STRATEGIC COMPENSATION
A Human Resource
Management Approach
Chapter 5
Incentive Pay
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Prepared by David Oakes
Incentive Pay
 Compensation fluctuates according to
 A pre-established formula
 Individual or group goals
 Company earnings
 Adds to base pay
 Controls costs
 Motivates employees
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Incentive Pay Categories
 Individual
 Group
 Company-wide
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Performance Measures
 Individual incentive plans
 Quantity of work output
 Quality of work output
 Monthly sales
 Work safety record
 Work attendance
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Group Incentive
Performance Measures
 Group incentive plans
 Customer satisfaction
 Labor cost savings
 Materials cost savings
 Reduction in accidents
 Services cost savings
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Company-Wide
Performance Measures
 Company-wide incentive plans
 Company profits
 Cost containment
 Market share
 Sales revenue
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Types of Individual
Incentive Plans
 Piecework plans
 Management incentive plans
 Behavior encouragement plans
 Referral plans
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Piecework 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
Advantages
 Helps relate pay to performance
 Promotes equitable distribution
of compensation
 Helps retain best performers
 Compatible with America’s
individualistic culture
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Disadvantages
 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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Group 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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Allocation Methods
 Equal incentive payments
 Differential payments based on
contribution to goals
 Differential payments according
to base pay
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Gain Sharing
 Incentives based on company’s
improved productivity
 Based on open leadership
 Involves employee participation
 Includes bonuses
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Gain Sharing Plans
3 Common Forms
 Scanlon Plan
 Rucker Plan
 Improshare
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Scanlon Plan
 Joseph Scanlon, 1935
 Emphasis on teamwork
 Two - tiered cost savings suggestion
system
 Production - level committees
 Screening committees
 Rewards = labor costs / SVOP
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Rucker 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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Improshare
 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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Company - Wide Incentive Plans
 Rewards employees when company
meets performance standards
 2 Types
 Profit sharing plans
 Employee stock option plans
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Profit Sharing Plans
 Current profit sharing plans
 Deferred profit sharing plans
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Profit Sharing Formulas
 Fixed-first-dollar-of-profits
 Graduated first-dollar-of profits
 Probability threshold formula
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Distribution Methods
 Equal payments
 Proportional payments based
on annual salary
 Proportional payments based
on contribution to profits
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Incentive Pay Considerations
 Based on individual or group
performance?
 Acceptable level of risk?
 Replace traditional pay?
 Performance criteria evaluated?
 Appropriate time horizon?
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Competitive Strategies
 Lowest - cost
 Lower output costs per employee
 Individual & group incentive plans
 Behavioral encouragement plans
 Differentiation
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Unique product or services
Creative, risk - taking employees
Long - term focus
Team - based incentives
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