Copyright
Copyright©2016
©2016Cengage
CengageLearning.
Learning.All
AllRights
RightsReserved.
Reserved.May
Maynot
notbebescanned,
scanned,copied
copiedororduplicated,
duplicated,ororposted
postedtotoa publicly
a publiclyacce
acce
ssible
ssiblewebsite,
website,ininwhole
wholeororininpart.
part.
Learning Outcomes
 Implement a strategic incentive program
 Detect when and what types of individual incentives
are appropriate
 Differentiate how gains may be shared with
employees under different group incentive plans like
the Scanlon and Improshare gainsharing systems
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
2
Learning Outcomes
 Differentiate between profit sharing plans and explain
advantages and disadvantages of these programs as an
alternative to individual and group incentive systems
 Understand how to apply different incentive systems
designed for professionals and executives
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
3
Strategic Reasons for Incentive Plans
 Variable pay programs: Tying pay to some measure of
individual, group, or organizational performance
 Incentive pay plans
 Establish a performance threshold for employees to
qualify for incentive payments
 Emphasize a shared focus on organizational objectives
 Creates an operating environment supporting shared
commitment
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
4
Figure 10.1 - Types of Incentive Plans
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
5
Incentive Plans as Links to Organizational
Objectives
 Purpose of incentive plan
 Encourages employees to assume ownership of their
jobs, thereby improving effort and job performance
 Motivates employees to expend more effort than under
hourly and/or seniority-based compensation systems
 Supports a compensation strategy to attract and retain
top-performing employees
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
6
Requirements for a Successful
Incentive Plan
 Identify important organizational metrics encouraging
employee behavior
 Involve employees
 Incentive programs should seem fair to employees
 Find the right incentive payout
 Payout formulas should be simple and understandable
 Establish a clear link between performance and payout
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
7
Individual Incentive Plans
Piecework
• Straight piecework: Employees receive a certain rate for each unit
produced
• Differential piece rate: Employees whose production exceeds the
standard amount of output receive a higher rate for all of their work
Standard hour plan
• Sets rates based on the completion of a job in a predetermined standard
time
Bonus
• Supplemental to the base wage
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
8
Individual Incentive Plans
Merit pay
• Links an increase in base pay to how successfully an employee performs his or
her job
Incentive awards and recognition
• Awards - Used to recognize productivity gains, special contributions or
achievements, and service to the organization
• Recognition - Conduit that shows employees that the company appreciates
their efforts, their unique gifts, and their contributions
Sales incentive
• Performance standards for sales employees are difficult to develop because
performance is affected by external factors
• Types - Straight salary plan, straight commission plan, Combination salary and
commission plan, and Sales plus bonus plan
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
9
Group Incentive Plans - Team
Compensation
 Team incentive plans: All team members receive an
incentive bonus payment when production or service
standards are met or exceeded
 Gainsharing incentive plan: Both employees and the
organization share financial gains by a predetermined
formula
 Scanlon plan
 Improshare
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
10
Figure 10.4 - Scanlon Plan Suggestion
Process
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
11
Group Incentive Plans
 Profit sharing - Employer makes available to all regular
employees, special current or deferred sums based on
the organization’s profits
 Stock options - Organizations allow employees to buy
stocks to increase productivity and assume partnership
role in the organization
 This in turn leads to the increase in stock prices
 Employee Stock Ownership Plans (ESOPs): Stock
plans in which an organization contributes shares of
its stock to an established trust for the purpose of
stock purchases by its employees
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
12
Incentives for Professional Employees
 Professional employees
 Motivation is influenced by their increased mobility
across companies
 Can receive compensation beyond base pay
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
13
Executive Pay Package
Base salary
Short-term
incentives or
bonuses
Benefits
Long-term
incentives or
stock plans
Perks
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
14
Figure 10.5 - Types of Long-Term
Incentive Plans
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
15
Figure 10.5 - Types of Long-Term
Incentive Plans
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
16
Executive Compensation: Ethics and
Accountability
 Justification of bonuses
 Large financial incentives are a way to reward superior
performance
 Business competition is pressure-filled and demanding
 Good executive talent is in great demand
 Effective executives create shareholder value
 Fact of business life, reflecting market compensation
trends
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
17
Executive Compensation Reform
 Internal Revenue Service (IRS) makes executive pay a
part of every corporate audit
 Securities and Exchange Commission issued pay
disclosure rules requiring companies listed on the New
York Stock Exchange and NASDAQ to disclose the true
size of their top executive pay packages
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
18
Executive Compensation Reform
 Financial Accounting Standards Board (FASB) requires
stock options to be recognized as an expense on
income statements
 Dodd-Frank Wall Street Reform and Consumer
Protection Act (Pub. L. 111-203) was signed into effect
giving share holders say on pay
 Voting shareholders of a company must ultimately
approve of its executive salaries
Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly acce ssible website, in whole or in part.
19