Pay for Performance Plans

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• Pay for Performance Plans

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Pay for performance plans signal a movement away
from entitlements. Pay will vary with some
measure of individual, team, or organizational
performance.
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Purposes of Pay for Performance

• Attain strategic goals
• Reinforce organizational norms
• Motivate performance
• Recognize differential employee contributions

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Performance Pay Obstacles

• Difficulties in specifying and measuring job
  performance
• Problems in identifying valued rewards
• Difficulties in linking rewards to job performance

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• Base Pay Adjustments
• General Increases
• Merit Pay Plans
• Lump-Sum Awards

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Difficulties in Rewarding Performance with Base
Pay Increases

• Economics
• Lack of flexibility
• Permanence
• Individual focus

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Individual Incentives

• Under a system of individual incentives, all or a
  portion of an individuals pay is tied to their
  performance.

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Pay-for-Performance Plans

• Merit Pay Adjustments to Base Pay
• Need better measures and enough money
• Lump Sum Bonuses
• Reduced costs because of lack of compounding.
• Individual Spot Awards
• exceptional performance on special projects or
  performance that exceeds expectations by a wide
  margin.
• Individual Incentive Plans
• Group Incentive Plans

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Individual Incentive Plans

• Incentive plans vary by
• Method of rate denomination
• Number of units of production per time period
• Time period per unit of production
• Relationship between production level and wages
• Wages are a constant function of production
• Wages vary as a function of production

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Individual Incentives Plans

• Straight Piecework System
• Wage rate determination is based on units of
  production per time period, and wages vary
  directly as a function of production level
• Standard Hour Plan
• Rate based on completion of a task in some
  expected time period. Regardless of the time
  actually taken to complete the task, pay is
  geared to the standard time

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Advantages

• Raise productivity, reduce production cost
• Less direct supervision required
• Improve labor costs forecasts

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Advantages

• Raise productivity, reduce production cost
• Less direct supervision required
• Improve labor costs forecasts

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Pay-for-Knowledge

• Base pay, or pay progression, is tied to job
  knowledge
• 1. Increased knowledge-based systems
• 2. Multi-skilled-based systems

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Recognition Plans

• Celebrate Objectives
• Reinforce Extraordinary Performers
• Recognize Activities
• Reinforce Demonstrated Desired Behaviors
• Recognize Service
• Recognize Needs of Employees

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Group Incentives

• Improve Organizational Performance
• Organizational Measures
• Measured Periodically

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Group Incentive Plans

• Balanced Scorecard Measures
• (Organization, Division, Department, Workgroup)
• Lead Customer and Employee Satisfaction,
  Market Share
• Operational Productivity, Quality, Cycle Time
• Lag Profit, Return on Net Assets, etc.
• Pre-announced Performance-Reward Schedule
• Formula Driven
• Participation by Level, not Function

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Gainsharing

• Under gainsharing plans, employees earn bonuses
  tied to unit-wide performance as measured by a
  predetermined, gainsharing formula.

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Advantages of Gainsharing Over Other P-F-P Options

• It is based upon group, not individual
  performance.
• It encourages teamwork.
• It is based on macro-measures.
• It results in pay-outs relatively close in time
  to performance.
• It is based upon factors controllable by the
  group.
• It usually does not encourage destructive
  competition among teams.
• It promotes an employee / company partnership for
  improvement.

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Criteria for Gainsharing Formula

• Fair to company
• Fair to employees
• Understandable
• Easy to administer
• Flexibility
• Helps to isolate problem areas

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Small Group Incentives

• Small group incentive systems are similar to
  gainsharing plans but in this case, the bonus
  employees receive is based on the performance of
  a small group instead of an entire department,
  division, or plant.

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Profit-Sharing Plans

• Employees receive an annual bonus or shares in
  the company based upon company-wide performance.
• Employees are either paid in cash, or their
  earnings are deferred into a retirement plan.

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Team Incentives

• Enabling Involvement
• Rewarding Contributions
• Project Measures

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Advantages and Disadvantages of Group Incentive
Plans

• ADVANTAGES
• Positive impact
• Ease of measures
• Cooperation valued
• Teamwork
• Participation in decision-making

• DISADVANTAGES
• Line of sight lessened
• Increased turnover
• Compensation at risk increased

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Example of Group IncentivesGE Information
Systems

• A team-based incentive with links to individual
  payouts
• Team and individual performance goals are set
• If the team hits its goals, the team members earn
  their incentive only if they hit their individual
  goals.
• The team incentive is 12 to 15 of base pay and
  is paid monthly.

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Example of Group IncentivesSaturn

• Earnings-at-risk plan where base pay is 93 of
  market
• Employees meet individual objectives to capture
  at-risk component
• All team members must meet objectives for any to
  get at-risk money
• A profit sharing component is based on corporate
  profits

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The Choice Between Individual and Group Variable
Plans

• Characteristics for decision
• Performance measurement
• Organizational adaptability
• Organizational commitment

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Characteristic Performance Measurement

• Choose an individual plan when
• Good measures of individual performance exist.
• Task accomplishment not dependent on performance
  of others.

• Choose a group plan when
• Output is group collaborative effort.
• Individual contributions to output cannot be
  assessed.

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Characteristic Organizational Adaptability

• Choose an individual plan when
• Individual performance standards are stable.
• Production methods and labor mix are relatively
  constant.

• Choose a group plan when
• Performance standards for individuals change to
  meet external environmental pressures on
  relatively constant organizational objectives.
• Production methods and labor mix must adapt to
  meet changing pressures.

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Characteristic Organizational Commitment

• Choose an individual plan when
• Commitment strongest to individuals profession
  or superior.
• Supervisor viewed as unbiased and performance
  standards readily apparent.

• Choose a group plan when
• High commitment to organization built upon sound
  communication of organizational objectives and
  performance standards.

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Long-Term Incentive Plans
Employee Stock Ownership Plans (ESOPs)
Performance Plans (Performance Share and
Performance Unit)
Broad-Based Option Plans (BBOP)
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Other Long-Term Incentive Plans

• Premium Priced Stock Options
• Long-term Vest Stock Options
• Indexed Stock Options
• External Standards LTI
• Career Grants

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Conditions for Effective Variable
Pay-for-Performance Plans

• Plan is clearly communicated
• Plan is understood
• Rewards are easy to calculate
• Employees participate in administering the plan
• Employees believe they are being treated fairly
• Employees believe they can trust the company and
  that they have security
• Rewards are awarded as soon as possible after the
  desired performance.

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The Serious Implications of Variable
Pay-for-Performance

• When a substantial portion of pay is tied to
  performance, that portion becomes variable - can
  go up or down - based upon individual, group, or
  company performance. This change is significant.
• The nature of authority relationships and status
  in the organization might change.
• Employees will demand, and the operation of the
  systems themselves might require, increased
  sharing of information.
• Finally, variable pay-for-performance systems
  will create heightened pressure for performance
  and cost containment within the organization.
  This pressure will come not just from managers,
  but from employees themselves.