2010 McGraw Hill Ryerson

11-1
COMPENSATION
Third Canadian Edition
Milkovich, Newman, Cole
2010 McGraw Hill Ryerson
11-2
Pay-for-Performance Plans
pay that varies with some measure of
individual or organizational performance
also called variable pay plans
these plans have a positive impact on
performance if they are designed well
2010 McGraw Hill Ryerson
11-3
Short Term
Pay-for-Performance Plans
Merit Pay
Lump-Sum Bonuses
Individual Spot Awards
Individual Incentives
2010 McGraw Hill Ryerson
11-4
Individual Incentive Plans
Method of Rate Determination
Units of production per
time period
Time period per unit of
production
(1) (2)
(4) (3)
Straight piecework plan Standard hour plan
Halsey 50 - 50 method

Taylor differential piece
rate system
Merrick multiple piece
rate system
Pay constant function of
production level
Pay varies as function of
production level
Relationship
between
production level
and pay
2010 McGraw Hill Ryerson
11-5
Advantages of Individualized
Incentive Plans
substantial contribution to:
increased productivity
lower production costs
increased earnings of workers
less direct supervision is required to maintain
output than under pay for time
payment for results (if accompanied by improved
organizational and work measurement) enable
labour costs to be estimated more accurately than
under pay for time
helps costing and budgetary control
2010 McGraw Hill Ryerson
11-6
Disadvantages of Individualized
Incentive Plans (1 of 2)

conflict between employees seeking to
maximize output and managers concerned
about deteriorating quality levels
attempts to introduce new technology may
be resisted by employees concerned about
the impact on production standards
reduced willingness of employees to
suggest new production methods for fear of
subsequent increases in production
standards
2010 McGraw Hill Ryerson
11-7
Disadvantages of Individualized
Incentive Plans (2 of 2)
increased complaints that equipment is
poorly maintained, hindering employee
efforts to earn larger incentives
increased turnover among new employees
discouraged by the unwillingness of
experienced workers to cooperate in on-
the-job training
elevated levels of mistrust between
workers and management
2010 McGraw Hill Ryerson
11-8
Team / Group
Incentive Plans
Gain-Sharing Plans
Profit Sharing Plans
Earnings-at-Risk Plans
2010 McGraw Hill Ryerson
11-9
Sample Group/Team
Performance Measures (1 of 2)
Customer-Focused Measures
Time to Market Measures
On time delivery
Cycle time
New product introductions
Customer Satisfaction
Measures
Market share
Customer satisfaction
Customer growth and retention
Account penetration
Financially-Focused Measures
Value Creation
Revenue growth
Resource yields
Profit margins
Economic value added
Shareholder Return
Return on invested capital
Return on sales / earnings
Earnings per share
Growth in profitability

2010 McGraw Hill Ryerson
11-10
Sample Group/Team
Performance Measures (2 of 2)
Capability-Focused Measures
HR Capabilities
Employee satisfaction
Turnover rates
Total recruitment costs
Rate of progress on
developmental plans
Promotability index
Staffing mix/head-count ratio
Other Asset Capabilities
Patents and copyrights
Distribution systems
Internal Process-Focused
Measures
Resource Utilization
Budget-to-actual expenses
Cost allocation ratios
Reliability / rework
Accuracy / error rates
Safety rates
Change Effectiveness
Program implementation
Teamwork effectiveness
Service / quality index
2010 McGraw Hill Ryerson
11-11
Different Types of Variable
Pay Plans
Cash Profit
Sharing
Stock Ownership
or Options
Balanced
Scorecard
Productivity /
Gain- Sharing
Team / Group
Incentives
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11-12
Gain-Sharing Plans
under gain-sharing plans,
employees share in cost-
savings or productivity gains
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11-13
Key Elements in Designing a
Gain-Sharing Plan
strength of reinforcement
productivity standards
sharing the gains
scope of the formula
perceived fairness of the formula
ease of administration
production variability
2010 McGraw Hill Ryerson
11-14
Three Gain-Sharing
Formulas
Scanlon Plan
(single ratio
volume)
Rucker Plan Improshare
Numerator of
ratio (input
factor)
Payroll costs Labour cost Actual hours
worked
Denominator
of ratio
(outcome
factor)
Net sales (+/-
inventories)
Value added Total standard
value hours
2010 McGraw Hill Ryerson
11-15
Profit-Sharing Plans
variable pay plans requiring a
corporate profit target to be met
before any payouts occur
2010 McGraw Hill Ryerson
11-16
Earnings-at-Risk Plans
incentive plans sharing profits in
successful years and reducing
base pay in unsuccessful years
2010 McGraw Hill Ryerson
11-17
Advantages of Group
Incentive Plans
positive impact on organization and individual
performance of about 5 10 percent per year
easier to develop performance measures than
for individual plans
signals that cooperation, both within and
across groups, is a desired behaviour
teamwork supported by most employees
may increase participation of employees in
decision making process
2010 McGraw Hill Ryerson
11-18
Disadvantages of Group
Incentive Plans
line of sight may be lessened
employees may find it more difficult to see how
their individual performance affects their
incentive payouts.
may lead to increased turnover among top
individual performers because they must
share with lesser contributors
increases compensation risk to employees
because of lower income stability
2010 McGraw Hill Ryerson
11-19
Long-Term Incentive Plans
Employee Stock Ownership
Plans (ESOPs)
Stock Options
Broad-Based Option Plans
(BBOP)
2010 McGraw Hill Ryerson
11-20
Special Groups in
Compensation Management
supervisors
top management
corporate directors
professional employees
sales staff
contingent workers
2010 McGraw Hill Ryerson
11-21
Components of an Executive
Compensation Package
1. base salary
2. short-term (annual) incentives or bonuses
3. long-term incentives and capital
appreciation plans
4. executive benefits
5. executive perquisites
2010 McGraw Hill Ryerson
11-22
Examples of Long-Term
Incentives for Executives
1. Appreciation-Based Plans
stock options
stock appreciation rights
2. Full-Share Plans
restricted stock plans
restricted stock units/phantom stock plans
Deferred share units
3. Performance-Based Plans
performance share / unit plans
2010 McGraw Hill Ryerson
11-23
Pay Components for
Professional Employees
dual career ladders
maturity curves
performance bonuses
attaining professional licenses
perks
flexible work schedules
Campus-like environment
2010 McGraw Hill Ryerson
11-24
Key Factors in Designing a
Sales Compensation Plan
the nature of the people who enter the
sales profession
organizational strategy
competitor practices
product/service being sold
2010 McGraw Hill Ryerson
11-25
Key Issues in Contingent
Workforce Compensation
equity/fairness relative to
permanent employees

boundaryless careers
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11-26
Conclusion
the design and effective administration of
pay-for-performance plans is key to their
success
special employee groups
compensation must address high
potential for conflict in these jobs
compensation treatment differs from that
for other employees