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Commerce 2BC3 Chapter 11: Variable Pay and Executive Compensation Variable Pay: Incentives for Performance Variable pay: Compensation linked directly to individual, group/team, and/or organizational performance - Includes incentives, bonuses, gainsharing, and goal plans and is any form of direct pay that is not folded into base pay - Attempt to provide tangible rewards to employees for performance beyond normal expectations - Based on several assumptions: Some jobs contribute more to organizational success than others Some people perform better and are more productive than others Employees who perform better should receive more compensation Some of employees total compensation should be tied directly to performance and results - Differences in job responsibilities are recognized through different amounts of base pay - Unions are opposed because of the belief that it will lead to a reduction in base pay - Study reported that 30% of unionized workplaces have variable pay plans that are used as a bonus to an employees base salary - Incentive programs vary from employer to employer Developing Successful Pay-for performance plans - Employers adopt variable pay or incentive plans for a number of reasons: Link strategic goals and employee performance Enhance organizational results and reward employees financially for their contributions Reward employees to recognize different levels of employee performance Achieve HR objectives, such as increasing retention, reducing turnover, recognizing training, or rewarding safety and attendance - Variable pay plans can be considered successful if they meet the objectives the organization has for them when they were initiated Does the plan fit the organization? - One size does not fit all - A plan that has worked well for one company will not work well for another - The plan must be linked to the objectives of the organization - The success relies on its consistency with the culture of the organization Does the plan reward the appropriate actions? - Should be tied as much as possible to desired performance - Employees must see a direct relationship between their efforts and their financial rewards - Linking pay to performance may not always be appropriate - Individual variable pay is inappropriate Is the plan administered properly? - May be complex or simple, but it will be successful only if employees understand what they have to do to be rewarded - The more complicated a plan is, the more difficult it will be to communicate it meaningfully to employees - Experts recommend that a variable pay plan include several performance criteria - Managers need to be able to explain clearly what future performance targets need to be met and what the rewards will be - Successful plans clearly identify how much is provided to employees separate from their base pay amounts - The separation makes a distinct connection between performance and pay Reinforces the notion that part of the employees pay must be re-earned in the next performance period Metrics for Variable Pay Plans - The results should be measured to determine the success of the programs - Different measures of success can be used, depending on the nature of the plan and goals set for it - Common metric is ROI - Regardless of the decision, the critical decisions is to gather and evaluate data to determine if the expenditures on it are justified by increased performance and results - If the measures show positive analyses, then the plan Is truly pay-for-performance in nature Success and Failures of Variable Pay Plans - If individuals see incentives as desirable, they are more likely to put forth the extra effort to attain the performance objectives that trigger the incentive payouts - One problem is that many employees prefer that performance rewards increase their base pay, rather than be given as a one-time, lump-sum payment - Many employees prefer individual rewards to group/team or organizational incentives - Providing variable pay plans that are successful can be complex and requires significant, continuing efforts- Suggestions contributing to a successful incentive plan: Develop clear, understandable plans that are continually communicated Use realistic performance measures Keep the plans current and linked to organizational objectives Clearly link performance results to payouts that truly recognize performance differences Identify variable pay incentives separately from base pay Three Categories of Variable Pay Individual incentives: Given to reward the effort and performance of individuals Piece rate systems, sales commissions, and bonuses Employees may focus on what is best for them personally and may block or inhibit the performance of other individuals with whom they are competing Group/team incentives: Gainsharing or goalsharing plans, in which employee teams that meet certain goals share in the gains measured against performance targets Focus on quality improvement, cost reduction, and other measurable results Rewards an entire group/team for its performance, cooperation among the members may increase as well Organizational incentives: Reward people according to the performance results of the entire organization Assumes that all employees working together can generate greater organizational results that lead to better financial performance Often share some of the financial gains made by the firm with employees through payments calculated as a percentage of the employees base pay Individual Incentives - Try to tie individual effort to additional rewards - Conditions necessary for the use of individual incentive plans are: Individual performance must be identified Individual competitiveness must be desired Individualism must be stressed in the organizational culture Piece-rate System Straight piece-rate system: Pay system in which wag
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