Term paper (HRM)
Incentive Plans
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In This Session:
We’ll look at how the goals and performances of individuals, teams/units/departments, and organizations might be more effectively linked.
We’ll examine the underlying concepts that distinguish effective incentives from ineffective ones.
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Effective rewards acknowledge what the organization wants to reward. Ineffective rewards do not reward what is hoped for by the organization and, in fact, reward the very things the organization doesn’t want. Kerr’s article, The Folly of Rewarding A While Hoping for B, is a good launching point for discussion of this (next slide).
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A Variety of Possible Incentives
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Individual Incentives
Necessary Conditions For Individual Incentive Plans
Individual performance must be identified
Individual competitiveness must be desired
Individualism must be stressed in the organizational culture
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Individual Incentive Plans – Piece-rate
Straight piece-rate:
Employees receive a certain rate for each unit produced
Differential piece-rate:
Pays employees one piece-rate wage for units produced up to a standard output and a higher piece-rate wage for units produced over the standard
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Managers often determine the quotas or
standards by using time and motion studies. For example, assume that the
standard quota for a worker is set at 300 units per day and the standard rate is
14 cents per unit. However, for all units over the standard, the employee
receives 20 cents per unit. Under this system, the worker who produces 400
units in one day would get $62 (300 × 14¢) + (100 × 20¢). Many possible
combinations of straight and differential piece-rate systems can be used,
depending on situational factors.
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Individual Incentive Plans - Bonuses
Bonuses: One-time payment that does not become part of the employee’s base pay
Spot bonus: An unplanned bonus given to an employee for exceptionally good behavior
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Individual Incentive Plans - Merit Pay
Merit pay is normally an annual pay increase tied to performance
Becomes part of base pay once issued regardless of future performance
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Individual Incentive Plans - Awards and Recognition
Awards and Recognition
When giving awards, organizations should describe clearly how those receiving the awards were selected
Management professor named winner of ‘Golden Apple,’ CSUSB’s top teaching award
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Work Unit or Team Incentive Plans - Team Compensation
Team incentive plans: All team members receive an incentive bonus payment when production or service standards are met or exceeded
Approaches in establishing team incentive payments
Set performance measures upon which incentive payments are based
Determine the size of the incentive bonus
Create a payout formula and should be explained to employees in detail
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Conditions for Effective Work Unit or Team Incentives
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Challenges with Work Unit/team Incentives
Challenges with work unit/team incentives:
Rewards distributed in equal amounts to all members may be perceived as unfair
Free rider: Member of the group who contributes little
Group size: Individual efforts of employees have little effect on the total performance of the group in large groups
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Organizational Incentives: Profit Sharing
Improve organizational results
Attract or retain employees
Improve product/service quality
Enhance employee morale
Focus employees on goals
Primary Objectives
Challenges
Disclosure of financial information
Variability of profits from year to year
Rewards not obviously linked to employee efforts
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Organizational Incentives: Employee Stock Plans
Stock option plan: Gives employees the right to purchase a fixed number of shares of company stock at a specified price for a limited period of time
Employee stock ownership plan (ESOP): Gives employees significant stock ownership in their organizations
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Microsoft: “We have an employee stock purchase plan (the "Plan") for all eligible employees. Shares of our common stock may be purchased by employees at three-month intervals at 90% of the fair market value on the last trading day of each three-month period. Employees may purchase shares having a value not exceeding 15% of their gross compensation during an offering period.”
Advantages
Favorable tax treatment for ESOP earnings
Employees motivated by their ownership stake in the firm
Employees have a voice in important matters
Disadvantages
Wages and retirement benefit tied to the firm’s future performance
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**Levels of Variable Pay
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Sales Incentive Plans
Permits salespeople to be paid for performing various duties that are not reflected immediately in their sales volume
Straight salary plan
Receives a percentage of the value of the sales the person has made
Straight commission plan
Includes a straight salary and commission
Combination salary and commission plan
Pays a salary plus a bonus achieved by reaching targeted sales goals
Sales plus bonus plan
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Watch and Think
How To Improve Your Sales Incentives
Questions:
What are the tips mentioned in the video?
From your point of view, which of them is most important?
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Use regular tactical incentives on top of year end target
Set achievable goals for employees of all levels, not just your top performers
Personalize your message of rewards to make it relevant and attainable to everyone
Use gamification to encourage participation
Incorporate educational modules and quizzes
Recognize those who live your brand values everyday
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Elements of Executive Compensation Packages
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Handled differently from employee pay
CEO responsibilities:
Establish strategic direction for the organization
Create shareholder value
Ensure the sustainability of the enterprise
Controversy
Should include an element of risk for the executive
When organization underperforms, executive payouts should fall
But compensation can get excessive because:
It is often based on peer group practices rather than rational compensation strategy
It increases as companies pay above average
CEOs have input as board members of other companies
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The Executive Pay Package - Base Salaries and Benefits
Executive base salaries
Represents 30 or 40 percent of total annual compensation
Executive benefits
Include programs for health insurance, life insurance, retirement plans, and vacations
Supplemental benefits that other employees do not receive
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The Executive Pay Package - Incentives
Executive short-term incentives
Annual bonuses form the main element
Bonus payment in form of cash or stock and may be paid immediately, deferred for a short time, or deferred until retirement
Executive long-term incentives
Is used to tie the incentives to the long term success of the organization
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The Executive Pay Package - Perks
Perks or perquisites: Special nonmonetary benefits given to executives
Allow the executives to be seen as “very important people”
May include a car, entertainment expenses, and club memberships, services such as free medical examinations, low-cost loans, and financial or legal counseling
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Design Issues for Performance-Based Incentives and Rewards
To be effective, incentive and reward systems must:
Specify and measure performance.
Specify the level of aggregation for reward distribution in the organization’s hierarchy.
Specify the type of reward.
Gain employee acceptance.
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Legal Considerations
Discrimination:
Must apply same decision rules to all employees eligible for the reward or incentive.
Employees protected by Title VII and Equal Pay Act.
Taxes and accounting rules:
There may be some unanticipated or unplanned tax consequences for employees.
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Like any employment decision, employers must make sure that incentives and rewards are equitably administered. If a group of employees are eligible to receive a reward, the criteria must be applied equitably across all employees in that group. Note that the criteria must be applied equitably, not equally. This does not mean that all employees should receive the same reward; the process, however, must be applied fairly and the outcomes distributed fairly, based on the set of performance standards set and achieved.
In addition, depending on employers’ choices of the types of incentives and rewards they offer, there may be some unanticipated or unplanned tax consequences for employees. For example, with incentive stock options, tax is deferred as long-term capital gains (15 percent) when the stock is actually sold by the employee. For employees with non-qualified stock options, the spread (i.e., the difference between the price at which the employee bought the stock and the current market value) is viewed as income and is treated as compensation, which is taxed at a rate higher than 15 percent. If the instructor is knowledgeable in this area, they could offer other tax and accounting issues that employers and employees might consider as they decide the mix of rewards.
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