Pay for performance plans signal

a movement away from

entitlements.

Pay will vary with some measure
of individual, team, or
organizational performance.
What Is Pay-for-Performance?
Purposes of Pay-for-Performance
Attain strategic goals
Reinforce organizational norms
Motivate performance at individual, group,
and organizational levels
Recognize differential employee contributions
Obstacles to Pay-for-Performance
Difficulties in specifying and measuring job
performance

Problems in identifying valued rewards

Difficulties in linking rewards to job
performance
Use of Different
Variable-Pay-Plan Types
Base vs. Variable Pay
Pay-for-Performance Plans: Short
Term
Merit Pay
Lump-Sum Bonuses
Individual Spot Awards
Individual Incentive
Plans
Issues: Rewarding Performance
With Merit Pay Increases
Expense
Improving employee and
organizational performance
Permanence
Individual focus
Managing Merit Pay
Improve accuracy of performance ratings
Allocate enough money to truly reward
performance
Make sure size of merit increase differentiates
across performance levels
Lump-Sum Bonuses
Increasingly used substitute for merit pay
Not built into base pay
Viewed as less of an entitlement than merit
pay
Less expensive than merit pay over the long
run
Relative Cost Comparisons
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
Bedeaux plan
Halsey 50 - 50 method
Rowan plan
Gantt plan
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
Advantages of
Individualized Incentive Plans
Substantial contribution to:
Raise productivity,
Lower production costs,
Increase earnings of workers.
Less direct supervision required
Enable labor costs to be estimated more
accurately than under payment by time.
Greater conflict may emerge between
employees seeking to maximize output and
managers concerned about quality
Changes to production may be more highly
resisted
Increased problems with work
interdependencies
Elevated levels of mistrust between workers
and management.
Disadvantages of
Individualized Incentive Plans
Improve organizational performance
Use organizational measures
Measured periodically
Overview of Team Incentives
A Sampling of
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

Capability-Focused Measures
Human Resources 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
A Sampling of
Performance Measures (2 of 2)
Balanced Scorecard Approach
Uses a constellation of measures
Pinpoints areas of success
Indicates areas to improve
Categories of measures
Financial results
Process improvements
Customer service
Innovation
Forces discussions about priorities among different
measures
Outcome Objectives with different weights in terms
of importance
Types of Variable Pay Plans: Advantages
and Disadvantages
Cash Profit Sharing
Stock Ownership or
Options
Balanced Scorecard
Productivity / Gain-
Sharing
Team / Group
Incentives
Three Gain-Sharing Formulas
Total standard
value hours
Value added Net sales (plus
or minus
inventories)
Denominator of
ratio (output
factor)
Actual hours
worked
Labor cost Payroll costs Numerator of
ratio (input
factor)
Improshare Rucker Plan
Scanlon Plan
(Single ratio volume)
Profit-Sharing Plans
Focus Predetermined index of profitability
Employees receive annual bonus or shares in
company based upon company-wide
performance
Paid in cash or
Deferred into a retirement plan
Issue
Employees may not feel their jobs directly impact
profits

Earnings-at-Risk Plans
Success sharing plan
Employee base pay is constant
Variable pay increases in successful years
No reduction in base pay and no variable pay in
poorly-performing years
Risk sharing plan
Employee base pay varies
Base pay often reduced in poor performance years
Rewards typically higher than success-sharing plans
in high-performance years
Shifts part of risk of doing business from company to
employee
Group Incentive Plans:
Advantages and Disadvantages
Advantages
Positive impact on
performance of about 5-
10%/yr.
Ease of measurement
Cooperation valued
Support of teamwork
Increases participation
in decision-making
Disadvantages
Line of sight lessened
Increased turnover
Increases compensation
risk to employees
Long-Term Incentive Plans
Employee Stock Ownership Plans
(ESOPs)
Performance Plans (Performance
Share and Performance Unit)
Broad-Based Option Plans (BBOPs)
Conditions for Effective Variable
Pay-for-Performance Plans
Plan is clearly communicated
Plan is understood
Rewards are easy to calculate
Employees participate in administering plan
Employees believe they are being treated fairly
Employees believe they can trust company and
they have security
Rewards are awarded as soon as possible after
desired performance