Pay-for-Performance

1
Pay-for-Performance

• Pay will vary with some measure of individual,
  team, or organizational performance
• Motivating better performance and helping cut
  costs

2
Short Term Individual-based

• Merit pay
• Permanent increase in base pay based on
  performance evaluation
• Expensive and doesnt achieve the desired goal
  improving employee and corporate performance
• Lump-sum bonuses
• Temporary end-of-year bonuses
• Individual spot awards
• Individual incentive plans
• Offer a promise of pay for some objective,
  pre-established level of performance

3
Exhibit 10.5 Individual Incentive Plans
4
Exhibit 10.9 Advantages and Disadvantages of
Individualized Incentive Plans
5
Short Term Team-based

• Few causes for failures of team incentive
  schemes
• Varieties in teams
• Level problem
• Complexity
• Control
• Communications
• Choice between individual and group plans
• Performance measurement
• Organizational adaptability
• Organizational commitment
• Union status

6
Gain-Sharing Plan

• Looks at cost components of the income ledger and
  identifies savings over which employees have more
  impact (reduced scrap, lower labor costs, reduced
  utility costs, etc.)
• Possibility of the sorting effect
• Key elements
• Strength of reinforcement
• Productivity standards
• Sharing the gains
• Scope of the formula
• Bottom-line effect
• Perceived fairness of the formula
• Ease of administration
• Production variability

7
Exhibit 10.15 Three Gain-Sharing Formulas
8
Profit-Sharing Plans

• Predetermined index of profitability
• Most employees dont feel their jobs have a
  direct impact on profits
• The trend in recent variable-pay design is to
  combine the best of gain-sharing and
  profit-sharing plans
• The plan must be self funding
• Along with having the financial incentive,
  employees feel they have a measure of control

9
Earnings-at-Risk Plans

• Risk sharing plan (vs. success sharing plan)
• Base pay is reduced by some amount relative to
  the level that would be offered in a
  success-sharing plan
• Can result in high turnover

10
Exhibit 10.17 Group Incentive PlansAdvantages
and Disadvantages
11
Long-Term Incentive Plans

• Employee Stock Ownership Plans (ESOPs)
• The effects are generally long-term
• Foster employee willingness to participate in the
  decision-making process
• Have little impact on productivity or profit
• Performance plans (performance share and
  performance unit)
• Corporate performance objectives for a time three
  years in the future
• Broad-Based Option Plans (BBOPs)
• Are stock grants
• Are versatile (performance- or ownership-culture)

12
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16
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