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Chapter 12

Chapter 12 BU354.docx

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John Coffey

BU354 Chapter 12 – Pay-for-Performance and Financial Incentives Week 8 Money and Motivation -Fixed pay- compensation that is independent of the performance level of the individual, group or organization -Fixed compensation include base pay and other forms of relatively consistent compensation that satisfy the need for income stability -Variable pay – any plan that ties pay to productivity or profitability -Employers continue to increase their use of variable pay plans while holding salary increases or fixed compensation at modest levels Types of Incentive Plans -Individual incentive plans give income over and above base salary to individual employees who meet a specific individual performance standard -Group incentive programs are like individual incentive plans, but they provide payments over and above base salary to all team members wen the group or team collectively meets a specified standard for performance, productivity, or the work-related behaviour -Organization-wide incentive plans provide monetary incentives to all employees of the organization Incentives for Operations Employees Piecework Plans -Piecework - a system of pay based on the number of items processed by each individual worker in a unit of time, such as items per hour or items per day -Straight piecework plan – a set payment for each piece produced or processed in a factory or shop -Guaranteed piecework plan- the minimum hourly wage plus an incentive for each piece produced about a set number of pieces per hour -Differential piece-rate plan – a plan by which a worker is paid a basic hourly rate plus an extra percentage of his or her base rate for production exceeding the standard per hour or per day. It is similar to piecework payment but is based on a percentage premium Advantages and Disadvantages -Simple to calculate and easily understood by employees -Somewhat unsavoury reputation among many employees, based on some employer’s habits of arbitrarily raising production standards whenever they found their workers earning ‘excessive wages’ -Tend to be tailor-made for relatively specialized jobs in which employees do basically the same narrow set of tasks over and over again many times a day -Employees become preoccupied with producing the number of units needed and are less willing to concern themselves with meeting quality standards or switching from job to job Team or Group Incentive Plans -Team or group incentive plan- a plan in which a production standard is set for a specific work group and its members are paid incentives if the group exceeds the production standard -One is to set work standards for each member of the group and maintain a count of the output of each member – reward is paid out by either: the pay earned by highest producer the pay earned by lowest producer, the average pay earned by group -The second is to set a production standard based on the final output of the group as a whole, all members ten receive the same pay, based on the piece rate that exists for the group’s job -The third is to choose a measurable definition of group performance or productivity that the group can control -Advantage: sometimes several jobs are interrelated -Disadvantage: worker’s rewards are no longer based solely on his or her own effort BU354 Chapter 12 – Pay-for-Performance and Financial Incentives Week 8 Incentives for Senor Managers and Executives Short-Term Incentives: The Annual Bonus Eligibility -A job-by-job review is conducted to identify key jobs that have a measurable impact on profitability -All employees earning over the threshold amount are automatically consideration for short-term incentives -All employees at a certain grade or above should be eligible for the short-term incentive program How Much to Pay Out (Fund Size) -Non-deductible formula – a straight percentage is used to create a short-term incentive fund -Deductible formula – the short term incentive fund should begin to accumulate only after the firm has met a specified level of earnings Determining Individual Awards -The amount is determined on a discretionary basis, but typically a target bonus is set for each eligible position and adjustments are then made for greater or less than targeted performance -A maximum amount may be set -Performance ratings are obtained for each manager, and preliminary bonus estimated are computed -There is the split-award method which breaks the bonus into two parts one part based on manager’s individual effort and one part based on the organization’s overall performance -The multiplier method says that the bonus should be a product of individual and corporate performance Long-Term Incentives -Intended to motivate and reward top management for the firm’s long-term growth and prosperity and to inject a long-term perspective into executive decisions -Capital accumulation programs- long-term incentives most often reserved for senior executives Stock Options -Stock option – the right to purchase a stated number of shares of a company’s stock at today’s price at some time in the future Plans Proving Share “Units” -Executives re granted a specified number of units whose value is equal to a company’s share price, subject to certain conditions -A performance share unit plan provides units subject to the achievement of predetermined financial targets, such as profit or growth in earnings per share -In a restricted share unit plan, units are promised to the executive but will be forfeited if an executive leaves the company before a vesting period -In a defer
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