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York University
Administrative Studies
ADMS 2600
Paul Fairlie

HRM1283 Pay-for-Performance Donna Verity and Chris Carella LESSON 10: PAY-FOR-PERFORMANCE INTRODUCTION: As previously mentioned, one of the most expensive parts of the HR dollar is compensation. In order to control the costs of compensation, some organizations have adopted pay for performance plans. These include merit pay, cash bonuses, and incentive pay and have been shown to increase productivity by up to 35% when used appropriately in companies. TOPICS FOR THIS LESSON INCLUDE: o linking incentive plans to organizational objectives  administering incentive plans  individual incentive plans  executive compensation •group incentive plans  enterprise incentive plans LEARNING OUTCOMES At the end of this module, you will be able to: 1 Describe why incentive plans are important to organizational outcomes 2 Discuss the various types of individual incentive plans and the advantages and disadvantages of each 3 Explain why merit pay is not always successful in organizations 4 Explain the reason why executive compensation is treated differently in companies and list the various types of executive compensation 5 Describe the difference between the various gainsharing approaches 6 Explain the advantages and disadvantages of enterprise incentive plans TEXT READING: Pay-for-Performance Incentive Rewards Pages 437 - 466 1 HRM1283 Pay-for-Performance Donna Verity and Chris Carella 2 HRM1283 Pay-for-Performance Donna Verity and Chris Carella 1. LINKING INCENTIVE PLANS TO ORGANIZATIONAL OBJECTIVES Incentive plans in organizations only make sense if they are linked to organizational objectives. Since the purpose of incentive plans is to increase overall productivity, it is important that staff feel some ownership for the results that are being produced. This is much easier when they can see that their efforts have an impact on the bottom line. If you take a look at Figure 10.1 on p. 4382 of the text, you will see the range of both group and individual incentive compensation plans and Figure 10.3 on p. 440 lists the advantages of incentive pay programs. It should be noted that incentive plans are used in both public and private organizations; however, only private companies are likely to share actual monetary rewards such as gains with staff. 2. SUCCESSFUL INCENTIVE PLANS Successful plans generally have the following characteristics: •employee acceptance – involving staff in the design and administration of the program helps here •the relationship between job performance and incentive plan payout is clear •standards are fair and objective – those standards that allow employees to self assess are best •plans are transparent to staff – they understand them and communication is regular and up to date On page 441 of the text, you will find a diagnostic tool that can be used to periodically review a company’s incentive program. On page 442, guidelines for establishing and maintaining a performance measurement system are also identified. 3. ADMINISTERING INCENTIVE PLANS Administering an incentive plan can be difficult, especially if the decision is made not to pay the incentive payments to the individual or group. However it is important to staff that they be recognized appropriately if an incentive plan is to work properly. So, incentives should not be automatic. Managers must be willing to differentiate between individuals and groups. At the same time, organizations that are operating too close to the edge financially, may not find it feasible to use incentive plans when their salary budgets cannot accommodate such payments. The failure to acknowledge performance is a serious issue. There are also costs to administering plans including items such as record keeping. 3 HRM1283 Pay-for-Performance Donna Verity and Chris Carella 4. INDIVIDUAL INCENTIVE PLANS Incentive plans pertain to both management and non management jobs. For non management jobs, some factors influencing plan design include the type of work performed by employees, technology of the organization, economics of the organization, and management philosophy. If the staff member is paid by the hour, incentives are generally paid as a supplement to their basic wages and are often based on producing more widgets, meeting a pre-determined goal, or an organizational goal being met. TYPES OF INDIVIDUAL PLANS Piecework •2 types of piecework plans - straight piecework and the differential piece rate plan •straight piecework - number of units produced X rate per unit • differential piece rate plan – once you reach a predetermined level, everything beyond that point earns additional money Advantages: •potential for satisfying an employee's desire to earn more money Disadvantages: •it is difficult to set production standards •it is sometimes difficult to set up a system to identify individual contributions •the work that is paid in this way is often too mechanical •staff may give up quality to achieve quantity •high producers sometimes get pressure from others to slow down • it is not conducive to team work since it rewards individual effort, so cross training often does not work •unions do not support the practice •does not work in environments where there are frequent changes to processes Note: in Ontario, a worker on piecework must still earn at least the minimum wage. Standard Hour Plan 1. in this type of plan, a “standard time” to do a job is established e.g. 5 hours 2. if the employee does the work in 4 hours, they still get paid for 5 4 HRM1283 Pay-for-Performance Donna Verity and Chris Carella 3. these are good because they can motivate an employee to produce more, but care must be taken to ensure that the employee does not sacrifice quality for speed Bonuses • a payment that is in addition to an employee’s wages • they are paid for a number of pre-determined reasons such as an increase in productivity, or a reduction in costs • sometimes a “spot bonus” is given – nothing was set up in advance, but the employee’s accomplishments are recognized in this way – care must be taken to do this in a consistent fashion Merit Pay • an increase in base pay, based on performance • very common for management employees • tied to performance – the highest performers get the highest increases • to work, you need to have a well developed performance appraisal system • this means that there has to be objective criteria and the measurement of staff has to be valid and reliable • a merit increase is not a cost of living increase which may be given to all staff, regardless of performance Advantages: • controls labour costs because you pay for what you get • can be motivating to staff who are hard workers to produce even more Disadvantages: • staff need to understand clearly that merit pay is tied to performance and that the payment is not automatic • staff need to buy in and perceive fairness in the application of increases • if the performance appraisal system is not well developed, then staff will not trust the system and it will have a negative effect • money may not always be available to reward performance so staff feel that they have been cheated – in cases like this, performers need to be rewarded in some other way On page 448 of the text, you will see an example of a merit pay plan. Lump-Sum Merit Pay • same as merit pay, but rather than paying it out over the next year, the money is given to the employee in one lump sum 5 HRM1283 Pay-for-Performance Donna Verity and Chris Carella • while companies feel that this has a bigger impact because staff see all of the money at the same time, the fact is that the effect is often short lived since employees forget abut the payment fairly quickly. Sales Incentives •these have been developed to respond to the unique nature of sales jobs • these type of jobs can go anywhere, from selling to managing an account to being responsible for a geographic area •they take into consideration high motivation, self discipline and independence • there are three basic types of sales incentive plans: straight salary; straight commission; and a combination of salary and commission. • in Ontario, staff must still make minimum wage, even if on straight commission 6 HRM1283 Pay-for-Performance Donna Verity and Chris Carella 5. INCENTIVES FOR PROFESSIONAL EMPLOYEES •includes engineers, scientists, lawyers, etc. •the problem is that they may end up making less than administrative management staff • a double-track pay program gives professional employees the opportunit
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