Group/Team based
Incentives
Session-14
Introduction
• Reward all team members equally based on
overall performance of the team
• Performance is evaluated using an objective
standard
• Fosters cohesiveness among the team
members
• Motivate to think as a unit
• Easy to measure the overall performance of
the team
The objectives are:• Creation of the collective interest and team
sprit among the workers.
• Creation of interest among the superiors to
improve performance.
• Reduction of wastage in materials and
elimination of idle-time.
Conditions Under Which Team-Based
Plans Are Most Likely to Succeed
• When work tasks are so intertwined that it is
difficult to single out who did what.
• When the firm’s structure and systems facilitate
the implementation of team-based incentives.
• When the objective is to foster entrepreneurship in
self-managed work groups.
• A group of persons of different skills is required
for the execution of the work due to its nature.
Conditions for Successful
Group/Team Incentives
5
Priestman’s production bonus
• A standard is fixed in terms of units or points
• When
actual
output
>
Standard
output,
workers will receive bonus in proportion to
the increase
• Can
operate
for
standard product
mass
production
of
a
Rucker plan
• Employees receive a constant proportion of the added
value (which is defined as sales minus raw materials
and services)
• The ascertainment of the ratio of earnings & added
value is done.
• The rationale behind using this formula is that
effects not controllable by employees, such as
inflation and market factors, are not included in the
formula.
• Rucker plan is known as share of production plan.
Rucker plan
It works in this manner:
• a firm has costs for producing it's service or product.
• If a firm is able to keep those costs under control,
it's profitability will increase.
• Employee input into how to better decrease
costs/improve efficiency is actively encouraged.
• Resultant costs savings from employee input that
increase profitability are shared with employees in
some form of bonus.
Scanlon plan
• This is similar to Rucker plan
• Instead of the ratio between earnings & added value
as considered in case of Rucker plan, the ratio
between earnings & selling price of production is
taken as the basis in case of Scanlon plan.
• This is a Cost saving productivity-incentive plan in
which any saving (computed per unit of output)
compared with an agreed upon standard labor cost is
shared equally between the workers and the firm.
Scanlon plan
A simple piece of logic at the heart of the Scanlon plan:
• If all employees have a personal and tangible financial stake in
the success of a corporation, they will contribute more actively
to its success.
• In such a system, employees are made part of the process of
allocating labor and capital resources within the company.
• Employees then collectively share a portion of any cost savings
that they are able to generate through systematic
improvements or more dedicated and productive labor.
Difference between Scanlon plan and Rucker plan
There are two major differences between the Scanlon
and Rucker plans:
(a)Rucker plans tie incentives to a wide variety of savings,
not just the labor savings focused on in Scanlon plans.
Due to this greater flexibility Rucker plans are more
amenable to linkages with individual incentive plans
(b)In Scanlon plan, rewards come from employee
participation in improving productivity and reducing cost.
In Rucker plan, the rewards come from the difference
between the labour cost and sales value of production.
Towne plan
• Standard cost of labour is set under this plan.
• In addition to the wages earned, the workers become
qualified to receive bonus for any reduction in the
labour cost as compared to the standard labour cost.
• 50% of the savings in labour cost is distributed among
workers and supervisors in proportion to their wages.
Allocation Methods
• Equal incentive payments
• Differential payments based on contribution to
goals
• Differential payments according to base pay
Advantages
Disadvantages
• Team spirit development • The bonus is shared by
all, irrespective of the
comparative efficiency of
• increased output
the workers in a group.
• competition
between
• Wastage minimization
groups.
• successful groups can
• Better quality of work
resist change.
• Free-riding effect
• Automatic training
• It can take time for
members of a group to
work well with each
other.
Organization wide incentive
plans
Introduction
• Reward employees on the basis of the success
of the organization over a specified time
period
• Promote a culture of ownership
• Develop a sense of belongingness, cooperation
and team work
• Profit sharing, gain sharing and ESOP
Profit sharing
• A scheme whereby employers undertake to pay a
particular potion of net profits to their employees
on compliance with certain service conditions and
qualification.
• The purpose is mainly to strengthen the loyalty of
employees to the firm by offering them an annual
bonus.
• The share of profit of the worker may be given in
cash or in the form of shares in the company.
• These shares are called bonus shares.
• In India, the share of the worker is governed by
the Payment of Bonus act.
Merits:
Demerits:
• Inspires the management
and the worker to be
sincere, devoted and loyal
to the firm
• It enables the workers to
lead a rich life
• Likely to induce motivation
in the workers and other
staff for quicker and
better work
• Workers do not require
close supervision.
• It
attracts
talented
people
• Profit
sharing
is,
in
practice a fair weather
plan.
• Management may dress up
profit figures and deprive
the workers of their
legitimate share in the
profits.
• Workers tend to impair
the solidarity of trade
unions.
• Fixation of worker’s share
in the profits of firm may
prove to be a bone of
contention in the long run.
Gain sharing
 when employees make a suggestion that
improves the organization, a percentage of
the organization’s gain from the suggestion
is shared with the employees who made the
suggestion
 Example:
 Employees make suggestions
 Management reviews the submitted suggestions,
determines the improvement (gain) from each
suggestion, and decides which suggestions to
implement
 A percentage of the gain from a suggestion is
shared with the employees who made the suggestion
Gain sharing
– A gain sharing plan aims at increasing productivity or decreasing labour costs
and sharing the resultant gains (usually a lump sum payment) with employees.
–
It is based on mathematical formula that compares a baseline of performance
with actual productivity during a given period.
– Gain sharing is built around the idea that the involved employees will improve
productivity through more effective use of organizational resources.
– Three major types of gain sharing plans are currently in use. Scanlon Plan,
Rucker Plan and Improshare.
–
Improshare stands for improved productivity through savings. This plan is
similar to a piece rate except that it rewards all employees in an organization.
– Input is measured in hours and output in physical units.
– A standard is calculated and bonuses are paid based on the extent to which the
standard is exceeded.
– The employees and the organization each receive payment for 50 per cent of the
improvements.
Gain sharing
•Unlike profit sharing plans which have deferred payments, gain sharing plans are
current distribution plans.
•They are directly related to individual behaviour and are distributed on a monthly
or quarterly basis.
•Gain sharing plans tend to increase the level of cooperation across workers and
teams by giving them a common goal.
•Managers are not required to base their calculations on complex mathematical
formulae, nor are they required to closely look into the specific contributions of
individuals or independent teams.
•It is easier for both to formulate bonus calculations and to achieve employees’
acceptance of those plans.
•Gain sharing plans may fail due to reasons such as:
poorly deigned bonus formulae
lack of management support for employee participation
poor communication
lack of trust or an apathy on the part of employees
Employee Stock Plans
• Stock Option Plan
 A plan that gives employees the right to purchase a
fixed number of shares of company stock at a
specified price for a limited period of time.
• If market price of the stock is above the
specified option price, employees can purchase
the stock and sell it for a profit.
• If the market price of the stock is below the
specified option price, the stock option is
“underwater” and is worthless to employees.
Employee Stock Plans
 Employee Stock Ownership Plan (ESOP): the company facilitates
employees owning stock in the company
 Methods of distributing stock to employees:
 As a bonus directly to employees
 Example: for every 2 shares an employee buys, the company gives
the employee 1 share
 Example: employees can buy shares for 85% of the current stock
market price
 Into a trust




Company contributes shares of stock into the trust
Shares in the trust are allocated to individual employee accounts
Employees become vested over time
When an employee leaves the company (e.g., retirement), they
receive the current market value of their vested shares in the
trust
Employee Stock Ownership Plan
(ESOP)
– Advantages
• Favorable tax treatment for ESOP earnings
• Employees motivated by their ownership stake
in the firm
– Disadvantages
• Retirement benefit is tied to the firm’s
future performance
• Risk for employees
• Limited effect on productivity
• Long-run financial difficulties
Conditions favoring
corporate-wide plans
–
Firm size
–
Interdependence of different parts of the
business
–
Market conditions
–
The presence of other incentives
Evaluation of Incentives
• Attention getter?
• Understandable?
• Establishes culture through values?
• Improves communication?
• Pays when it should?
(achievements versus failures)
• Improves individual performance?
• Improves org. performance?