MHR 523 Chapter Notes - Chapter 12: Piece Work, Eval, Industrial Engineering

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16 Aug 2016
Pay-for-Performance and Financial Incentives
fixed pay = compensation that is independent of the performance level of the indiv., group, or org.
o base pay, relatively consistent compensations (satisfy need for income stability)
variable pay = any plan that ties pay to productivity or profitability
o productivity, profitability, some other measure of org. performance
employers increase use of variable pay while holding salary increase/fixed compensation modest levels
premise of variable pay: top performers get top pay, secure commitment
“line of sight”: extent to which an employee can relate their daily work to the achievement of overall
corporate goals
treat workers like partners, think of business goals as own pay like partners
Types of Incentive Plans
individual incentive programs give income over and above base salary to indiv. employees who meet a
specific indiv. perf. std.
o group incentive programs
informal incentives (indiv.) for accomplishments not readily measured by std.
has to be appealing to indiv. receiving
o demographics
Piecework Plans
piecework = a system of pay based on the number of items processed by each indiv. workers in a unit of
o items per hr., items per day
job eval. and industrial engineering
o job eval.: assign hrly wage rate, industrial engineering: production std.
std. # min per unit or std. # units per hr.
eg) $10 per hour 20 things per hr. $0.50 per thing
straight piecework plan = a set payment for each piece produced or processed in a factory/shop
guaranteed piecework plan = min. hrly wage + incentive for each piece produced above a set # of pieces
per hr.
differential piece-rate plan = a plan by which a worker is paid a basic hrly rate + an extra % of their base
rate for production exceeding the std. per hr/day
o similar to piecework payment but based on % premium
Advantages and Disadvantages
o adv.: easy to calculate, easily understood by employees, equitable in principle, powerful (link
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o disadv: employees don’t like it, employers can change std. (excessive wages), when new job eval.
new piece rate, ridged (quantity ≠ quality)
o differential piece-rate plan
adv.: fairly simple compute and understand, express in time not money, clerical chore
Team or Group Incentive Plans
team or group incentive plans = a plan in which production standard is set for a specific work group and
its members are paid incentives if the group exceeds the production standard
1. all members receive the pay earned by the highest producer OR
o all members receive the pay earned by the lowest producer OR
o all members receive payment equal to the avg pay earned by the group
2. set production std. based on the final output of the group as a whole; all members then receive the same
pay, based on the piece rate that exists for the group’s job
o piece rate, std. hr plan
3. choose measurable definition of group performance or productivity that the group can control
adv.: jobs interrelated, reduce jealously, ppl indebted to each other, cooperation, less bickering, OJT
disadv.: less motivating
most effective when high lvl comm. w/ employees about specifics of the plan, strong worker involvement
in plan design/implementation, group members perceive plan fair
sr. man. and execs get bonus/incentive b/c of role they play in determining divisional and corp.
Short-Term Incentives: The Annual Bonus
increase or decrease of up to 70% in total pay relative to the prev. yr.
o key position
job-by-job review is conducted to identify key jobs that have measurable impact on
o salary-level cut off point
all employees earning above amt. are automatically eligible for consideration short-term
o salary grade
refinement salary cut-off, assumes that all employees at a certain grade or above should
be eligible for the short-term incentive program
o size of bonus greater for top-level execs.
How Much to Pay Out (Fund Size)
o fund size total amt. of bonus money that will be available
o non-deductible formula
straight % (usually net income) used to create the short-term incentive fund
o deductible formula
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