COMPENSATION
Third Canadian Edition
Milkovich, Newman, Cole
11-1
© 2010 McGraw Hill Ryerson
Pay-for-Performance Plans
 pay that varies with some measure of
individual or organizational performance
 also called variable pay plans
 these plans have a positive impact on
performance if they are designed well
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Short Term
Pay-for-Performance Plans
 Merit Pay
 Lump-Sum Bonuses
 Individual Spot Awards
 Individual Incentives
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Individual Incentive Plans
Method of Rate Determination
Units of production per
time period
Pay constant function of
production level
Relationship
between
production level
and pay
Pay varies as function of
production level
(1)
Straight piecework plan
(3)
Taylor differential piece
rate system
Time period per unit of
production
(2)
Standard hour plan
(4)
Halsey 50 - 50 method
Merrick multiple piece
rate system
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Advantages of Individualized
Incentive Plans
 substantial contribution to:
 increased productivity
 lower production costs
 increased earnings of workers
 less direct supervision is required to maintain
output than under pay for time
 payment for results (if accompanied by improved
organizational and work measurement) enable
labour costs to be estimated more accurately than
under pay for time
 helps costing and budgetary control
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Disadvantages of Individualized
Incentive Plans (1 of 2)
conflict between employees seeking to
maximize output and managers concerned
about deteriorating quality levels
attempts to introduce new technology may
be resisted by employees concerned about
the impact on production standards
reduced willingness of employees to
suggest new production methods for fear of
subsequent increases in production
standards
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Disadvantages of Individualized
Incentive Plans (2 of 2)
increased complaints that equipment is
poorly maintained, hindering employee
efforts to earn larger incentives
increased turnover among new employees
discouraged by the unwillingness of
experienced workers to cooperate in onthe-job training
elevated levels of mistrust between
workers and management
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Team / Group
Incentive Plans
Gain-Sharing Plans
Profit Sharing Plans
Earnings-at-Risk Plans
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Sample Group/Team
Performance Measures (1 of 2)
Customer-Focused Measures
Financially-Focused Measures
 Time to Market Measures
 Value Creation
 On time delivery
 Revenue growth
 Cycle time
 Resource yields
 New product introductions
 Profit margins
 Customer Satisfaction
 Economic value added
Measures
 Shareholder Return
 Market share
 Return on invested capital
 Customer satisfaction
 Return on sales / earnings
 Customer growth and retention
 Earnings per share
 Account penetration
 Growth in profitability
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© 2010 McGraw Hill Ryerson
Sample Group/Team
Performance Measures (2 of 2)
Capability-Focused Measures
 HR 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
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Different Types of Variable
Pay Plans
Cash Profit
Sharing
Stock Ownership
or Options
Balanced
Scorecard
Team / Group
Incentives
Productivity /
Gain- Sharing
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Gain-Sharing Plans
 under gain-sharing plans,
employees share in costsavings or productivity gains
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Key Elements in Designing a
Gain-Sharing Plan
 strength of reinforcement
 productivity standards
 sharing the gains
 scope of the formula
 perceived fairness of the formula
 ease of administration
 production variability
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Three Gain-Sharing
Formulas
Scanlon Plan
(single ratio
volume)
Rucker Plan
Improshare
Numerator of Payroll costs
ratio (input
factor)
Denominator Net sales (+/of ratio
inventories)
(outcome
factor)
Labour cost
Actual hours
worked
Value added
Total standard
value hours
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Profit-Sharing Plans
 variable pay plans requiring a
corporate profit target to be met
before any payouts occur
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Earnings-at-Risk Plans
 incentive plans sharing profits in
successful years and reducing
base pay in unsuccessful years
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Advantages of Group
Incentive Plans
 positive impact on organization and individual
performance of about 5 – 10 percent per year
 easier to develop performance measures than
for individual plans
 signals that cooperation, both within and
across groups, is a desired behaviour
 teamwork supported by most employees
 may increase participation of employees in
decision making process
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© 2010 McGraw Hill Ryerson
Disadvantages of Group
Incentive Plans
 line of sight may be lessened
 employees may find it more difficult to see how
their individual performance affects their
incentive payouts.
 may lead to increased turnover among top
individual performers because they must
share with lesser contributors
 increases compensation risk to employees
because of lower income stability
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Long-Term Incentive Plans
Employee Stock Ownership
Plans (ESOPs)
Stock Options
Broad-Based Option Plans
(BBOP)
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Special Groups in
Compensation Management






supervisors
top management
corporate directors
professional employees
sales staff
contingent workers
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© 2010 McGraw Hill Ryerson
Components of an Executive
Compensation Package
1. base salary
2. short-term (annual) incentives or bonuses
3. long-term incentives and capital
appreciation plans
4. executive benefits
5. executive perquisites
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Examples of Long-Term
Incentives for Executives
1. Appreciation-Based Plans
 stock options
 stock appreciation rights
2. Full-Share Plans
 restricted stock plans
 restricted stock units/phantom stock plans
 Deferred share units
3. Performance-Based Plans
 performance share / unit plans
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Pay Components for
Professional Employees
 dual career ladders
 maturity curves
 performance bonuses
 attaining professional licenses
 perks
 flexible work schedules
 Campus-like environment
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Key Factors in Designing a
Sales Compensation Plan
 the nature of the people who enter the
sales profession
 organizational strategy
 competitor practices
 product/service being sold
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Key Issues in Contingent
Workforce Compensation
 equity/fairness relative to
permanent employees
 boundaryless careers
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© 2010 McGraw Hill Ryerson
Conclusion
the design and effective administration of
pay-for-performance plans is key to their
success
special employee groups
compensation must address high
potential for conflict in these jobs
compensation treatment differs from that
for other employees
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© 2010 McGraw Hill Ryerson