spot bonusSpot bonus  Unplanned bonus given for employee effort unrelated to an established performance measure. © 2010 South-Western, a part of Cengage Learning. All rights reserved

13. Merit Pay Merit Pay Program (Merit Raise)Merit Pay Program (Merit Raise)  Links an increase in base pay to how successfully an employee achieved some objective performance standard. Merit GuidelinesMerit Guidelines  Guidelines for awarding merit raises that are tied to performance objectives. © 2010 South-Western, a part of Cengage Learning. All rights reserved

14. Motivation Through Merit Raises Develop employee confidence and trust in performance appraisal.Develop employee confidence and trust in performance appraisal. Establish job-related performance criteria.Establish job-related performance criteria. Separate merit pay from regular pay.Separate merit pay from regular pay. Distinguish merit raises from cost-of-living raises.Distinguish merit raises from cost-of-living raises. Withhold merit payments when performance declines.Withhold merit payments when performance declines. © 2010 South-Western, a part of Cengage Learning. All rights reserved

15. Lump-Sum Merit Pay Lump-Sum Merit ProgramLump-Sum Merit Program  Program under which employees receive a year-end merit payment, which is not added to base pay.  Advantages:  Provides financial control by maintaining annual salary expenses and not escalating base salary levels.  Contains employee benefit costs for levels of benefits normally calculated from current salary levels.  Provides a clear link between pay and performance. © 2010 South-Western, a part of Cengage Learning. All rights reserved

16. Sales Incentives Straight Commission Sales Incentive Plans Straight Salary Salary and Commission Combinations © 2010 South-Western, a part of Cengage Learning. All rights reserved

17. Incentives for Professional Employees Profit sharing and stock ownership Double-track wage systems Managerial and Executive Incentives Bonuses and merit increases Performance incentive bonuses Executive perquisites (perks) © 2010 South-Western, a part of Cengage Learning. All rights reserved

18. Executive Compensation The Executive Pay PackageThe Executive Pay Package  Base salary  Short-term incentives or bonuses  Long-term incentives or stock plans  Benefits  Perquisites (perks) © 2010 South-Western, a part of Cengage Learning. All rights reserved

19. Group Incentive Plans Team Incentive PlansTeam Incentive Plans  Compensation plans where all team members receive an incentive bonus payment when production or service standards are met or exceeded. Establishing Team Incentive PaymentsEstablishing Team Incentive Payments  Set performance measures upon which incentive payments are based  Determine the size of the incentive bonus.  Create a payout formula and fully explain to employees how payouts will be distributed. © 2010 South-Western, a part of Cengage Learning. All rights reserved

20. Group Incentive Plans (cont’d) Gainsharing PlansGainsharing Plans  Programs under which both employees and the organization share the financial gains according to a predetermined formula that reflects improved productivity and profitability. © 2010 South-Western, a part of Cengage Learning. All rights reserved

21. Enterprise Incentive Plans Profit SharingProfit Sharing  Any procedure by which an employer pays, or makes available to all regular employees, in addition to their base pay, current or deferred sums based upon the profits of the enterprise.  Challenges:  Agreement over the percentages of shared of profits and the forms of distribution (cash or deferred) of profits between company and employees  Annual variations and possibility of no payout due to financial condition of company  Maintaining motivational connection of profit-sharing to performance of employees © 2010 South-Western, a part of Cengage Learning. All rights reserved

22. Enterprise Incentive Plans (cont’d) Stock OptionsStock Options  Granting employees the right to purchase a specific number of shares of the company’s stock at a guaranteed price (the option price) during a designated time period.  The value of an option is subject to stock market conditions at the time that option is exercised. © 2010 South-Western, a part of Cengage Learning. All rights reserved