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Chapter 12

Chapter 12: Pay-for-Performance and Financial Incentives

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Business Administration
BUS 381
Rick Iverson

Chapter 12 PayforPerformance and Financial IncentivesMoney and MotivationVariable payplan that ties pay to productivity or profitabilityoPremise top performers must get top pay in order to secure their commitmentoTo be effective performance measures must be accuratemeasurableoAlso must have line of sight between individual responsibilities and corporate goals 85 of Canadian employers have variable pay plansTypes of Incentive PlansIndividual incentive plansincome over base salary to employees who meet specific performance standardSpot bonusspontaneous award to individuals for accomplishments not readily measured by a standard eg exemplary customer serviceGroup incentive programsgiven to all groupteam members when they meet a specified standardProfitsharing plansorganizationwide share of profits in a specific periodGainsharingorganizationwide rewards for improvements in organizational productivity Important for incentives to be appealing affected by demographics eg age or generationIncentives for Operations EmployeesPiecework PlansPieceworkpay based on number of items processed by an individual in a unit of timeStraight piecework planpaid for each piece producedprocessed with no guaranteed minimum wage usually not legalGuaranteed piecework planminimum hourly wage plus incentive for each piece produced above a set number of pieces per hourAdvantagesoSimple to calculate easily understoodoEquitable ties pay directly to performanceDisadvantagesoEmployers can arbitrarily raise standardsoProduction is tightly tied with money earnedhard to make changesoRigid might ignore quality and maintenance of machinesStandard Hour PlanStandard hour planpaid basic hourly rate plus extra percentage of base rate for production exceeding standard eg if you produce 25 more than standard you get a 25 bonusTeam or Group Incentive PlansProduction standard is set for a work group and members are paid if group exceeds standardsThree approaches1Standards are set for each member and then they are paid either according to 1 everyone receives pay earned by highest producer 2 everyone receives pay earned by lowest producer or 3 everyone receives pay earned by average producer2Standard is set for group as a whole and everyone is paid the same amount3Choose a measurable standard of performance that the group can controlAdvantagesoTeams work better more collaborationoLess bickering amount group membersoFacilitates onthejob trainingDisadvantagesoIndividuals pay is not based on hisher own effortmay be less motivatingIncentives for Senior Managers and ExecutivesShortterm Incentives The Annual BonusAnnual bonusdesigned to motivated shortterm performance tied to company profits Three main issuesdecisionsoEligibility decided in three ways1Key position which jobs have a measurable impact on profits2Salarylevel cutoff point employees earning above a certain amount are eligible3Salary grade similar to above but according to gradeoFundsize determination how much to pay outNondeductible formula straightof net incomeDeductible formula calculated on excess over specified level of earningsoIndividual awardsUsually a target bonus is setShould managers be rewarded on individualteamcorporate performanceSplitaward methodbonus is split between individual effort and organizational performanceDisadvantage person who performs poorly still gets bonusMultiplier methodbonus is a product of individualcorporate performance avoids awarding underperformersLongterm IncentivesEncourage execs to stay at the company accumulate capital based on firms longterm successCapital accumulation programlongterm incentives usually for senior execs Include stock options book value plans stock appreciation rights performance achievement plans restricted stock plans and phantom stock plansoStock optionsright to purchase number of shares at todays price some time in the future most popular but decliningIncreasingly popular with employees below exec level
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