Pay for Performance

Chapter 9
Wage Components Pages 269 -270
Know what these mean
Base pay
Across the board
Cost-of-living
Merit pay
Lump-sum bonus
Individual incentive
 Chapter 9 cont

Wage components cont

Success-sharing plans
Gain sharing
Profit sharing
Risk sharing plans

You should know the definition and the

level of risk to the employee.
 Chapter 10
Pay-for-performance plans signal a
shift away from entitlement towards
pay that varies with some measure
of individual or organizational
performance.
Variable pay is commanding a larger
share of total compensation for all
employee groups
 Chapter 10
Base vs. variable pay
2 trends
Cut costs & increase productivity
Business environment requires employees to
adjust what they do and how they do it.

Focuson designing reward systems that

more closely link employee interests with
the organizations objectives.
 Specific Pay-for-Performance:
Short Term
Merit pay
Lump-Sum Bonuses

Individual Spot Awards

Individual Incentive Plans

Types
Pros and cons
Examples
 Team Incentive Plans

Comparing Group and Individual

Incentive Plans
free-rider problem
How will you address in your group?

The choice between individual and group

plans. Know the chart on page 300
 Types of Variable-Pay Plans
Chart page 298-299
Types
Cash profit sharing
Stock ownership/options
Balance scorecard
Productivity/gain sharing
Team/group incentives
 Team Compensation
5 problems with team compensation
So many types of teams no best answer
At what level should they be defined?
Broadlydefined?
Narrowly defined?

3 Cs
Complexity

Control

Communication
 Gain-Sharing Plans

Looks at the cost components and

identifies savings over which
employees have more impact.
Compared to profit sharing, where
employees may not feel they have
much impact on profits, employees
can impact savings.
 Gain-Sharing Plans
Keyelements in designing-page 303-
304.
Strength of reinforcement
Productivity standards
Sharing the gains
Scope of formula
Perceived fairness of the formula
Ease of administration
Production variability
 Three Gain-Sharing Formulas
3 types differentiated by their focus
on either cost savings or some
measure of revenue.

Scanlon Plan
Rucker Plan

Improshare
 Scanlon Plan
A group cost savings plan designed
to lower labor costs without lowering
the level of the firms activity.
Incentives are derived as a function
of the ratio between labor costs and
sales value of production(SVOP).
SVOP includes sales revenue and
value of goods in inventory
 Rucker Plan
A group cost savings plan in which cost
reductions due to employee efforts are
shared with the employees. It involves a
more complex formula than a Scanlon
plan for determining employee incentive
bonuses.
A ratio is calculated that expresses the
value of production required for each
dollar of the total wage bill.
 Implementing Scanlon/Rucker
Plans
Two major components
Productivity norm
Effective worker committees
Key elements to success
Strong management interest and
participation in program development
Belief workers should play a vital role in
the decision making process.
Similarities and Differences between
Scanlon and Rucker Plans
Both differ from individual incentive
plans by their focus.
Individual incentive plans focus
primarily on wage incentives to motivate
performance through increased effort
Both plans focus more on organizational
behavior variables as increased output
is a function of group efforts.
 Similarities and Differences
between Scanlon and Rucker Plans
2 differences between the plans
Rucker ties incentives to a variety of
savings not just labor in the Scanlon
plan.
This difference give the Rucker plan
more flexibility which makes it easier to
link to individual incentive plans.
 Improshare
IMproved PROductvity through SHARing
Gainsharing plan standard time to
produce an acceptable level of
outcome is identified.

Anysavings that arise from

producing that outcome in a shorter
time frame is shared by the firm and
the worker.
 Profit Sharing Plans
Popularas it focuses on the measure
that matters most to people
predetermined profitability.

Problem- most employees dont feel

they personally impact profits.
 Trends in variable-pay design
Combine best of gain-sharing and
profit-sharing.
Variable payout linked to a profit
measure
Workers get $ when increased efficiency
leads to increased profits.
Benefit - employees get $ and a feeling
of participation in efficiency and
profitability.
 Earning-at-Risk Plans
Up to now weve discussed success-
sharing plans, base wages constant
and variable pay added if successful
Risk-sharing shifts risk of doing
business from company to employee
Examples: AmeriSteel, Dupont and
Saturn
Big Surprise- employee
dissatisfaction
 Pros & Cons of Group Incentive
Plans
Can help organization involve into
learning organization.

Know the chart page 310.

 Long-term incentive plans
Stock option plans (SOPs)
Employee Stock Ownership Plans
(ESOPs)
Performance Plans

Broad-Based Option Plans (BBOP)