Ch 10 Contingent pay schemes

Contingent pay
It is any form of financial reward that is added to the base rate or paid as a cash bonus and is related to performance, competence, skill or service. It is also called as variable pay.

Objective of contingency pay

1. It acts as a motivator 2. It encourages and supports desired behaviors 3. It delivers the message that performance, competence, contribution, and skills are importance. 4. It provides a means for defining and agreeing performance and competence expectations. 5. It can reinforce the organizations value. 6. It helps in achieving culture change by assisting the development of a performance culture.

Objective of contingency pay

7. it increases productivity 8. It provides customer satisfaction

Criteria for success

1. Effect- performance-Result Measures Pay out. 2. Reward should be clear 3. Fair and consistent 4. It should be meaningful 5. People should develop there skill. 6. Reward should be done accurately.

Problems with contingent pay plans

1. Poor performance system 2. Rewards are not considered significant : as many times there is a very difference between outstanding and poor performance. 12- 15 % inc in reward is meaning. 3. Managers are not accountable 4. There exists extrinsic motivation at the expense of intrinsic motivation : only money decreases motivation. 5. Reward of executives is large compared to others

Types of Scheme
1. 2. 3. 4. Performance related pay Contribution related pay Competency related pay Skill based pay

1. Performance related pay

Offers individual in increase in pay/ cash bonuses which is linked with performance. Thus high performer should get more than low performer. Employer cannot pay same amount to everyone at same job.

Objective of PRP
1. Encourage high performance by linking to pay 2. Increase high performance culture. 3. Creates notion of equity or fairness.

Methods of operating PRP

1. 2. 3. 4. 5. Performance appraisal Objective setting Review performance Measure performance Determine award

Conditions for successful PRP

1. Proper linking of PM and reward 2. Tailoring organizational needs 3. Balancing PRP- input and output factors of work. 4. Flexibility- if not inc in salary than give lump sum amount. 5. Teamwork 6. Long term based 7. Involve employees in designing of PRP.

2. Contribution related pay

Contribution related pay recognized that people should be rewarded for both the quality of their inputs( ability) and the level of their achievements ( output)

CONTRIBUTION PAY: SEPARATE OUTPUT AND COMPETENCE CRITERIA FOR BONUS AND CONSOLIDATED PAY INCREASES

Bonus

Output

Salary

Competence

This resource is part of a range offered free to academics and/or students using Armstrongs Handbook of Reward Management Practice, 3rd edition, as part of their course. For more academic resources and other FREE material, please visit www.koganpage.com/resources and then click on Academic Resources.

CONTRIBUTION-RELATED PAY MODEL (2)

Paying for past performance

+
+

Paying for future success

=
Results Competence

Paying for contribution

This resource is part of a range offered free to academics and/or students using Armstrongs Handbook of Reward Management Practice, 3rd edition, as part of their course. For more academic resources and other FREE material, please visit www.koganpage.com/resources and then click on Academic Resources.

3. Competency related pay

It rewards people for what they are capable of doing, not for results over which they might have little control.

4. Skill Based pay

Rewarding individual based on number, type, depth ,skills acquired, mastered and applied. See level of knowledge of what they are capable of doing. People of varied skill are generally perform multiple role. Develop broader understanding.

4 types of skill
1. Horizontal skill : department to department 2. Vertical skill : acquiring skill of higher level within single job. 3. Depth job : acquiring high level of skill in specialized area 4. Basic skill : developing expertise in basic area language, maths, etc

Objective of skill based pay

1. Raise the skill base : 2. Flexibility : transfer through inter department. 3. Operating with a leaner workforce : learning group.

Steps in skill based pay

1. Determination of skills needed by organization 2. Creating skill blocks- collection of task, duties and responsibility. 3. Pricing and progression through skill blocks 4. Skill certification- work test , assessment etc. 5. Identification of training needs.

Prepared by : Ms. Shirufi Daruwala