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Chapter 10

ADMS 2600 Chapter 10 notes.docx

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York University
Administrative Studies
ADMS 2600
Sung Kwon

Chapter 10:Pay for Performance: Incentive Rewards Ways in which Canadian organizations were forced to adapt after the recent economic:  pressures on employees to curb their pay and benefits and/or grant concessions, especially in the public sector  organizations were forced to take a second and third look at their pay-for-performance and incentive systems pay-for-performance systems - attributed for the financial crisis in the housing and banking sectors that spawned the national and international economic troubles - encouraged aggressive selling on the part of mortgage brokers and real estate agents Aligning the interests of the employees with the interests of the company: 1. choosing the right incentive plans based on organizational objectives 2. setting up performance measures 3. administering those incentive plans TYPES OF INCENTIVE PLANS Individual Group Enterprise/Organization Piecework Team compensation Profit sharing Standard hour plan Scanlon Plan Stock options Bonuses Improshare Employee stock ownership plans (ESOPs) Merit pay Lump-sum merit pay Incentive awards Sales incentives Incentives for professional employees Executive incentives Strategic Reasons for Incentive Plans incentive plans (variable pay programs) - major element of strategic compensation management - based entirely on a pay-for-performance philosophy - establish a performance ―threshold‖ (a baseline performance level) that an employee or group of employees must reach to qualify for incentive payments - emphasize a shared focus on organizational objectives by broadening the opportunities for incentives to employees throughout the organization - create an operating environment that champions a philosophy of shared commitment through the belief that every individual contributes to organizational performance and success Incentive Plans as Links to Organizational Objectives - specific company goals or objectives might be to lower labour costs, improve customer satisfaction, expand product markets, or maintain high levels of productivity and quality, which in turn improve the market for the company's goods and services in a global economy Advantages of Incentive Pay Programs  Incentives focus employee efforts on specific performance targets - provide real motivation that produces important employee and organizational gains  Incentive payouts are variable costs linked to the achievement of results - base salaries are fixed costs largely unrelated to output.  Incentive compensation is directly related to operating performance- incentives are paid if performance objectives (quantity and/or quality) are met; withheld if objectives are not achieved  Incentives foster teamwork and unit cohesiveness when payments to individuals are based on team results  Incentives are a way to distribute success among those responsible for producing that success  Incentives are a means to reward or attract top performers when salary budgets are low Degree of success of incentive plans depends on 1. identifying important organizational metrics by which to measure employee performance 2. a customized incentive plan that effectively measures employee output and rewards exceptional employee performance Variable pay plans may not achieve their proposed objectives or lead to organizational improvements 1. incentive plans sometimes fail to satisfy employee expectations for pay gains 2. management may have failed to give adequate attention to the design and implementation of the plan, leaving employees confused about how incentive payments are calculated 3. employees may have little ability to affect performance standards success of an incentive plan - will depend on the environment that exists within an organization o morale is high o employees believe they are being treated fairly o there is harmony between employees and management Requirements for a Successful Incentive Plan - employees must have some desire for the plan o encourage employees to participate in developing and administering the plan - employees must be able to see a clear connection between the incentive payments and their job performance o there should be objective quality or quantity standards by which they can judge their performance - commitment by employees to meet these standards o incentive payments should be viewed as a reward that must be earned through effort o incentive money should be distributed to employees in a separate cheque - the best managed incentive pay programs are clearly and continuously communicated to employees o continuous evaluation of the operation and administration of variable pay programs Setting Performance Measures - what gets measured and rewarded gets attention - most performance options focus on quality, cost control, or productivity - best measures are quantitative, simple, and structured to show a clear relationship to improved performance - necessary to evaluate the extent to which the employees involved can actually influence the measurement - employers must guard against ―ratcheting up‖ performance goals by continually trying to exceed previous results o leads to employee frustration and employee perception that the standards are unattainable o mistrust of management and a backlash against the entire incentive program Administering Incentive Plans - thorough planning must be combined with a ―proceed with caution‖ approach Important points related to the effective administration of incentive plans:  Incentive systems are effective only when managers are willing to grant incentives based on differences in individual, team, or organizational performance o poor performance must go unrewarded  Annual salary budgets must be large enough to reward and reinforce exceptional performance o constraints on compensation budgets may prohibit rewarding outstanding individual or group performance  The overhead costs associated with plan implementation and administration must be determined o cost of establishing performance standards and the added cost of record keeping o time consumed in communicating the plan to employees, answering questions, and resolving any complaints about it Setting Performance Measures: The Keys  Performance measures at all organizational levels must be consistent with the strategic goals of the organization o avoid irrelevant measures or metrics that are not closely linked to the business or what employees do in their work  Define the intent of performance measures and champion the cause relentlessly o demonstrate that performance measures are good business management and hold managers and employees accountable for their success  Involve employees o critical step in any measurement program is the development of an employee involvement strategy outlining the nature of employee participation, implementation, and ongoing management of the performance management program o segment the workforce based on the nature of the work and the potential for impact o consider which metrics require customization o acceptance of a performance measurement program is heightened when employees ―buy into‖ the process  Consider the organization's culture and workforce demographics when designing performance measures o E.g., organizations with a more traditional hierarchical structure may need more time to introduce performance metrics compared to flatter organizations, which are more fluid and less steeped in control and command characteristics  Set challenging but attainable goals o goals that are unattainable demotivate employees  Widely communicate the importance of performance measures o performance messages are the principles and guidelines that communicate to employees about required performance levels and why the organization needs to achieve those levels of success Individual Incentive Plans - tradition and philosophy, as well as economics and technology, help govern the design o incentive payments may be determined by the number of units produced, achievement of specific performance goals, or productivity improvements in the organization as a whole o low profit margins will affect the availability of monies for incentive payouts in highly competitive industries Piecework - wage payment for each employee is simple to compute - permits an organization to predict its labour costs with considerable accuracy, because these costs are the same for each unit of output - more likely to succeed when: o units of output can be measured readily o quality of the product is less critical o job is fairly standardized o constant flow of work can be maintained Straight piecework - compensation is determined by the number of units they produce during a pay period differential piece rate - employees whose production exceeds the standard output receive a higher rate for all of their work than the rate paid to those who do not exceed the standard Computing the Piece Rate - incentive rates must be based on hourly wage rates that would otherwise be paid for the type of work being performed Example: the standard time for producing one unit of work in a job paying $12.75 per hour was set at 12 minutes. The piece rate would be $2.55 per unit, computed as follows: 60 (minutes per hour) / 12 minutes (standard time per hour) = 5 units per hour $12.75 (hourly rate) / 5 (units per hour) = $2.55 per unit Piecework: The Drawbacks  may not always be an effective motivator: ―rate busting‖ (increase in output will provoke disapproval from fellow workers) causes employees to avoid exerting maximum effort because their desire for peer approval outweighs their desire for more money  jobs in which individual contributions are difficult to distinguish or measure or in which the work is mechanized to the point that the employee exercises very little control over output may be unsuited to piecework  can work against an organizational culture promoting workforce cooperation, creativity, or problem solving because each of these goals can infringe on an employee's time and productivity and, therefore, total incentive earned Piecework may also be inappropriate in the following situations:  When quality is more important than quantity  When technology changes are frequent  When productivity standards on which piecework must be based are difficult to develop  Importantly, piecework incentive systems. Standard Hour Plan - sets incentive rates on the basis of a predetermined ―standard time‖ for completing a job, even if employees finish the work in less than the expected time - popular in service departments in automobile dealerships - particularly suited to long-cycle operations or jobs or tasks that are non-repetitive and require a variety of skills - can motivate employees to produce more, but employers must ensure that equipment maintenance and product quality do not suffer as employees strive to do their work faster to earn additional income Bonuses - incentive payment that is given to an employee beyond his or her normal base wage - frequently given at the end of the year and does not become part of base pay - advantage of providing employees with more pay for exerting greater effort, while having the security of a basic wage at the same time - common among managerial and executive employees, but recent trends show that they are increasingly given to employees throughout the organization - recent economic downturn resulted in fewer bonuses being awarded to all employee groups - incentive payment may be determined on the basis of cost reduction, quality improvement, or performance criteria established by the organization spot bonus - given ―on the spot,‖ normally for some employee effort not directly tied to an established performance standard - championed as useful retention and motivational tools for overburdened employees, especially during lean financial times Merit Pay - links an increase in base pay to how successfully an employee performs his or her job - normally given on the basis of an employee having achieved some objective performance standard—although a superior's subjective evaluation of subordinate performance may play a large role in the increase given - can serve to motivate if employees perceive the raise to be related to the performance required to earn it - research shows that a merit increase in the range of 7 to 9 percent is necessary to serve as a pay motivator - meaningful merit increase will catch the attention of top performers while sending a signal to poor performers - a strategic compensation policy must differentiate between outstanding and good or average performance - should be distinguishable from cost-of-living or other general increases Problems with Merit Raises - merit raise may be perpetuated year after year even when performance declines, causing employees to expect the increase and see it as an entitlement, unrelated to their performance - merit raises often turn out to be increases based on seniority or favouritism since a superior's biased evaluation of subordinate performance may play a large role in the increase given - employee's gains may be offset by inflation and higher income taxes - women generally receive less than men in merit pay Other problems with merit pay plans:  Money available for merit increases may be inadequate to satisfactorily raise all employees’ base pay.  Managers may have no guidance in how to define and measure performance; there may be vagueness regarding merit award criteria.  Employees may not believe that their compensation is tied to effort and performance; they may be unable to differentiate between merit pay and other types of pay increases.  Employees and their managers may hold different views of the factors that contribute to job success.  Merit pay plans may create feelings of pay inequity. merit guidelines - basis of percentage pay raise used by organizations having a true merit pay plan - organizations should consider individual performance along with such factors as training, experience, and current earnings Lump-Sum Merit Pay - employees receive a single lump-sum increase at the time of their review, an increase that is not added to their base salary - advantages: o Employees: can provide a clear link between pay and performance o Employers: lump-sum payments essentially freeze base salaries, thereby maintaining annual salary and benefit costs, because the level of benefits is normally calculated from salary levels Incentive Awards and Recognition Awards - used to recognize productivity gains, special contributions or achievements, and service to the organization - popular noncash incentive awards include merchandise, personalized gifts, theatre or sports tickets, vacations, dining out, gift certificates or gift cards, and personalized clothing - tangible awards presented with the right message and style can make employees feel appreciated while at the same time underscoring a company value - noncash incentive awards are most effective as motivators when the award is combined with a meaningful employee recognition program - employers should take care to tie awards to performance and deliver awards in a timely, sincere, and specific way - noncash incentive awards should support business goals and objectives - incentive awards work best when awards are appreciated and valued by employees Customize Your Noncash Incentive Awards Traditionalists (born before 1945) - extremely loyal to their organization and see their employment as a duty and an obligation - big savers, and as a result, a wealthy group - attractive awards include entertainment venues, vacations, and technology items - also appreciate health and wellness opportunities Boomers (born between 1946 and 1964) - thrive on personal achievement and recognition - very materialistic, placing very high value on working hard and achieving career success - optimistic group responsible for several social movements - favour incentive rewards in the areas of travel, luxury gifts, health and wellness options, and personalized plaques and awards Generation X (born between 1965 and 1981) - grew up with both parents working outside the home, so they value work–life balance and flexible work arrangements - more likely to be satisfied by challenges, learning, and development and value being promoted and being paid equitably Generation Y (born between 1982 and 1999) - tech-savvy and desire easy and quick access to information and immediate performance feedback - learn quickly and value diversity - enjoys freedom at work and places huge emphasis on social networking/media Sales Incentives - must provide a source of motivation that will elicit cooperation and trust Unique Needs of Sales Incentive Plans - performance standards for sales employees are difficult to develop because their performance is often affected by external factors beyond their control - sales volume alone may not be an accurate indicator of the effort salespeople have expended - managers are also confronted with the problem of how to reward extra sales effort and at the same time compensate for activities that do not contribute directly or immediately to sales - sales employees must be able to enjoy some degree of income stability - many schemes to reward employees for reaching sales goals are threatened by instances of unethical behaviour where the needs of employees are not aligned with the needs of the customers Types of Sales Incentive Plans  straight salary plan  straight commission plan  combination salary and commission plan  sales plus bonus plan straight salary plan - permits salespeople to be paid for performing various duties not reflected immediately in their sales volume - enables them to devote more time to providing services and building up the goodwill of customers without jeopardizing their income - principal limitation is that it may not motivate salespeople to exert sufficient effort in maximizing their sales volume straight commission plan - based on a percentage of sales - provides maximum incentive and is easy to compute and understand - encourage aggressive selling, which might be needed in highly competitive industries - salespeople may be allowed a salary draw - cash advance that must be paid back as commissions are earned - disadvantages: o Salespeople will stress high-priced products o Customer service after the sale is likely to be neglected o Earnings tend to fluctuate widely between good and poor periods of business, and turnover of trained sales employees tends to increase in poor periods o Salespeople are tempted to grant price concessions combination salary and commission plan - most widely used sales incentive program - ratio of base salary to commission can be set to fit organizational objectives - advantages: o most of the advantages of both the straight salary and the straight commission forms of compensation o offers greater design flexibility and can therefore be more readily set up to help maximize company profits o can develop the most favourable ra
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