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Prentice Hall, Inc. © 2006
5-1
A Human Resource A Human Resource Management ApproachManagement Approach
STRATEGIC STRATEGIC COMPENSATIONCOMPENSATION
Prepared by David Oakes
Chapter 5Chapter 5
Incentive PayIncentive Pay
Prentice Hall, Inc. © 2006
5-2
Incentive PayIncentive Pay
Compensation fluctuates according to A pre-established formula Individual or group goals Company earnings
Adds to base pay Controls costs Motivates employees
Prentice Hall, Inc. © 2006
5-3
Incentive Pay CategoriesIncentive Pay Categories
Individual
Group
Company-wide
Prentice Hall, Inc. © 2006
5-4
Performance MeasuresPerformance Measures
Individual incentive plans
Quantity of work output
Quality of work output
Monthly sales
Work safety record
Work attendance
Prentice Hall, Inc. © 2006
5-5
Group Incentive Group Incentive Performance MeasuresPerformance Measures
Group incentive plans Customer satisfaction
Labor cost savings
Materials cost savings
Reduction in accidents
Services cost savings
Prentice Hall, Inc. © 2006
5-6
Company-WideCompany-WidePerformance MeasuresPerformance Measures
Company-wide incentive plans
Company profits
Cost containment
Market share
Sales revenue
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5-7
Types of Individual Types of Individual Incentive Plans Incentive Plans
Piecework plans
Management incentive plans
Behavior encouragement plans
Referral plans
Prentice Hall, Inc. © 2006
5-8
Piecework PlansPiecework Plans
Awards based on individual production v. objective standards
Awards based on individual performance standards using objective & Subjective criteria
Quantity and / or quality goals
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Individual Incentive Plan Individual Incentive Plan AdvantagesAdvantages
Helps relate pay to performance
Promotes equitable distribution of compensation
Helps retain best performers Compatible with America’s individualistic culture
Prentice Hall, Inc. © 2006
5-10
DisadvantagesDisadvantages May promote inflexibility Unrealistic standards may hamper employee motivation
Setting performance standards is time consuming Factors beyond employee’s control may affect outcomes Factors not rewarded may be overlooked
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5-11
Group Incentive PlansGroup Incentive Plans
Rewards employees for their collective performance Use has increased in industry
2 types Team - based or small group Gain sharing
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5-12
Allocation MethodsAllocation Methods
Equal incentive payments
Differential payments based on
contribution to goals
Differential payments according
to base pay
Prentice Hall, Inc. © 2006
5-13
Gain SharingGain Sharing
Incentives based on company’s improved productivity
Based on open leadership
Involves employee participation
Includes bonuses
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5-14
Gain Sharing PlansGain Sharing Plans
3 Common Forms
Scanlon Plan
Rucker Plan
Improshare
Prentice Hall, Inc. © 2006
5-15
Scanlon PlanScanlon Plan
Joseph Scanlon, 1935 Emphasis on teamwork Two - tiered cost savings suggestion system
Production - level committees Screening committees Rewards = labor costs / SVOP
Prentice Hall, Inc. © 2006
5-16
Rucker PlanRucker Plan
Allan W. Rucker, 1933
Emphasizes employee involvement
Uses a value - added formula Value of sales price Value of materials used Total labor costs
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5-17
ImproshareImproshare
Mitchell Fein, 1973
Improved productivity through sharing
Incentive to finish products
Bonus based on a labor ratio
Includes a buy - back provision
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5-18
Company - Wide Incentive PlansCompany - Wide Incentive Plans
Rewards employees when company meets performance standards
2 Types Profit sharing plans Employee stock option plans
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5-19
Profit Sharing PlansProfit Sharing Plans
Current profit sharing plans
Deferred profit sharing plans
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5-20
Profit Sharing FormulasProfit Sharing Formulas
Fixed-first-dollar-of-profits Graduated first-dollar-of profits Probability threshold formula
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5-21
Distribution MethodsDistribution Methods
Equal payments
Proportional payments based
on annual salary
Proportional payments based
on contribution to profits
Prentice Hall, Inc. © 2006
5-22
Incentive Pay Considerations Incentive Pay Considerations
Based on individual or group performance?
Acceptable level of risk?
Replace traditional pay?
Performance criteria evaluated?
Appropriate time horizon?
Prentice Hall, Inc. © 2006
5-23
Competitive Strategies Competitive Strategies
Lowest - cost Lower output costs per employee Individual & group incentive plans Behavioral encouragement plans
Differentiation Unique product or services Creative, risk - taking employees Long - term focus Team - based incentives
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