Download Purposes of Pay-for

What Is Pay-for-Performance?
Pay for performance plans signal
a movement away from
entitlements.
Pay will vary with some measure
of individual, team, or
organizational performance.
Purposes of Pay-for-Performance
Attain
strategic goals
Reinforce
organizational norms
Motivate
performance at individual, group,
and organizational levels
Recognize
differential employee contributions
Obstacles to Pay-for-Performance
Difficulties
in specifying and measuring job
performance
Problems
in identifying valued rewards
Difficulties
in linking rewards to job
performance
Use of Different
Variable-Pay-Plan Types
Base vs. Variable Pay
Pay-for-Performance Plans: Short
Term

Merit Pay

Lump-Sum Bonuses

Individual Spot Awards

Individual Incentive
Plans
Issues: Rewarding Performance
With Merit Pay Increases

Expense

Improving employee and
organizational performance

Permanence

Individual focus
Managing Merit Pay
Improve
accuracy of performance ratings
Allocate
enough money to truly reward
performance
Make
sure size of merit increase differentiates
across performance levels
Lump-Sum Bonuses
 Increasingly
 Not
used substitute for merit pay
built into base pay
 Viewed
as less of an entitlement than merit
pay
 Less
run
expensive than merit pay over the long
Relative Cost Comparisons
Individual Incentive Plans
Method of Rate Determination
Units of production
per time period
(1)
Pay constant function
of production level
Relationship
between
production level
and pay
Pay varies as function
of production level
Straight piecework
plan
(3)
Taylor differential
piece-rate system
Merrick multiple piecerate system
Time period per unit
of production
(2)
Standard hour plan
Bedeaux plan
(4)
Halsey 50 - 50 method
Rowan plan
Gantt plan
Advantages of
Individualized Incentive Plans
 Substantial
contribution to:
 Raise
productivity,
 Lower production costs,
 Increase earnings of workers.
 Less
direct supervision required
 Enable labor costs to be estimated more
accurately than under payment by time.
Disadvantages of
Individualized Incentive Plans
 Greater
conflict may emerge between
employees seeking to maximize output and
managers concerned about quality
 Changes to production may be more highly
resisted
 Increased problems with work
interdependencies
 Elevated levels of mistrust between workers
and management.
Overview of Team Incentives

Improve organizational performance

Use organizational measures

Measured periodically
A Sampling of
Performance Measures (1 of 2)
Customer-Focused Measures
 Time
to Market Measures
Financially-Focused Measures
 Value
Creation

On time delivery

Revenue growth

Cycle time

Resource yields

New product introductions

Profit margins

Economic value added
 Customer
Satisfaction Measures

Market share
 Shareholder
Return

Customer satisfaction

Return on invested capital

Customer growth and retention

Return on sales / earnings

Account penetration

Earnings per share

Growth in profitability
A Sampling of
Performance Measures (2 of 2)
Capability-Focused Measures
 Human Resources Capabilities
 Employee satisfaction
 Turnover rates
 Total recruitment costs
 Rate of progress on
developmental plans
 Promotability index
 Staffing mix/head-count ratio
 Other Asset Capabilities
 Patents and copyrights
 Distribution systems
Internal Process-Focused
Measures
 Resource
Utilization

Budget-to-actual expenses

Cost allocation ratios

Reliability / rework

Accuracy / error rates

Safety rates
 Change
Effectiveness

Program implementation

Teamwork effectiveness

Service / quality index
Balanced Scorecard Approach
Uses
a constellation of measures
 Pinpoints
areas of success
 Indicates
areas to improve
Categories
 Financial
 Process
of measures
results
improvements
 Customer
service
 Innovation
Forces
discussions about priorities among different
measures
Outcome – Objectives with different weights in terms
of importance
Types of Variable Pay Plans: Advantages
and Disadvantages
Cash Profit Sharing
Stock Ownership or
Options
Balanced Scorecard
Team / Group
Incentives
Productivity / GainSharing
Three Gain-Sharing Formulas
Scanlon Plan
(Single ratio volume)
Rucker Plan
Improshare
Numerator of
ratio (input
factor)
Payroll costs
Labor cost
Actual hours
worked
Denominator of
ratio (output
factor)
Net sales (plus
or minus
inventories)
Value added
Total standard
value hours
Profit-Sharing Plans
Focus
– Predetermined index of profitability
Employees
receive annual bonus or shares in
company based upon company-wide
performance
 Paid
in cash or
 Deferred
into a retirement plan
Issue
 Employees
profits
may not feel their jobs directly impact
Earnings-at-Risk Plans
Success
sharing plan
 Employee
base pay is constant
Variable
pay increases in successful years
No reduction in base pay and no variable pay in
poorly-performing years
Risk
sharing plan
 Employee
Base
base pay varies
pay often reduced in poor performance years
Rewards typically higher than success-sharing plans
in high-performance years
Shifts part of risk of doing business from company to
employee
Group Incentive Plans:
Advantages and Disadvantages
Advantages
Positive
impact on
performance of about 510%/yr.
Ease
of measurement
Cooperation
Support
valued
of teamwork
Increases
participation
in decision-making
Disadvantages
Line
of sight lessened
Increased
Increases
turnover
compensation
risk to employees
Long-Term Incentive Plans
Employee Stock Ownership Plans
(ESOPs)
Performance Plans (Performance
Share and Performance Unit)
Broad-Based Option Plans (BBOPs)
Conditions for Effective Variable
Pay-for-Performance Plans
Plan
is clearly communicated
Plan
is understood
Rewards
are easy to calculate
Employees
participate in administering plan
Employees
believe they are being treated fairly
Employees
believe they can trust company and
they have security
Rewards
are awarded as soon as possible after
desired performance