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Incentive Pay
CHAPTER #5
REWARDS FOR ATTAINING A WORK
OBJECTIVE
Three Major Assumptions
1. Differences in contributions by individuals or
teams.
2. Firms overall performance depends on
performance of individuals or work teams.
3. To attract, retain and motivate high
performance.
Contrasting Incentive Pay with Traditional Pay
Traditional Pay
Incentive Pay
Fixed hourly rate
Pay based on
Fixed salary
performance
Individual plans
Group plans
Companywide plans
Individual Incentives
PIECEWORK…TWO
Production
2. individual performance plus subjective
criteria
1.
2.
TYPES
Two economic advantages
More incentive plans
Management incentives
For reaching firm’s goals
look www. aflcio.com
Behavioral encouragement
For attendance record or safety
Referral plans
Recruitment of new clients or ees
Group Incentives #110
Reward for collective performance
Team based
Gain sharing
Work teams
Project teams
Task forces
Scanlon plans
Rucker value added plan
Value added formula
Improshare
Labor hour formula and buy-back provision #116
Companywide Incnetives
Profit sharing plans
Use of funding formulas and then plan for distribution
Equal payments
Proportional payments based on contribution
Employee stock options
Equity segment of ownership
Company stock
Stock option
ESOP’s
Designing Incnetive Pay Programs
Five key factors
1. Should it be based on group or individual
incentives?
2. Should incentive pay replace base salary?
3. Level of risk ees are willing to accept?
4. How shall performance be judged?
5. Time horizon for goals ?
Linking incentive pay with strategy
Lowest cost strategy?
Differentiation strategy?
Exercise for class application
Google firms with both types of strategies low cost
and differentiation and low cost
What type of incentive plans do they offer their
employees?
What are the advantages and disadvantages of
both programs????