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Chapter 8

HR Chapter 8 + 9.doc

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Department
Business
Course
BU354
Professor
Steve Risavy
Semester
Fall

Description
Chapter 8/9: Pay-for-Performance and Financial Incentives Money and Motivation Variable Pay • plan that links pay to productivity, profitability, or some other measure of organizational performance • more than 85 percent of Canadian employers have one or more types of variables pay plans in place • prerequisite for effective variable pay plans is “line of sight” or the extent to which an employee can relate his or her daily work to the achievement of overall corporate goals • accurate performance appraisal or measurable outcomes is a precondition for effective pay-for-performance plans Types of Incentive Plans • individual incentive programs: give income over and above salary to individual employees who meet a specific individual performance standard o spot bonuses are awarded, generally to individual employees, for accomplishment that are not readily measured by a standard • group incentive programs: are like individual incentive plans but they give pay over and above salary to all team members when the group or team collectively meets a specified standard for performance or productivity o profit sharing plans: are generally organization-wide incentives programs that provide employees with a share of the organizations profits in a specified period o gainsharing plans: organization-wide pay plans designed to reward employees for improvements in organizational productivity – include employee suggestion systems and focus on reducing labour costs Incentives for Operations Employees • Piecework plans – straight; guaranteed- this is alright in Ont., but not in Alberta o Piecework is the oldest incentive and most commonly used o Earnings are tied directly to what the worker produces; the person is paid a piece rate for each unit that he or she produces o Developing a workable piece rate requires both job evaluation and industrial engineering o Critical issue is the production standard (industrial engineering) which is the standard number of minutes per unit or standard number of unites per hour o Straight piecework plan is a set payment for each piece produced or processed in a factory or shop o Guaranteed piecework plan is the minimum hourly wage plus an incentive for each piece produced above a set number of pieces per hour o ADV: simple to calculate and easily understood, appear equitable and rewards are directly tied to performance o DIS: employers habits of arbitrarily raising production standards whenever they found their workers earning excessive wages, the revising of a piece rate when a new job evaluation results, when an attempt to revise production standards is made it meets considerable worker resistance, employees become preoccupied with producing the number of units needed and are less willing to concern themselves with meeting quality standards, equipment is not well maintained since employees are focusing on maximizing each machines output • Standard hour plan- per hour or per 40 hour work week o Like the piece rate with one major difference: the worker is rewarded by a premium that equals the percentage by which his or her performance exceeds the standard o The worker still has a guaranteed base rate o ADV: fairly simple to understand and compute, less tendency for the worker to line their production standard with pay and the clerical job of re-computing piece rates whenever hourly rate are re-evaluated is avoided • Team or group incentive plan o Members are paid incentives if the group exceeds the production standard o Plans have been found to be more effective when there are high levels of communication with employees about the specifics of the plan and strong worker involvement in the plans design and implementation and when group members perceive the plan as fair Ways to implement: o Set work standards for each member of the group and maintain a cont of the output of each member. Members are then paid based on one of three formulas: (1) all members receive the pay earned by the highest produced, (2) all members receive the pay earned by the lowest producer or (3) all members receive payment equal to the average pay earned by the group o Another approach is to set a production standard 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 groups job o Third option is to choose a measurable definition of group performance or productivity that the group can control ADV o One workers performance reflects not only his or her own effort but that of co-workers as well o Team plans also reinforce group planning and problem solving to help ensure that collaboration takes place o Facilitate on the job training, since each member of the group has interest in getting new members trained as quickly as possible DIS o Each workers rewards are not based solely on his or her own effort Incentives for Senior Managers and Executives Annual Bonus – Decisions (short term) • More than 90% of firms in Canada with variable pay plans provide an annual bonus • Short-term incentives can easily result in an increase or decrease of 25% or more in total pay relative to the previous year • Three basic issues should be considered when awarding: eligibility, fund-size determination and individual awards • Eligibility – depends on hierarchy o Decided in one of three ways: o (1) key position: a job-by-job review is conducted to identify the key jobs that have a measurable impact on profitability o (2) salary level cutoff point: all employees earning over that threshold amount are automatically eligible for consideration for short-term incentives o (3) salary grade: refinement of the salary cutoff approach and assumes that all employees at a certain grade or above should be eligible for the short-term incentive programs o Simplest approach is just to use salary level as a cutoff • Fund size- depends on hierarchy o It is the total amount of bonus money that will be available, formulas include: o Nondeductible formula : straight percentage (usually of the company net income) is used to create the short term incentive fund o Deductible formula: assumption that the short-term incentive fund should begin to accumulate only after the firm has met a specified level of earnings • Determining individual awards- may be compared to others in firm, by use of a “multiplier” o Sometimes the amount is determined in a discretionary basis but typically a target bonus is set for each eligible position and adjustments are then made for greater or less than target performance o In a profit-sharing plan, each person gets a bonus based on the company’s result o With a true individual incentive – it’s the managers individual effort and performance that are rewarded with a bonus o Top level executives bonuses are generally tied to overall corporate results, assumption is that corporate results reflect the individual performance o Experts argue that managerial and executive bonuses should be tied to both organizational and individual performance o Split-award method – breaks the bonus into two pays: one based on their individual effort and one based on the organizations overall performance o Drawback is that is pays to much to the marginal performer who even if their performance is mediocre at least it gets that second, company-based bonus o Multiplied method – manager whose individual performance was “poor” might not even receive a company-performance-based bonus on the assumption that the bonus should be a product of individual and corporate performance  When either is poor, the product is zero Long-Term Incentives (capital accumulation) – if you measure something, employees will do everything they can to improve that measure (it is what will get most focus, effort) • that is, if firm says they will base incentives on stock levels, then employees will focus on improving stock price rather than their performance • intended to motivate and reward top management for the firms long- term growth and prosperity , and to inject a long-term perspective into executive decisions • approximately 50 percent of Canadian organizations provide long-term incentives • capital accumulation program (long-term incentives) are most often reserved for senior executives but have more recently begun to be extended to employees at lower organizational levels Six popular long-term incentive plans: • Stock options o The most popular long-term incentive in Canada but its use is decreasing o A stock option is the right to purchase a specific number of shares of company stock at a specific price during a period of time o Executives hope to profit by exercising their option to buy the shares in the future but at today’s price - assumption is that the price of the stock will go up o Attractive from a taxation perspective in Canada, as only 75% of the gain on exercising the option is taxable o Stock price depends to a significant extent on consideration outside the executives control, such as general economic conditions of investors sentiment o They have come under attack as the motive for short-term financial managerial focus – it dilutes share values for shareholders and creates a distorted impression of the true value of a company • Book value plan- o for non listed, private companies (give employees shares on book value today and then employee can sell later at higher value) o executives can earn dividends on the stock they own and as the company grows, the book value of their shares may grow too o when these employees leave the company, they can sell the shares back to the company at the new higher book value • Stock appreciation rights o similar to stock options, but you only get the amt by which stock increased o Performance achievement plan: awards shares of stock for the achievement of predetermined financial targets, such as profit or growth in earnings per share o Restricted stock plans: shares are usually awarded without cost to the executive but with certain restrictions that are imposed by the employer – risk of forfeiture if an executive leave the company before the specified time limit elapses o Phantom stock plans: executives receive not shares but “units” that are similar to shares of company’s stock – then at a future time, they receive an amount (c
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