Chapter 11 – Pay for Performance Plans
What is a PFP plan?
oSignal a movement away from entitlement toward pay that
varies with some measure of individual and org performance
oGrandfather of all plans – MERIT PAY
oTwo trends can be traced back to PFP plans:
Increasing competition from foreign producers forces
North American producers to cut costs and/or increase
productivity – well designed variable plans have known to
motivate employees and even cut costs
In today’s fast paced business environment with so much
new technology, workers must be willing to adjust what
they do now and how they do it – failure to move quickly
means market share goes to competitors
Scientific pay for performance plans: Short term
oMerit pay – increase in base pay related to performance
What the employee does this year in terms of
performance is rewarded every year he/she remains with
the employer
Some people say that it is expensive and it doesn’t
achieve its desired goal – improving individual and
corporate performance
Must improve the accuracy of performance ratings,
allocate enough merit money to truly reward
performance, and make sure the size of the merit
increase differentiates across performance levels
oLump sum bonuses
Employees receive an end of year bonus that does not
build into base pay
Viewed less of an entitlement than merit pay because it
has to be earned every year
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By giving lump sum bonuses, the company is essentially
freezing the base pay – employees not fond of this
oIndividual spot awards
Awarded for exceptional performance that top
management is notified about
In a large company, formal recognition might occur
Smaller companies may be more casual about recognition
and more subjective about deciding the size of the award
oIndividual incentive plans: types
Offer a promise of pay for some pre-established level of
Incentive plans vary on two dimensions
Method of rate determination – based on units of
production over time or time period per unit of
Specified relationship between production level and
wages – ties wages to output on a one-to-one basis
or vary wages as a function of production level
Method of rate determination
Relationship between
production level and
Units of production
per time period
Time period per unit
of production
Pay constant function
of production level
1 Straight piecework
2 Standard hour plan
Pay varies as function
of production level
3 Taylor differential
piece rate system –
Merrick multiple piece
rate system
4 Halsey 50-50 method
1 – most frequently implemented; easily understood by workers and
more readily accepted than some other systems
2 – relatively common – more practical than 1 for long-cycle operations
and jobs that are non-repetitive and require numerous skills for
3 – both those plans provide diff piece rates depending on the level of
production relative to standard – Taylor plan establishes 2 rates – one
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is put into effect when the worker exceeds the published standard and
the second one is established for production below standard
4 – features a shared split between worker and employer in any
savings in direct cost – savings resulting from completion of task in
less than the standard time are allocated 50-50 between the worker
and the company
Individual incentive plans:
Substantial contribution to raise productivity, to lower
production costs, and to increase earnings of workers
Less direct supervision is required to maintain reasonable
levels of output than under payment by time
Systems of payment by results enable labour costs to be
estimated more accurately than under payment by time –
helps costing and budgetary control
Greater conflict may emerge between employees seeking
to maximize output and managers concerned about
deteriorating quality levels
Attempts to introduce new technology may be resisted by
employees concerned about the impact on production
Reduced willingness for employees to suggest new
production methods for dear of subsequent increases in
production standards
Increased complaints that equipment is poorly
maintained, hindering employee efforts to learn larger
Increased turnover amongst new employees discouraged
by the unwillingness of experienced workers to cooperate
in on-the-job training
Elevated levels of mistrust between workers and
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