Employee Contribution

Pay-for-performance

Motivational theories

Maslows need hierarchy Herzbergs two-factor theory Expectancy Equity Reinforcement Goal setting Agency

Total reward system

Compensation Benefits Social interaction Security Status/recognition Work variety Work load Work importance Authority /autonomy Advancement Feedback Work conditions Development opportunity

Wage Components
Wage Component Base Pay Cost of living Merit pay Lump-sum bonus Individual incentives Success-sharing Gain sharing Definition Guaranteed portion Change in cost of living Assessment of performance , add on to base pay One time bonus ,does not add to base Measures of performance are objective Variable pay measure of group performance Exceeding some cost index

Profit sharing
Risk sharing

Exceeding financial goal

Penalized for poor performance

Importance for Retention

Type of Reward Work variety challenges Dev opportunity Social Status recognition Work imp Benefits

% who think it is important for retention 50% 38% 40% 23% 20% 22%

Personality indicators for preferred rewards

Person characteristic Materialistic Preferred Reward More concerned about pay levels

Low self-esteem

Want decentralized ,large organization with little pay for performance

Want more pay based on performance Want less performance based pay Want pay plans based on individual performance on team performance

Risk taker Risk averse

individualistic

Overall preference for alternative Reward plans

Type of plan % of companies who think such reward system motivates employee 92

Short-term incentives

Annual pay rise

Restricted stock grant Health care Benefits Spot awards Non cash recognition Profit sharing

84
79 75 72 57 49

Designing a Pay-For-Performance Plan

1.

Efficiency: Strategy: Does this plan support corporate objectives Structure: Is the structure sufficiently decentralized for different operating units to create flexible pay Standard: Objectives, Measures,Eligibility , Funding

Cont
2.

3.

Equity/Fairness Compliance

Pay For-Performance Plan

1.

Specific plan Merit Pay: It links increase in base pay to the rating on subjective performance Lump-sum Bonuses: End-ofyear bonus that does not build into base pay Individual Spot Awards: Awarded for exceptional performance

Cont

Individual incentive plan: Pay for some objective ,pre established level of performance Straight piece work plan: Based on units of production per time period Standard hour plan: Based on completion of a task in some expected time period Taylor differential piece rate/Merrick plan: Based on unit of production per time period Halsey 50-50 method: Based on shared split between worker and employer of any saving in direct cost

Advantages

Raises productivity ,lower production cost and increase earning of workers Less direct supervision needed Helps costing and Budgetary control

Disadvantages

Greater conflict between employees New technology introduction will be resisted New production method will be resisted Increased turnover among employees Elevated level of mistrust

Team incentive plans

Plan type What it is Adv Simple, easy to understand Disadv Profit influenced by number of factors, demotivational Cash profit Shares sharing percentage of profit Stock options Balanced score card Gain sharing Stock shares

Impact employee Indirect pay behavior, tax /performance link, deferral Put money Can be complex

Combine financial Communicate and operating organization ,quality measures priorities Share economic benefit of improved productivity , quality Based on team and group Clear performance reward ,Foster team work Reinforce teamwork

Can be administrative complex

Team incentive

May create team competition

Advantages

Positive impact on employees Easier to develop performance measures Employee support Increase employee participation in decision making

Disadvantages

Individual performance may not be emphasized Increased turnover among employee Increases compensation risk to employee because of lower income stability

Comparison between Individual and Group plans

Characteristics Performance Measure Individual plan Task accomplishment not dependent on performance of others
Individual performance standards are stable , Production methods and labor mix constant

Group plan Output is group collaborative

Organizational Adaptability

Individual performance standards changes , Production methods and labor mix must adapt to changing pressure

Organizational Commitment

Superior viewed as un High commitment to biased and organization objectives performance standards clearly stated Non union or union treat everyone equal Non Union or Union less opposed to group incentives

Union status

Key Elements in Gain Sharing Plan

Strength of reinforcement Productivity standards Sharing the gains between management and workers Scope of the formula Perceived fairness of the formula Ease of administration Production variability

Various Gain sharing plans

Scanlon plan Rucker plan Improshare

Input factor

Payroll costs

Labor cost

Actual hours worked

Output factor

Net sales

Value added

Total standard value hours

Cont

Scanlon plan :Incentives are derived as function of the ratio between labor costs and sales revenue and the value of goods in inventory. Rucker Plan : Incentives are derived as function of the ratio between labor costs and value added of production.

Difference between Scanlon and Rucker Plan

Rucker plan ,tie incentive to a wide variety of savings ,not just labor savings. Rucker plan provide better flexibility

Improshare

Improved Productivity Through sharing (Improshare) decides the standard that identifies the expected hours required to produce an acceptable level of output . Any savings arising from production of the agreed-upon output in fewer than expected hours is shared by the firm and by workers.

Long term incentive plans

Focus on performance beyond one year Motivates long-term value creation Increases internal growth Create ownership

Employee stock ownership plans(ESOPs)

Effects are generally longterm What effect stock price is difficult to judge Performance measures are too complex to understand Sudden fall in stock price may lead to demotivation

Performance plans
They features corporate performance objectives for next three years They are given for exceeding goals related to financial earning or return measure

Broad based plans(BBOPs)

Shares of stock over a designated time period. They show lot of versatility Create culture of ownership Reinforce a strong performance culture Rewarding all employees(broad based participation)

Cont

Starbuck uses beanstock plan for those employee who work for more than 500 hrs per year, of 10 to 14 % of their earning and expiring 10 years after the grant date. Microsoft BBOP is given to all permanent employees starting 12 month after the stock grant date,12.5 % is vested every six month