4
Incentive Pay
Learning Objectives
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When you finish studying this chapter, you should be A
able to:
4-1. Explore the incentive pay approach.
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4-2. Describe the differences between incentive pay methods and traditional pay
E
methods.
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4-3. Summarize five types of individual incentive pay plans.
,
4-4. Explain two types of group incentive plans.
4-5. Discuss two types of company-wide incentive plans.
D pay programs.
4-6. Summarize considerations when designing incentive
E
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CHAPTER WARM-UP!
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D section of mymanagementlab.com
to complete the Chapter Warm-Up! and see what you already know. After reading the
R and see what you’ve learned.
chapter, you’ll have a chance to take the Chapter Quiz!
A
As we will discuss momentarily, incentive pay places some portion of employee compensation
at risk. When employees, groups of employees, or entire companies fail to meet preestablished
1 or all of their compensation. Expert
performance standards (e.g., annual sales), they forfeit some
incentive pay consultants argue that a critical element of 1
successful incentive pay plans is the
provision of regular, honest communication to employees. We will explore this issue and several
2
others related to effective incentive pay design.
EXPLORING INCENTIVE PAY
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Incentive pay or variable pay rewards employees for partially or completely attaining a predetermined work objective. Incentive or variable pay is defined as compensation, other than base
wages or salaries that fluctuate according to employees’ attainment of some standard, such as a
preestablished formula, individual or group goals, or company earnings.1
Effective incentive pay systems are based on three assumptions:2
š Individual employees and work teams differ in how much they contribute to the company,
both in what they do as well as in how well they do it.
š The company’s overall performance depends to a large degree on the performance of individuals and groups within the company.
š To attract, retain, and motivate high performers and to be fair to all employees, a company
needs to reward employees on the basis of their relative performance.
Strategic Compensation: A Human Resource Management Approach, Ninth Edition, by Joseph J. Martocchio. Published by Pearson.
Copyright © 2017 by Pearson Education, Inc.
4-1 Explore the
incentive pay
approach.
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Much like seniority and merit pay approaches, incentive pay augments employees’ base
pay, but incentive pay appears as a one-time payment. Employees usually receive a combination of recurring base pay and incentive pay, with base pay representing the greater portion of
core compensation. More employees are presently eligible for incentive pay than ever before,
as companies seek to control costs and motivate personnel continually to strive for exemplary
performance. Companies increasingly recognize the importance of applying incentive pay programs to various kinds of employees as well, including production workers, technical employees, and service workers.
Some companies use incentive pay extensively. Lincoln Electric Company, a manufacturer
of welding machines and motors, is renowned for its use of incentive pay plans. At Lincoln
Electric, production employees receive recurring base pay as well as incentive pay. The company
determines incentive pay awards according to five performance criteria: quality, output, dependability, cooperation, and ideas. The company has awarded incentive payments every year since
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1934, through prosperous and poor economic
times. In 2014, the average profit sharing payment
per employee was $33,984.3 Coupled A
with average base pay, total core compensation for Lincoln
employees was $82,903. Over the past 10 years, Lincoln’s profit-sharing payments averaged
T 4 Similarly, Southwest Airlines has distributed profitapproximately 40 percent of annual salary.
sharing payments to employees every E
year for the past 40 years.5 In 2014, Southwest announced
6
that it would share $228 million in profits.
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Companies generally institute incentive pay programs to control payroll costs or to motivate
, control costs by replacing annual merit or seniority inemployee productivity. Companies can
creases or fixed salaries with incentive plans that award pay raises only when the company enjoys
an offsetting rise in productivity, profits, or some other measure of business success. Well-developed
D
incentive programs base pay on performance, so employees control their own compensation levels.
E business objectives. For example, the management of
Companies can choose incentives to further
H. Lee Moffitt Cancer Center and Research
A Institute at the University of South Florida continually
strives to improve patient care as well as control costs. Moffitt’s incentives are usually tied to net
N care measures, patient satisfaction scores, and operating
income or operating surplus, quality of
D
efficiencies.
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A
CONTRASTING INCENTIVE PAY
WITH TRADITIONAL PAY
4-2 Describe the
differences between
incentive pay methods
and traditional pay
methods.
1
Strategic Compensation: A Human Resource Management Approach, Ninth Edition, by Joseph J. Martocchio. Published by Pearson.
Copyright © 2017 by Pearson Education, Inc.
ISBN 1-323-59381-0
In traditional pay plans, employees receive compensation based on a fixed hourly pay rate or an1 pay programs that replace all or a portion of base pay
nual salary. Some companies use incentive
in order to control payroll expenditures2and to link pay to performance. Since 1998, there has been
a 47 percent increase in the use of incentive pay programs. Companies use incentive pay programs
3
in varying degrees for different kinds of positions.7 Nowadays, most companies use a mix of traditional and incentive pay methods. The T
mix has steadily changed. In 1998, traditional pay increases
totaled 4.2 percent of payroll while incentive
pay increases amounted to 8.0 percent. In 2014, the
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amounts were 2.9 percent and 12.7 percent, respectively.8
As we discussed in Chapter 3, employees under traditional pay structures earn raises according to their length of service in the organization or to supervisors’ subjective appraisals of
employees’ job performance. Again, both merit pay raises and seniority pay raises are permanent
increases to base pay. Annual merit pay increase amounts usually total no more than a small percentage of base pay (approximately 3 percent), but the dollar impact represents a significant cost
to employers over time. Table 4-1 shows the contrast in rate of compensation increase between a
traditional merit compensation plan and an incentive plan.
Companies use incentive pay to reward individual employees, teams of employees, or whole
companies based on their performance. Incentive pay plans are not limited solely to production
or nonsupervisory workers. Many incentive plans apply to such categories of employees as sales
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TABLE 4-1 Permanent Annual Merit Increases versus Incentive Awards: A Comparison
(At the end of 2015, John Smith earned an annual salary of $35,000.)
Cost of Increase
(Total Current Salary—2015
Annual Salary equals $35,000)
Total Salary under
N%
Increase
'& SX
Permanent Merit
&%" SVX
Incentive
~% SVX
Permanent Merit Increase
(Percent Increase × Previous
N% &&'% %%/X + Previous
&&'% %%/ SVX
2016
2017
2018
2019
2020
3
5
4
7
6
1,050
2,853
4,367
7,122
9,649
1,050
1,750
1,400
2,450
2,100
36,050
37,853
39,367
42,122
44,649
Incentive Award
(Percent Increase × 2015
%%/X + K%" %/
SVJ[D```X SVX
36,050
36,750
36,400
37,450
37,100
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A
T
professionals, managers, and executives. Management typically
E relies on business objectives to
determine incentive pay levels such as company profits and sales growth. Management then comS to managers. Although merit pay
municates these planned incentive levels and performance goals
performance standards aim to be measurable and objective, incentive
levels tend to be based on even
,
more objective criteria, such as quantity of items an employee produces per production period or
market indicators of a company’s performance (e.g., an increase in market share for the fiscal year).
D in advance that correspond to obMoreover, supervisors communicate the incentive award amounts
jective performance levels. On the other hand, supervisors generally
do not communicate the merit
E
award amounts until after they offer subjective assessments of employees’ performance.
Incentive pay plans can be broadly classified into threeAcategories:
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š Individual incentive plans. These plans reward employees whose work is performed
Dtypically for their production
independently. Some companies have piecework plans,
employees. Under piecework plans, an employee’s compensation
depends on the number
R
of units she or he produces over a given period.
A
š Group incentive plans. These plans promote supportive, collaborative behavior among
employees. Group incentives work well in manufacturing and service delivery environments that rely on interdependent teams. In gain sharing
1 programs, group improvements in
productivity, cost savings, or product quality are shared by employees within the group.
1 compensation to a company’s
š Company-wide incentive plans. These plans tie employee
performance over a short time frame, usually from a one-month
period to a five-year period.
2
Table 4-2 lists common performance measures used in 3
individual, group, and company-wide
incentive plans9.
T
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INDIVIDUAL INCENTIVES
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Individual incentive pay plans are most appropriate under three conditions. First, employees’
performance can be measured objectively. Examples of objective performance measures include:
š Number of units produced—an automobile parts production worker’s completion of a turn
signal lighting assembly
š Sales amount—a Mary Kay Cosmetics sales professional’s monthly sales revenue
š Reduction in error rate—a word processor’s reduction in typing errors
Second, individual incentive plans are appropriate when employees have sufficient control
over work outcomes. Factors such as frequent equipment breakdowns and delays in receipt
Strategic Compensation: A Human Resource Management Approach, Ninth Edition, by Joseph J. Martocchio. Published by Pearson.
Copyright © 2017 by Pearson Education, Inc.
4-3 Summarize five
types of individual
incentive pay plans.
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TABLE 4-2 Typical Performance Measures for Individual,
Group, and Company-wide Incentive Plans
Individual Incentive Plans
Quantity of work output
Quality of work output
Monthly sales
Work safety record
Work attendance
Group Incentive Plans
Customer satisfaction
Labor cost savings (through gain sharing plans)
Materials cost savings
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Services cost savings (e.g., utilities)
A
Company-wide Incentive Plans
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Operational Measures:
E
Customer satisfaction
Operational efficiency S
Service/quality
,
Safety/occupational injury
Financial Measures:
D
Revenue
E share
Earnings per company stock
Operating income
A
Revenue growth
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D
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employees’ ability
Note: Measures such as safety records and customer satisfaction can be measured on
an individual, group, or company-wide basis according to a company’s objectives.
of raw materials limit
to control their performance levels. Employees are
not likely to be diligent when they encounter interference: Chances are good that employees
who previously experienced interference will expect to encounter interference in the future.
1 because companies will find it difficult to motivate
Employees’ resistance threatens profits
people to work hard when problem factors
1 are not present.
Third, individual incentive plans are
2 appropriate when they do not create a level of unhealthy
competition among workers that ultimately leads to poor quality. For example, a company may
3 the number of incentive awards to only 10 percent of
create unhealthy competition when it limits
the employees who have demonstratedTthe highest levels of performance. If the company judges
performance according to volume, then employees may sacrifice quality as they compete against
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each other to outmatch quantity. In addition, under an incentive plan that rewards quantity of
output, those employees who meet or exceed the highest standard established by their employer
may be subject to intimidation by workers whose work falls below the standard.10 Unions may
use these intimidation tactics to prevent plan standards from being raised.
Defining Individual Incentives
Strategic Compensation: A Human Resource Management Approach, Ninth Edition, by Joseph J. Martocchio. Published by Pearson.
Copyright © 2017 by Pearson Education, Inc.
ISBN 1-323-59381-0
Individual incentive plans reward employees for meeting such work-related performance standards as quality, productivity, customer satisfaction, safety, or attendance. Any one of these
standards by itself or in combination may be used. A company ultimately should employ the
standards that represent work that an employee actually performs. For instance, take the case
of telemarketers. Customer satisfaction and sales volume measures indicate telemarketers’
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performance. Tardiness would not be as relevant unless absenteeism was a general management problem.
Managers should also choose factors that are within the individual employee’s control
when they create individual performance standards. Furthermore, employees must know about
standards and potential awards before the performance period starts. When designed and implemented well, individual incentive plans reward employees based on results for which they are
directly responsible. The end result should be that excellent performers receive higher incentive
awards than poor performers.
Types of Individual Incentive Plans
There are five common types of individual incentive plans:
š
š
š
š
š
Piecework plans
Management incentive plans
Behavioral encouragement plans
Referral plans
Spot bonuses
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PIECEWORK PLANS Companies generally use one of two E
piecework plans.11 The first, which
is typically found in manufacturing settings, rewards employees
based on their individual
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hourly production against an objective output standard and are determined by the pace at which
,
manufacturing equipment operates. For each hour, workers receive piecework incentives for
every item produced over the designated production standard. Workers also receive a guaranteed
hourly pay rate regardless of whether they meet the designated
D production standard. Table 4-3
illustrates the calculation of a piecework incentive.
E a unit is relatively short, usually
Companies use piecework plans when the time to produce
less than 15 minutes, and the cycle repeats continuously. Piecework
plans are usually found in
A
such manufacturing industries as textiles and apparel.
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Quality is also an important consideration. Companies do not reward employees for producD attempt to minimize defect rates
ing defective products. In the apparel industry, manufacturers
because they cannot sell defective clothing for the same price
R as nondefective clothing. Selling
defective clothing at a lower price reduces company profits.
A
The second type of piecework incentive plan establishes individual performance standards that
include both objective and subjective criteria. Units produced represent an objective standard. Overall
work quality is a subjective criterion that is based on supervisors’
1 interpretations and judgments. For
example, supervisors may judge customer service representatives’ performance to be higher when
1
2
TABLE 4-3 Calculation of a Piecework Award for a Garment Worker
3
Piecework standard: 15 stitched garments per hour
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Hourly base pay rate awarded to employees when the standard is not met: $4.50 per hour
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That is, workers receive $4.50 per hour worked regardless of whether they meet the piecework standard
ISBN 1-323-59381-0
of 15 stitched garments per hour.
Piecework incentive award: $0.75 per garment stitched per hour above the piecework standard
Guaranteed
Hourly
K%" %/ SVX
First hour
Second hour
4.50
4.50
Piecework Award
S# 2 %&"
above the Piecework
%&% × ~@ && ~%X
10 garments × $0.75/garment = $7.50
Fewer than 15 stitched garments, thus
piecework award equals $0
Total Hourly
%&&)" SVX
12.00
4.50
Strategic Compensation: A Human Resource Management Approach, Ninth Edition, by Joseph J. Martocchio. Published by Pearson.
Copyright © 2017 by Pearson Education, Inc.
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sales professionals emphasize the benefits of purchasing extended product warranties than when
sales professionals merely mention the availability and price of extended product warranties.
Economists argue that there are two advantages to companies of using piecework plans in
manufacturing settings known as the incentive effect and sorting effect.12 The incentive effect
refers to a worker’s willingness to work diligently to produce more quality output than simply
attending work without putting in the effort. To put this simply, employees earn much less under
the piecework system than they would under a standard hourly pay system. Whereas employees
are certainly expected to perform without an incentive (piece rate), research shows that incentives
often are associated with higher employee performance.
The sorting effect addresses an employee’s choice to stay versus leave his or her employer
for another job, presumably one without an incentive pay contingency. Specifically, a hardworking, highly skilled employee is likely to choose to remain employed under an incentive system
because both diligence and skill presumably contribute to higher quantity and quality of output—
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thus, higher pay.
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MANAGEMENT INCENTIVE PLANS Management
incentive plans award bonuses to managers
when they meet or exceed objectives
T based on sales, profit, production, or other measures
for their division, department, or unit. Management incentive plans differ from piecework
E
plans in that piecework plans base rewards on the attainment of one specific objective,
S require multiple complex objectives. For example,
and management incentive plans often
management incentive plans reward ,managers for increasing market share or reducing their
budgets without compromising the quality and quantity of output. The best-known management
incentive plan is management by objectives (MBO).13 In Chapter 3, MBO was presented as an
D technique for merit pay systems. When MBO is used
outcome-oriented performance appraisal
as part of merit pay systems, superiors
Emake subjective assessments of managers’ performance,
and they use these assessments to determine permanent merit pay increases. When used as
part of incentive programs, superiorsA
communicate the amount of incentive pay managers will
receive based on the attainment of specific
N goals.
D Under behavioral encouragement plans, employees
BEHAVIORAL ENCOURAGEMENT PLANS
receive payments for specific behavioral
R accomplishments (e.g., good attendance or safety
records). For example, companies usually award monetary bonuses to employees who have
A
exemplary attendance records for a specified period. When behavioral encouragement plans
are applied to safety records, workers earn awards for lower personal injury or accident rates
associated with the improper use of
1 heavy equipment or hazardous chemicals. Table 4-4
contains an illustration of a sample behavioral encouragement plan that rewards employees for
1
2
TABLE 4-4 A Sample Behavioral Encouragement Plan that Rewards
3
T
At the end of each 3-month period, employees with exemplary attendance records will receive
monetary incentive awards according to S
the following schedule. Note that the number of days
absent does not refer to such company-approved absences as vacation, personal illness, jury duty,
bereavement leave, military duty, scheduled holidays, and educational leave.
'0 2 F%/"
Absent
250
200
100
50
25
Strategic Compensation: A Human Resource Management Approach, Ninth Edition, by Joseph J. Martocchio. Published by Pearson.
Copyright © 2017 by Pearson Education, Inc.
ISBN 1-323-59381-0
0 (perfect attendance)
1
2
3
4
Monetary Incentive
~% SVX
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excellent attendance. Employees can earn $250 for perfect attendance during a three-month
period. With perfect attendance for an entire year, employees can earn $1,000. Behavioral
encouragement plans have the potential to save companies substantially more money than the
cost of these awards. For example, frequent absenteeism in a company’s workforce could disrupt
production goals and quality. Customers may respond by choosing to make purchases for better
quality products from other companies. Loss of customer bases will have a negative impact on
profitability and reputation that prompts prospective customers to choose alternate sources to
purchase products.
REFERRAL PLANS Employees may receive monetary bonuses under referral plans for referring
new customers or recruiting successful job applicants. Companies commonly rely on referral
bonuses to enhance recruitment of highly qualified employees, particularly when the supply of
highly qualified individuals is low, or the company is experiencing explosive growth. HubSpot,
the developer of inbound marketing software, recently experienced
growth in excess of 80
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percent.14 The company relies heavily on the work of talented software engineers and designers.
In response to this substantial growth, HubSpot offered aA
$30,000 bonus to employees whose
T program expands eligibility to any
referral was hired as a software engineer or designer. This
individual regardless of employment status.
E
A successful referral usually means that companies award bonuses only if hired referrals
S a designated period, often at least
remain employed with the company in good standing beyond
30 days. Referral plans rely on the idea that current employees’
, familiarity with company culture
should enable them to identify viable candidates for job openings more efficiently than employment agencies could because agents are probably less familiar with client companies’ cultures.
Employees are likely to make only those referrals they trulyDbelieve are worthwhile because their
personal reputations are at stake.
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SPOT BONUSES Many organizations today are providingAspot bonuses for critical areas and
talents. Spot bonuses are relatively small monetary gifts provided
to employees for outstanding
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work or effort during a reasonably short period of time. If an employee’s performance has been
exceptional, the employer may reward the worker with aDone-time bonus with an amount as
low as $50. For certain professional jobs it is not unheardR
of for a highly productive worker to
receive $5,000 shortly after a noteworthy achievement. A
Advantages of Individual Incentive Pay Programs
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1 plans. First, individual incentive
There are three key advantages of individual incentive pay
plans can promote the relationship between pay and performance.
As discussed in Chapter 1,
1
employees in the United States are highly motivated by earning money. Employees strive for
2
excellence when they expect to earn incentive awards commensurate with their job performance.
3
Second, individual incentive plans promote an equitable
distribution of compensation
within companies (i.e., the amount employees earn depends
on
their
job performance). The betT
ter they perform, the more they earn. Equitable pay ultimately enables companies to retain the
S a signal that the company approbest performers. Paying better performers more money sends
priately values positive job performance.
A third advantage of individual incentive plans is their compatibility with such individualistic cultures as the United States. Because U.S. employees are socialized to make individual
contributions and be recognized for them, the national culture of the United States probably
enhances the motivational value of individual incentive programs.
Disadvantages of Individual Incentive Pay Programs
Although individual incentive plans can prove effective in certain settings, these programs also
have serious limitations. Supervisors, human resource (HR) managers, and compensation professionals should know about three potential problems with individual incentive plans.
Strategic Compensation: A Human Resource Management Approach, Ninth Edition, by Joseph J. Martocchio. Published by Pearson.
Copyright © 2017 by Pearson Education, Inc.
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First, individual incentive plans possess the potential to promote inflexibility. Because
supervisors determine employee performance levels, workers under individual incentive plans
become dependent on supervisors for setting work goals. If employees become highly proficient
performers, they are not likely to increase their performance beyond their reward compensation.
For example, let’s assume that management defines the maximum incentive award as $500 per
month, which is awarded to employees whose productivity rates 15 percent above the performance standard. Employees who produce more than 15 percent above the production standard
will not receive additional incentive pay beyond the $500. With this design, employees would not
be motivated to further improve their performance.
Second, with merit pay systems, supervisors must develop and maintain comprehensive
performance measures to properly grant incentive awards. Individual incentive programs pose
measurement problems when management implements improved work methods or equipment.
When such changes occur, it will take some time for employees to become proficient performers.
Thus, it will be difficult for companiesGto determine equitable incentive awards, which may lead
to employees’ resistance to the new methods.
A
A third limitation of individual incentive plans is that they may encourage undesirable
workplace behavior when these plansTreward only one or a subset of dimensions that constitute
employees’ total job performance. Let’s
E assume that an incentive plan rewards employees for
quantity of output. If employees’ jobs
Saddress such various dimensions as quantity of output,
quality, and customer satisfaction, employees may focus on the one dimension—in this case,
, pay and thereby neglect the other dimensions.
quantity of output—that leads to incentive
Our focus has been on financial incentive awards. Companies may provide nonfinancial
incentives to employees, including companies such as hotels that operate in a low-paying industry.
D
Hotel chain Joie de Vivre Hospitality does just that. Several times a year, employees are given the
E hotels at no charge and to take full advantage of the
opportunity to stay in any of the company’s
amenities. By assuming the customer A
role, Joie de Vivre Hospitality employees can improve job
performance because they gain a better understanding of their guests’ needs.
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WATCH IT!
If your professor has assigned this,
Rgo to the Assignments section of mymangementlab.com
" b "%/$ %/ 2 2%& %&
A
&%&% &&"#
4-4 Explain two types
of group incentive
plans.
1
GROUP INCENTIVES 1
U.S. employers are increasingly using2teams to get work done. Two main changes in the business environment have led to an increased use of teams in the workplace.15 First, in the 1980s,
3
many more Japanese companies were conducting business in the United States, particularly in
T of Japanese companies was the use of teams, which
the automobile industry. A common feature
contributed to superior product quality.
S Second, team-based job design promotes innovation in
16
Strategic Compensation: A Human Resource Management Approach, Ninth Edition, by Joseph J. Martocchio. Published by Pearson.
Copyright © 2017 by Pearson Education, Inc.
ISBN 1-323-59381-0
the workplace. At Newell Rubbermaid, a manufacturer of such plastic household products as
snap-together furniture and storage boxes, product innovation has become the rule since the implementation of project teams. Team members represent various cross-functional areas, including
research and development (R&D), marketing, finance, and manufacturing. Rubbermaid attributes
the rush on innovation to the cross-fertilization of ideas that has resulted from the work of these
diverse teams.17
Companies that use work teams need to change individualistic compensation practices so
that groups are rewarded for their behavior together.18 Team-based pay plans should accordingly
emphasize cooperation between and within teams, compensate employees for additional responsibilities they often must assume in their roles as members of a team, and encourage team members
to attain predetermined objectives for the team.19 Merit, seniority, or individual incentives do not
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encourage team behaviors and may potentially limit team effectiveness. Experts suggest that traditional pay programs will undermine the ability of teams to function effectively.20 Both merit- and
seniority-based pay emphasize hierarchy among employees, which is incompatible with the very
concept of a team.
Team-based organizational structures encourage team members to learn new skills and
assume broader responsibility than is expected of them under traditional pay structures that are
geared toward individuals. Rather than following specific orders from a supervisor, employees
who work in teams must initiate plans for achieving their team’s production. A pay plan for
teams usually emphasizes cooperation and rewards its members for the additional responsibilities they must take on, as well as the skills and knowledge they must acquire. Chapter 5 will
show how skill- and knowledge-based pay plans can address these additional responsibilities.
Defining Group Incentives
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Group incentive programs reward employees for their collective
performance, rather than for
each employee’s individual performance. Group incentiveAprograms are most effective when
all group members have some impact on achieving the goal,
T even though individual contributions might not be equal. Boeing utilizes a team-based approach to manufacture its model 777
E to the construction of each jet, and
jumbo jet. More than 200 cross-functional teams contribute
the contribution of each individual is clearly not equal. Installing
such interior trim features as
S
upholstery is not nearly as essential to the airworthiness of each jet as are the jobs of ensuring
,
the aerodynamic integrity of each aircraft.
Well-designed group incentive plans ultimately reinforce teamwork, cultivate loyalty to the
company, and increase productivity. For instance, the Morning
D Star Company, which processes
tomato production, is based almost entirely on self-management principles: “We envision an orE
ganization of self-managing professionals who initiate communication and coordination of their
activities with fellow colleagues, customers, suppliers, andAfellow industry participants, absent
directives from others.”21 Annually, each employee negotiates
Na Colleague Letter of Understanding
with other employees who are most affected by his or her work.22 Morning Star leadership believes
D
that voluntary agreements among individuals can produce effective
coordination.
Types of Group Incentive Plans
R
A
Companies use two major types of group incentive plans:
š Team-based or small-group incentive plans. A small1group of employees shares
a financial reward when a specific objective is met.
š Gain sharing plans. A group of employees, generally1a department or work unit,
is rewarded for productivity gains.
2
3
T receives a financial reward for the
individual incentives with one exception. Each group member
attainment of a group goal. There are many kinds of team S
incentive programs. Most companies
23
ISBN 1-323-59381-0
TEAM-BASED OR SMALL-GROUP INCENTIVE PLANS Team-based incentives are similar to
define these programs based on the type of team:
Work (process) teams refer to organizational units that perform the work of the organization on an ongoing basis. Membership is relatively permanent, and members work full time in
the team. Customer service teams and assembly teams on production lines represent excellent
examples of work teams. Work teams are effective when individuals are cross-trained to perform
team members’ work when they are absent. The goal is to maintain consistency in performance
quality (e.g., addressing customer concerns promptly even when one or more team members are
absent) and output (e.g., in the case of assembly teams). Team members ultimately engage in
performance sharing rather than focusing exclusively on one set of tasks. The knowledge and
skill sets required to contribute effectively to the work of a process team can be acquired with
the assistance of person-focused pay, which we discuss in Chapter 5.
Strategic Compensation: A Human Resource Management Approach, Ninth Edition, by Joseph J. Martocchio. Published by Pearson.
Copyright © 2017 by Pearson Education, Inc.
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Project teams consist of a group of people assigned to complete a one-time project.
Members usually have well-defined roles and may work on specific phases of the project,
either full time or in addition to other work responsibilities of the team. Project teams usually
work across such functions as engineering, product development, and marketing to ensure
that the final product meets company specifications in terms of cost, quality, and responsiveness to market demands (e.g., Toyota’s hybrid vehicles). Many individuals collaborated to
ensure the production of cars that rely less on fossil fuels, demonstrate excellent gas mileage,
and offer the same driving experience that people have come to expect of gasoline-powered
automobiles.
Parallel teams, or task forces, include employees assigned to work on a specific task in
addition to normal work duties. The modifier parallel indicates that an employee works on the
team task while continuing to work on normal duties. Also, parallel teams or task forces operate on a temporary basis until their work culminates in a recommendation to top management.
G systems and processes, to select new technology, and to
Task forces are used to evaluate existing
improve existing products. There is some
A evidence that team interactions on complex tasks are
likely to influence creativity more than individual efforts, and group incentive plans may foster
creativity. This especially seems to beTthe case when incentive compensation is truly an add-on,
and independent of employees’ regularEbase pay.24
Teams or groups may ultimatelySreceive incentive pay based on such criteria as customer
satisfaction (i.e., customer service quality), safety records, quality, and production records.
, categories of incentive programs as well (individual,
Although these criteria apply to other
company-wide, and group plans), companies allocate awards to each worker based on the
group’s attainment of predetermined performance standards.
D
Human resource managers must devise methods for allocating incentives to team members.
E
Although the team-based reward is generated
by the performance of the team, the incentive payments are typically distributed to members
of
the team individually. Human resource experts
A
allocate rewards in one of three ways:
N
š Equal incentive payments to all team
D members.
š Differential incentive payments to team members based on their contribution to the team’s
R
performance.
š Differential payments determinedAby a ratio of each team member’s base pay to the total
base pay of the group.
The first method—the equal incentives
payment approach—reinforces cooperation among
1
team members except when team members perceive differences in members’ contributions or
1
performance. The second method—the differential incentive payments approach—distributes
2 performance. Differential approaches obviously can
rewards based to some extent on individual
hinder cooperative behavior. Some employees
may focus on their own performance rather than
3
on the group’s performance because they wish to maximize their income. As a compromise, companies may base part of the incentiveTon individual performance, with the remainder based on
S
the team’s performance. The third disbursement
method—differential payments by ratio of base
pay—rewards each group member in proportion to her or his base pay. This approach assumes
that employees with higher base pay contribute more to the company and so should be rewarded
in accord with that worth.
GAIN SHARING PLANS Gain sharing describes group incentive systems that provide participating
Strategic Compensation: A Human Resource Management Approach, Ninth Edition, by Joseph J. Martocchio. Published by Pearson.
Copyright © 2017 by Pearson Education, Inc.
ISBN 1-323-59381-0
employees with an incentive payment based on improved company performance for increased
productivity, increased customer satisfaction, lower costs, or better safety records.25 Gain sharing
was developed so that all employees could benefit financially from productivity improvements
resulting from the suggestion system. In addition to serving as a compensation tool, most gain
sharing reflects a management philosophy that emphasizes employee involvement. The use of
gain sharing is most appropriate where workplace technology does not constrain productivity
Z
improvements. For example, assembly line workers’ abilities to improve productivity may be
limited. Increasing the speed of the conveyor belts may compromise workers’ safety.
Most gain sharing programs have three components:26
š Leadership philosophy
š Employee involvement systems
š Bonus
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The first component—leadership philosophy—refers to a cooperative organizational climate
that promotes high levels of trust, open communication, and participation. The second component—
employee involvement systems—drives organizational productivity improvements. Employee involvement systems use broadly based suggestion systems. Anyone can make suggestions to a
committee made up of both hourly and management employees who oversee the suggestion implementation. This involvement system also may include other innovative employee involvement pracG
tices (e.g., problem-solving task forces).
The bonus is the third component of a gain sharing plan.
A A company awards gain sharing
bonuses when its actual productivity exceeds its targeted productivity level. The gain sharing
T
bonuses are usually based on a formula that measures productivity that employees perceive
E
as fair and the employer believes will result in improvements
in company performance.
Employees typically receive gain sharing bonuses on a S
monthly basis. Most bonuses range
between 5 and 10 percent of an employee’s base annual pay. A noteworthy exception to this
, plan pays out between 35 and 45
norm is AmeriSteel. On average, AmeriSteel’s gain sharing
percent of base pay.
Although many accounts of gain sharing use can be found
D in the practitioner and scholarly
literature, no one has completed a comprehensive, soundly designed investigation of the effectiveness of gain sharing programs.27 Meanwhile, gainE
sharing programs’ success has been
attributed to company cultures that support cooperation among
A employees.28 Some gain sharing attempts have failed. Such organizational, external environmental and financial information
N
factors, including poor communications within and across departments, highly competitive
D can inhibit effective gain sharing
product markets, and variable corporate profits over time
29
programs. Poor communications will stifle the creativity
R needed to improve the efficiency
of work processes when employees focus exclusively on their own work. Highly competitive
A
product markets often require companies to make frequent changes to their production methods, as in the automobile industry, where such changes occur each year with the introduction
of new models. When companies make frequent or sudden
1 changes, employees must have
time to learn the new processes well before they can offer productive suggestions. Companies
1 do not use gain sharing because
that experience variable profits from year to year most likely
management sets aside as much excess cash as possible in2reserve for periods when profits are
down and excess cash is scarce.
3
The Scanlon, Rucker, and Improshare gain sharing plans are the most common forms
T gain sharing plans developed and
used in companies, and they were also the first types of
used by employers. These plans were adopted wholesale
Sin the early days of gain sharing.
Employers today generally modify one of these traditional plans to meet their needs or adopt
hybrid plans.
THE SCANLON PLAN Joseph Scanlon first developed the gain sharing concept in 1935 as an
employee involvement system without a pay element.30 The hallmark of the Scanlon plan is its
emphasis on employee involvement. Scanlon believed that employees will exercise self-direction
and self-control if they are committed to company objectives and that employees will accept
and seek out responsibility if given the opportunity.31 Current Scanlon plans include monetary
rewards to employees for productivity improvements. Scanlon plans assume that companies will
be able to offer higher pay to workers, generate increased profits for stockholders, and lower
prices for consumers. The Scanlon plan is a generic term referring to any gain sharing plan that
Strategic Compensation: A Human Resource Management Approach, Ninth Edition, by Joseph J. Martocchio. Published by Pearson.
Copyright © 2017 by Pearson Education, Inc.
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has characteristics common to the original gain sharing plan devised by Scanlon. Scanlon plans
have the following three components:32
š An emphasis on teamwork to reduce costs, assisted by management-supplied information
on production concerns.
š Suggestion systems that route cost-saving ideas from the workforce through a labor–
management committee that evaluates and acts on accepted suggestions.
š A monetary reward based on productivity improvements to encourage employee
involvement.
Scanlon plan employee involvement systems include a formal suggestion program structured at two levels. Production-level committees, usually including a department foreman
or supervisor and at least one elected worker, communicate the suggestion program and its
reward features to workers. Production committee members encourage and assist workers in
G suggestions for consideration. Production committees
making suggestions and formally record
may also reject suggestions that are A
not feasible, but they must provide a written explanation
of the reasons for the rejection to theTworker who made the suggestion. Providing the written
rationale under this circumstance is key to helping employees understand why the suggestions
Enot discouraged from making suggestions in the future.
are not feasible and, thus, workers are
After employees’ suggestions have been
S fully implemented, they typically receive bonuses on
a monthly basis.
,
The production committee forwards appropriate suggestions to a company-wide screening
committee, which also includes worker representatives. This committee reviews suggestions
referred by the production committees,
D serves as a communications link between management
and employees, and reviews the company’s performance each month.
Actual gain sharing formulas areEdesigned to suit the individual needs of the company.33
Formulas are usually based on the ratio
A between labor costs and sales value of production
(SVOP).34 The SVOP is the sum of sales
N revenue plus the value of goods in inventory.
Smaller Scanlon ratios indicate that labor costs are lower relative to SVOP. Companies
D 4-5 illustrates. In addition, Table 4-5 shows the calcudefinitely strive for lower ratios, as Table
lation for a bonus distribution under aRScanlon plan.
A plan, the Rucker plan was developed by Allan W.
THE RUCKER PLAN Similar to Scanlon’s
Strategic Compensation: A Human Resource Management Approach, Ninth Edition, by Joseph J. Martocchio. Published by Pearson.
Copyright © 2017 by Pearson Education, Inc.
ISBN 1-323-59381-0
Rucker in 1933. Both the Scanlon and Rucker plans emphasize employee involvement and
provide monetary incentives to encourage employee participation. The main difference lies in
1
the formula used to measure productivity. Rucker plans use a value-added formula to measure
1 between the value of the sales price of a product and
productivity. Value added is the difference
the value of materials purchased to 2
make the product. The following example illustrates the
concept of value added based on the sequence of events that eventually lead to selling bread
3
to consumers. These events include growing the wheat, milling the wheat, adding the wheat to
T the bread to consumers.
other ingredients to make bread, and selling
A farmer grows the wheat and sells
S it to a miller; the added value is the difference in the income the farmer receives for the wheat and the costs incurred for purchasing seed, fertilizer, fuel,
and other supplies. The miller, in turn, buys the wheat from the farmer, mills it, and then sells it
to a bakery. The difference in the cost of buying the wheat and the price it is sold for to the baker
is the amount of “value” the miller “adds” in the milling processes. The same process is repeated
by the baker, as the flour that was milled by the miller is mixed with other ingredients, baked,
and sold as bread either to the consumer or to a retailer who in turn sells it to the consumer. The
baker “adds value” by blending in the other ingredients to the flour and baking the bread. If the
bread is sold to the consumer through a retailer, then the retailer also “adds value” by buying
the bread from the bakery, transporting it to a store convenient for the consumer, displaying the
bread, and selling it. The total of all the added values from each step along the way equals the
total contribution to the overall economy from the chain of events.35
Z
TABLE 4-5 Illustration of a Scanlon Plan
For the period 2012–2014, the labor costs of XYZ Manufacturing Company have averaged
$44,000,000 per year. During the same 3-year period, the sales value of XYZ’s production (SVOP)
averaged $83,000,000 per year. (As an aside, of the $83,000,000, $65,000,000 represents sales
revenue and $18,000,000 represents the value of goods held in inventory.) The Scanlon ratio for
XYZ Manufacturing Company is:
$44,000,000/$83,000,000 = 0.53
The ratio of 0.53 is the base line or standard. Any benefits that result from an improvement in production
methods produce results. Labor cost savings are shared with workers. In other words, when improvements
lead to a Scanlon ratio that is lower than the standard of 0.53, employees will receive gain sharing bonuses.
The operating information for XYZ Manufacturing Company for March 2015 was as follows:
Total labor costs
SVOP
G
$3,100,000
A
$7,200,000
T
E
$3,100,000
= 0.43
S
$7,200,000
The Scanlon ratio for March 2015 was less than the standard of,0.53. In order for there to be a payThe Scanlon ratio, based on March 2015 information was
out, labor costs for March 2015 must be less than $3,816,000 (i.e., 0.53 × $7,200,000); $3,816,000
represents allowable labor costs for March 2015 based on the Scanlon standard established for XYZ
D
Manufacturing.
E The actual labor costs were
In summary, the allowable labor costs for March 2015 were $3,816,000.
$3,100,000. Thus, the savings $716,000 ($3,816,000–$3,100,000)Ais available for distribution as a bonus.
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N
The following ratio is used to determine whether bonusesDwill be awarded under a Rucker plan:
Value added
R
Total employment costs
A
In contrast to the Scanlon ratio, companies prefer a larger Rucker ratio. A larger Rucker ratio indicates that the value added is greater than total employment costs. Table 4-6 illustrates the
1
calculation for bonus distribution under the Rucker plan.
1 Productivity through Sharing—
Invented by Mitchell Fein in 1973, Improshare—Improved
measures productivity physically rather than in terms of 2
dollar savings like those used in the
Scanlon and Rucker plans. These programs aim to produce more products with fewer labor
3
hours. Under Improshare, the emphasis is on providing employees
with an incentive to finish
products. The Improshare bonus is based on a labor hour
T ratio formula. A standard is determined by analyzing historical accounting data to find the
S number of labor hours needed to
complete a product. Productivity is then measured as a ratio of standard labor hours and actual
labor hours. Unlike the Rucker and Scanlon plans, employee participation is not a feature, and
workers receive bonuses on a weekly basis.
In summary, the Scanlon, Rucker, and Improshare plans are among the best-known kinds of
gain sharing programs that are used by companies. Although the principle underlying these different
plans is the same (i.e., a group incentive system that provides all or most employees a bonus payment based on improved performance), they each rest on slightly different assumptions.
Advantages of Group Incentives
The use of group incentive plans has two advantages for companies. First, companies can more
easily develop performance measures for group incentive plans than they can for individual
Strategic Compensation: A Human Resource Management Approach, Ninth Edition, by Joseph J. Martocchio. Published by Pearson.
Copyright © 2017 by Pearson Education, Inc.
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TABLE 4-6 Illustration of a Rucker Plan
Calculating the Standard:
For the 2012 – 2015 period, ABC Manufacturing Company generated average net sales of $7,500,000.
The company paid $3,200,000 for materials, $250,000 for sundry supplies, and $225,000 for such
services as liability insurance, basic maintenance, and utilities. On the basis of these data, average
value added was $3,825,000 (i.e., net sales – costs of materials, supplies, and services rendered), for
this example, $7,500,000 - ($3,200,000 + $250,000 + $225,000).
For the same period, average total employment costs were $2,400,000, which includes hourly
wages for nonexempt workers, annual salaries for exempt employees, payroll taxes, and all benefit
costs. Based on the Rucker formula, the ratio of value added to total employment costs was 1.59
($3,825,000/$2,400,000).
If there are to be bonuses at the end of 2016, each dollar attributed to employment costs must be
accompanied by creating at least $1.59 of
Gvalue added.
Value A
added
Total employment costs
T
E
S $3,825,000
$2,400,000
,
Applying the Standard to a 2016 Performance:
$3,825,000
$2,400,000
The Rucker ratio, based on this information, was:
= 1.59
The operating information for ABC Manufacturing Company for 2016 was as follows:
Value D
added
Total employment
costs
E
$670,000
$625,000
The Rucker ratio, based on 2016 data, was:
A
N $670,000 = 1.07
D $625,000
This Rucker ratio for 2016 was less than the standard of 1.59. In order for there to be a payout, value
R
added for 2016 must be more than the standard, which would be $1,065,300 (1.59 × $670,000).
However, based on the Rucker ratio obtained
A for this month (1.07), value added was only $716,900
(1.07 × $670,000). Therefore, employees of ABC Manufacturing will not receive any gain sharing
bonuses based on 2016 performance.
1
1
incentive plans. There are obviously fewer
2 groups in a company than individuals. Thus, companies generally use fewer resources (e.g., staff time) to develop performance measures. In addition,
3 makes the most sense because companies must deliver
judging the quality of the final product
high-quality products to maintain competitiveness.
During the late 1970s and early 1980s, U.S.
T
automobile manufacturers lost substantial market share to foreign automobile manufacturers
S
because foreign automakers marketed automobiles of substantially higher quality than U.S. automakers. The trend did not change until U.S. automakers manufactured high-quality vehicles on a
consistent basis.
Greater group cohesion is the second advantage associated with group incentive plans.36
Cohesive groups usually work more effectively toward achieving common goals than do individual
group members focusing on the specific tasks for which they are responsible. Working collaboratively is undoubtedly in group members’ best interests in order to maximize their incentive awards.
The main disadvantage of group incentive compensation is employee turnover. Companies’
implementation of group incentive programs may lead to turnover because of the free-rider
Strategic Compensation: A Human Resource Management Approach, Ninth Edition, by Joseph J. Martocchio. Published by Pearson.
Copyright © 2017 by Pearson Education, Inc.
ISBN 1-323-59381-0
Disadvantages of Group Incentives
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effect. Some employees may make fewer contributions to the group goals because they possess
lower ability, skills, or experience than other group members. In some groups, members may
deliberately choose to put forth less effort, particularly when each group member receives the
same incentive compensation regardless of individual contributions to the group goals. In any
case, the free-rider effect initially leads to feelings of inequity among those who make the greatest contributions to the attainment of the group goal. Over time, members who make the greatest
contributions are likely to leave.
Group members may feel uncomfortable with the fact that other members’ performance influences their compensation level. Exemplary performers are more likely to feel this way when
other group members are not contributing equally to the attainment of group goals. The lower
performance of a few group members may lead to lower earnings for all members of the group.
Discomfort with group incentive plans is likely to be heightened where incentive compensation
represents the lion’s share of core compensation.
G
A
COMPANY-WIDE INCENTIVES T
The use of company-wide incentive plans can be traced to the nineteenth century. Companies
E
instituted profit sharing programs to ease workers’ dissatisfaction
with low pay and to change
S
their beliefs that company management paid workers substandard
wages while earning substantial profits. Quite simply, management believed that workers
, would be less likely to challenge
managerial practices if they received a share of company profits.
Defining Company-wide Incentives
D
Company-wide incentive plans reward employees when E
the company exceeds minimum acceptable performance standards (e.g., profits or the overall value of the company based on its
A management sought methods to
stock price). As competitive pressures on companies increased,
improve employee productivity. Companies presently use N
company-wide incentive programs to
motivate employees to work harder for increased profits or increased company value to owners.
D
Advocates of company-wide incentive plans believe that well-designed programs make workers’
and owners’ goals more compatible as workers strive towardRincreasing company profits or value.
A
Types of Company-wide Incentive Plans
Companies use two major types of company-wide incentive plans:
1
š Profit sharing plans. Employees earn a financial reward when their company’s profit
1
objective is met.
š Employee stock option plans. Companies grant employees
2 the right to purchase shares
of company stock.
3
T
separate from base pay, cost-of-living adjustments, or permanent merit pay increases. Two basic
S profit sharing plans award cash
kinds of profit sharing plans are used widely today. First, current
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PROFIT SHARING PLANS Profit sharing plans pay a portion of company profits to employees,
to employees, typically on a quarterly or annual basis. Current profit sharing represents a form of
short-term incentive because of the frequency of payout potential. Second, deferred profit sharing
plans place cash awards in trust accounts for employees. These trusts are set aside on employees’
behalf as a source of retirement income, and can also be considered a long-term incentive. Aircraft
manufacturer Boeing offers current profit sharing plans to all employee groups, except for ones
that are represented by labor unions. Under the plan, nonmanagement employees can earn from
1 to 20 days of regular pay.37 In 2015, nonmanagement employees were granted 12.5 days’ extra
pay.38 Management employees received awards that ranged from 12.5 to 22.5 of their salaries.
Calculating Profit Sharing Awards HR professionals determine the pool of profit sharing
money with any of three possible formulas. A fixed first-dollar-of-profits formula uses a specific
Strategic Compensation: A Human Resource Management Approach, Ninth Edition, by Joseph J. Martocchio. Published by Pearson.
Copyright © 2017 by Pearson Education, Inc.
4-5 Discuss two
types of companywide incentive plans.
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percentage of annual profits, contingent upon the successful attainment of a company goal. For
instance, a company might establish that the profit sharing fund will equal 7 percent of corporate
profits; however, payment is contingent on a specified reduction in scrap rates.
Second, companies may use a graduated first-dollar-of-profits formula instead of a fixed
percentage. For example, a company may choose to share 3 percent of the first $8 million of
profits and 6 percent of the profits in excess of that level. Graduated formulas motivate employees to strive for extraordinary profit targets by sharing even more of the incremental gain.
Third, profitability threshold formulas fund profit sharing pools only if profits exceed a predetermined minimum level but fall below some established maximum level. Companies establish
minimums to guarantee a return to shareholders before they distribute profits to employees. They
establish maximums because they attribute any profits beyond this level to factors other than
employee productivity or creativity (e.g., technological innovation).
After management selects a funding formula for the profit sharing pool, they must consider
how to distribute pool money amongG
employees. Companies usually make distributions in one
of three ways: equal payments to all A
employees, proportional payments to employees based on
annual salary, and proportional payments to employees based on their contribution to profits.
T a belief that all employees should share equally in the
Equal payments to all employees reflect
company’s gain in order to promote E
cooperation among employees; however, employee contributions to profits probably vary. Most
S employers accordingly divide the profit sharing pool
among employees based on a differential basis.
Companies may disburse profits, based on proportional payments to employees based on
their annual salaries. As we will detail in Chapters 6 and 7, salary levels vary based on both
internal and external factors; in general, the higher the salary, the more value the company asD
signs to a job. Higher-paying jobs presumably indicate more potential to influence a company’s
E pay will differ according to performance or seniority.
competitive position. For any given job,
Chapter 3 notes that higher performance
A levels and seniority result in greater worth.
Still another approach is to disburse profits as proportional payments to employees based on
N
their contribution to profits. Some companies
measure employee contributions to profit based on
D is not very feasible because it is difficult to isolate each
job performance; however, this approach
employee’s contributions to profits. For
R example, how does a secretary’s performance (based
on answering telephones, greeting visitors, and typing memos) directly contribute to company
A
performance?
Advantages of Profit Sharing Plans The use of a profit sharing plan has two main
1 other for companies. When properly designed, profit
advantages, one for employees and the
sharing plans enable employees to share
1 in companies’ fortunes. As employees benefit from
profit sharing plans, they will be more likely to work productively to promote profits. The upshot
2
of enhanced employee productivity obviously
is greater profits for companies that use profit
sharing plans.
3
Companies that use profit sharing programs gain greater financial flexibility. As we disT
cussed, monetary payouts to employees vary with profit levels. During economic downturns,
S they are during economic boom periods. This feature
payout levels are significantly lower than
of profit sharing plans enables companies to use limited cash reserves where needed (e.g., for
R&D activities).
Strategic Compensation: A Human Resource Management Approach, Ninth Edition, by Joseph J. Martocchio. Published by Pearson.
Copyright © 2017 by Pearson Education, Inc.
ISBN 1-323-59381-0
Disadvantages of Profit Sharing Plans There are two main disadvantages associated with
profit sharing plans. The first one directly affects employees; the second affects companies. Profit
sharing plans may undermine the economic security of employees, particularly if profit sharing
represents a sizable portion of direct compensation. Because company profits vary from year to
year, so do employees’ earnings. Thus, employees will find it difficult to predict their earnings,
which will affect their saving and buying behavior. If there is significant variability in earnings,
a company’s excellent performers are likely to leave for employment with competitors. The
turnover of excellent performers certainly represents a significant disadvantage to companies.
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Employers also find profit sharing programs to be problematic under certain conditions.
Profit sharing plans may fail to motivate employees because they do not see a direct link between
their efforts and corporate profits. Hourly employees in particular may have trouble seeing this
connection because their efforts appear to be several steps removed from the company’s performance. For instance, an assembly line worker who installs interior trim (e.g., carpeting and seats)
in automobiles may not find any connection between his or her efforts and the level of company
profits because interior trim represents just one of many steps in the production of automobiles.
EMPLOYEE STOCK OPTION PLANS Employee stock option plans represent a long-term
company-wide incentive plan that provide employees with stock options. Under these plans,
companies grant employees the right to purchase shares of company stock. Company stock
represents total equity of a company. Company stock shares represent equity segments
of equal value. Equity interest increases positively with the number of stock shares. Stock
options describe an employee’s right to purchase company
G stock. Employees do not actually
own stock until they exercise the stock option rights. This is done by purchasing stock at a
A usually no more than 10 years.
designated price after a company-chosen time period lapses,
Employee stock options provide an incentive to work Tproductively, with the expectation
that collective employee productivity will increase the value of company stock over time.
E
Employees earn monetary compensation when they sell the stock at a higher price than they
S
originally paid for it.
,
DESIGNING INCENTIVE PAY PROGRAMS
D
When designing an incentive pay plan, HR professionals and line managers should consider five
E
key factors:
š
š
š
š
š
A
Whether the plan should be based on group or individual employee performance.
The level of risk employees will be willing to accept inNtheir overall compensation package.
Whether incentive pay should replace or complement traditional
pay.
D
The criteria by which performance should be judged.
R
The time horizon for goals—long term, short term, or a combination of both.
A
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Group versus Individual Incentives
Companies considering various design alternatives should choose a design that fits the structure
1
of the company. Group incentive programs are most suitable where the nature of the work is
1 are difficult to measure. In such
interdependent and the contributions of individual employees
situations, companies require cooperative behavior among2their employees. Companies may be
able to encourage team behavior by linking compensation to the achievement of department or
3
division goals and eliminating from the pay determination process such factors that are outside
the group’s control as the late delivery of raw materials by T
an independent vendor.
On the other hand, individual incentive plans reward S
employees for meeting or surpassing
such predetermined individual goals as production or sales quotas. The attainment of individual
goals should be well within employees’ grasp as is the case for group incentives. Moreover, goals
for individual incentive programs should be based on independent work rather than interdependent
work. For example, it would be appropriate to base an employee’s incentive on typing accuracy
because the work can be performed independently and there are few external constraints on an
employee’s ability to complete such work. At the group level, it would be reasonable to provide
incentives to the individual members of a sales team. In the case of computer hardware and networks, the sale and implementation of these products involve a team of marketing professionals
and technical experts who depend on the others’ expertise to identify the appropriate configuration
of hardware and networking equipment (i.e., meeting the client’s needs) and to install the equipment in the client’s company successfully.
Strategic Compensation: A Human Resource Management Approach, Ninth Edition, by Joseph J. Martocchio. Published by Pearson.
Copyright © 2017 by Pearson Education, Inc.
4-6 Summarize
considerations when
designing incentive
pay programs.
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Level of Risk
Careful consideration should be given to the level of risk employees are willing to accept.
As mentioned previously, incentive pay may complement base salary or may be used in place
of all or a portion of base salary. The level of risk clearly increases as incentive pay represents a
greater proportion of total core compensation. The level of risk tends to be greater among higherlevel employees than among those who are at the lower levels of a company’s job structure. It is
reasonable to infer that the attainment of a first-line supervisor’s goal of maintaining a packing
department’s level of productivity above a predetermined level is less risky than the achievement
of a sales manager’s goal of increasing market share by 10 percent in a market where the competition is already quite stiff. Apart from an employee’s rank, the level of risk chosen should depend
on the extent to which employees control the attainment of the desired goal. The adoption of
incentive pay programs makes the most sense when participants have a reasonable degree of control over the attainment of the plan’s goals. Incentive programs logically are bound to fail when
G they are too difficult or because extraneous factors are
the goals are simply out of reach because
hampering employees’ efforts to meet A
goals.
T
E
When complementing base pay, a company awards incentive pay in addition to an employee’s
S companies may reduce base pay by placing the reduced
base pay and benefits. On the other hand,
portion at risk in an incentive plan. For
, instance, if a company grants its employees 10 percent
Complementing or Replacing Base Pay
raises each year, the company could, instead, grant its employees a 4 percent cost-of-living
increase and use the remaining 6 percent as incentive by awarding none of it to below-average
Dwhose performance is average, and the entire 6 percent to
performers, only half of it to employees
employees whose performance is above
E average. In this scenario, the 6 percent that was expected
by the employees to become part of their base pay is no longer a guarantee because that potential
A
salary has been placed at risk. By introducing
risk into the pay program, employees have the potential to earn more than the 6 percentN
because poor performers will receive less, leaving more to
be distributed to exemplary performers.
D
Companies in such cyclical industries as retail sales could benefit by including an incentive
component in the core compensationR
programs they offer to employees. During slow business
periods, the use of regular merit pay A
programs that add permanent increments to base pay can
create budget problems. If incentive pay were used instead of permanent merit raises, then the
level of expenditure on compensation would vary with levels of business activity. In effect, the
use of incentive pay can lower payroll1costs during lean periods and enhance the level of rewards
when business activity picks up.
1
2
3
As seen in the discussion of performance appraisal in Chapter 3, the measures used to appraise
T be quantifiable and accessible. For incentive pay proemployee performance obviously should
grams, common measures of employee
S performance are company profits, sales revenue, and
Performance Criteria
Strategic Compensation: A Human Resource Management Approach, Ninth Edition, by Joseph J. Martocchio. Published by Pearson.
Copyright © 2017 by Pearson Education, Inc.
ISBN 1-323-59381-0
number of units produced by a business unit. The measures chosen preferably should relate to
the company’s competitive strategy. For instance, if a company is attempting to enhance quality, its incentive plan would probably reward employees on the basis of customer satisfaction
with quality.
In reality, more than one performance measure may be relevant. In such instances, a company is likely to employ all of the measures as a basis for awarding incentives. The weighting
scheme would reflect the relative importance of each performance criterion to the company’s
competitive strategy [e.g., company performance (10 percent), unit performance (40 percent),
and individual performance (50 percent), incorporating all of the organizational levels]. An
employee clearly would receive an incentive even if company or departmental performance
was poor. In effect, the relative weights are indicative of the degree of risk to an employee that
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is inherent in these plans. Compared with the previous example, the following plan would be
quite risky: 50 percent company performance, 35 percent departmental performance, and 15
percent individual performance. Employees’ earnings would depend mainly on company and
departmental performance over which they possess less control than they do over their own
performance.
Time Horizon: Short Term versus Long Term
A key feature of incentive pay plans is the time orientation. There are no definitive standards to
distinguish between short term and long term. A general rule of thumb is that short-term goals
generally can be achieved in five years or less and that long-term goals may require even longer.
Most companies offer one or more short-term plans.39 Among the most popular plans are spot
awards, profit sharing, and team-based incentives.
On the other hand, incentive programs for professionals and executives also have a longterm orientation. Stock option plans are among the mostG
commonly used.40 For instance, rewarding an engineer’s innovation in product design requires
A a long-term orientation because
it takes an extended amount of time to move through the series of steps required to bring the
T
innovation to the marketplace (e.g., patent approval, manufacturing, and market distribution).
E horizon because their success is
The incentives that executives receive are based on a long-term
matched against the endurance of a company over time. S
,
COMPENSATION IN ACTION
D
E
The use of incentive pay by an employer can be an effective way
to tie individual or team performance to compensation. ManyA
of the items in the Action Checklist are critical to the proper
N
formation and administration of an incentive pay program (i.e.,
accurate criteria and measurement along with ongoing andD
honest performance discussions). Once this critical foundation is
R
established, line managers and HR and compensation specialists
must ensure that the plan is understood by employees and theyA
can see the link between their performance and the portion of
pay at risk.
1
Action checklist for line managers and HR—
1
establishing an incentive pay program
2
HR takes the lead
3
Work with compensation specialists on your team to
T
benchmark industry competitors to identify whether
individual, group, or company-wide programs are being
S
used (to stay current with trends and ensure that the best
people are retained).
Work with line managers, based on the chosen program
(individual, group, or company-wide), to choose which
types of plan are utilized.
Hold roundtable discussions with employees to gather
feedback on the proposed program and to identify
potential areas where additional buy-in may be necessary.
Line managers take the lead
Work with HR to identify the desired behavior(s) you want
to tie to incentives—ensuring that the focus on these
behaviors does not come at the expense of other desired
outcomes.
Seek the education of HR to understand limitations of the
chosen plan and how to overcome some of the potential
pitfalls; plan should be monitored and/or tailored if these
obstacles lead to the wrong behaviors being rewarded.
Provide proper information to HR so that a communication plan is created for rollout and implementation of the
program—HR will form frequently asked questions (FAQs)
and talking points that detail rationale for the change.
ISBN 1-323-59381-0
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Strategic Compensation: A Human Resource Management Approach, Ninth Edition, by Joseph J. Martocchio. Published by Pearson.
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Summary
Learning Objective 1: Incentive pay or variable
pay is defined as compensation, other than base wages
or salaries, which fluctuates according to employees’
attainment of some standard, such as a preestablished formula, individual or group goals, or company
earnings.
and can be quantified objectively such as by sales volume
or number of units produced.
Learning Objective 2: In traditional pay plans, employees receive compensation based on a fixed hourly
pay rate or annual salary. Annual raises are added
to base pay according to seniority or a supervisor’s
evaluation of past performance. In incentive plans,
employees receive one-time payments that correspond
to the level of performance attainment based on objective goals.
Learning Objective 5: Company-wide incentive plans
tie employee compensation to a company’s performance
over a relatively short time frame, not uncommonly, from
three months to five years.
Learning Objective 3: Individual incentive plans reward employees whose work is performed independently
Key Terms
incentive pay 77
variable pay 77
piecework plans 81
incentive effect 82
sorting effect 82
management incentive plans 82
behavioral encouragement plans 82
referral plans 83
spot bonuses 83
Learning Objective 4: Group incentive plans promote
supportive, collaborative behavior among employees. In
general, members of a group or team receive the same
incentive award for the group’s performance.
G
Learning
Objective 6: Compensation professionals
A
give consideration to at least five important factors when
T
designing
effective incentive pay plans. These include:
(a)
E group versus individual incentives, (b) level of risk,
(c) compensating or replacing base pay, (d) performance
S
criteria, and (e) short- or long-term time horizon.
,
D
E
group incentive programs
A
team-based incentives 85
gain sharing 86 N
Scanlon plan 87 D
sales value of production
R
(SVOP) 88
A
Rucker plan 88
value-added formula
Improshare 89
88
85
labor hour ratio formula 89
free-rider effect 90
profit sharing plans 91
current profit sharing 91
deferred profit sharing 91
employee stock option plans 93
company stock 93
company stock shares 93
stock options 93
1
1
2
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S
to complete the Chapter Quiz! and see what you’ve learned.
Discussion Questions
plans. Identify two jobs for which individual incentive pay is appropriate and two jobs for which
individual incentive pay is inappropriate. Be sure
to include your justification.
4-3. Critics of profit sharing plans maintain that these
plans do not motivate employees to perform at
Strategic Compensation: A Human Resource Management Approach, Ninth Edition, by Joseph J. Martocchio. Published by Pearson.
Copyright © 2017 by Pearson Education, Inc.
ISBN 1-323-59381-0
4-1. Indicate whether you agree or disagree with the
following statement: “Individual incentive plans
are less preferable than group incentives and
company-wide incentives.” Explain your answer.
4-2. There is currently a tendency among business
professionals to endorse the use of incentive pay
Z
higher levels. Under what conditions are profit
sharing plans not likely to motivate employees?
4-4. Unlike individual incentive programs, group
and company-wide incentive programs reward
individuals based on group (e.g., cost savings
in a department) and company-wide (e.g., profits) performance standards, respectively. Under
group and company-wide incentive programs, it
97
is possible for poor performers to benefit without making substantial contributions to group or
company goals. What can companies do to ensure that poor performers do not benefit?
4-5. Opponents of incentive pay programs argue that
these programs manipulate employees more than
seniority and merit pay programs. Discuss your
views of this statement.
CASE
Individual or Team Reward?
G
A
Jack Hopson has been making wood furniture for more than 10 years. He recently joined Metropolitan
TJack likes working for Sally because she
Furniture and has some ideas for Sally Boston, the company’s CEO.
is very open to employee suggestions and is serious about making the
E company a success. Metropolitan is currently paying Jack a competitive hourly pay rate for him to build various designs of tables and chairs. However,
S
Jack thinks that an incentive pay plan might convince him and his coworkers
to put forth more effort.
At Jack’s previous employer, a competing furniture maker, Jack
was
paid
on a piece-rate pay plan. The
,
An additional Supplemental Case can be found on MyManagementLab.
company paid Jack a designated payment for every chair or table that he completed. Jack felt this plan provided him an incentive to work harder to build the furniture pieces. Sally likes Jack’s idea; however, Sally
is concerned about how such a plan would affect the employees’ need
D to work together as a team.
While the workers at Metropolitan build most furniture pieces individually, they often need to pitch in
E but as a delivery date approaches for a
and work as a team. Each worker receives individual assignments,
preordered furniture set due to a customer, the workers must helpA
each other complete certain pieces of the
set to ensure on-time delivery. A reputation for on-time delivery differentiates Metropolitan from its competitors. Several companies that compete against Metropolitan have aN
reputation of late deliveries, which gives
Metropolitan a competitive edge. Because their promise of on-time
Ddelivery is such a high priority, Sally is
concerned that a piece-rate pay plan may prevent employees from working together to complete furniture sets.
Sally agrees with Jack that an incentive pay plan would helpRboost productivity, but she thinks that a
team-based incentive pay plan may be a better approach. She has
A considered offering a team-based plan
that provides a bonus payment when each set of furniture is completed in time for scheduled delivery.
However, after hearing from Jack about the success of the piece-rate pay plan at his previous employer, she
is unsure of which path to take.
1
1
Questions:
4-6. What are some advantages of offering a piece-rate pay2plan to the furniture builders at
Metropolitan Furniture?
3
4-7. What are some advantages of offering a team-based incentive
pay plan?
4-8. What do you think Sally should do?
T
S
Crunch the Numbers!
Calculating Piecework Pay Awards
& %&% '& '0"1 " %& 0 2'& & mymanagementlab.com.
ISBN 1-323-59381-0
N
Table 4-3 illustrates the calculation of a piecework award for a garment worker who has completed two
hours of service. Over the course of a six-hour shift, his productivity varies:
First hour: 10 garments above the hourly standard
Second hour: no garments above the hourly standard
Third hour: 15 garments above the hourly standard
Strategic Compensation: A Human Resource Management Approach, Ninth Edition, by Joseph J. Martocchio. Published by Pearson.
Copyright © 2017 by Pearson Education, Inc.
98
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Fourth hour: 13 garments above the hourly standard
Fifth hour: 9 garments above the hourly standard
Sixth hour: 3 garments above the hourly standard
Questions:
4-9. Calculate the worker’s total earnings for his shift.
4-10. How many dollars did the garment worker earn in incentive payments?
4-11. On the following day, the garment worker completed a six-hour shift, but did not exceed the standard
at any time during this shift. How much did he earn for the day?
MyManagementLab
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writing questions as well as the following
G
Assisted-graded writing questions:
A
4-12. How can incentive pay systems, when properly applied, contribute to companies
meeting the goals of lowestTcost and differentiation strategies?
4-13. Considering our discussion E
of employee roles in strategic compensation (Chapter 1),
how can companies explainSemployees’ contributions to company profits? How
would the conversation go with administrative staff members compared to sales
,
professionals?
4-14. MyManagementLab Only – comprehensive writing assignment for this chapter.
D
E
Endnotes
A
1. Peck, C. (1993). Variable Pay: Nontraditional
Programs for Motivation and Reward. New York:
N
The Conference Board.
2. Gómez-Mejía, L. R., & Balkin, D. R.D
(1992). Compensation, Organizational Strategy and Firm
Performance. Cincinnati, OH: South-Western.
R
3. Kinchen, D. M. (2014). Lincoln Electric Celebrates 81 Uninterrupted Years of Paying Employee
Profit-Sharing Bonus (December 13).AAvailable: https://davidkinchen.files.wordpress.com, accessed
Strategic Compensation: A Human Resource Management Approach, Ninth Edition, by Joseph J. Martocchio. Published by Pearson.
Copyright © 2017 by Pearson Education, Inc.
ISBN 1-323-59381-0
February 5, 2015.
4. Lincoln Electric. (2015). I Choose Lincoln…. Available: www.lincolnelectric.com, accessed
1
February 5, 2015.
5. Southwest Airlines. (2015). WorkPerks.
1Available: http://www.southest.com, accessed February 23, 2015.
6. Blasi, J., & Freeman, R. (2014). Southwest Airlines’ profit-sharing payout: What capitalism should
2
be. Fortune (April 14). Available: http://www.fortune.com,
accessed February 23, 2015.
7. WorldatWork and Deloitte Consulting
LLP
(2014).
Incentive
Pay Practices Survey: Publicly Traded
3
Companies (February). Available: http://www.worldatwork.org, accessed February 12, 2015.
8. Abosch, K. (2014). Making the mostT
of your variable pay program. Workspan (November): 30–34.
9. WorldatWork and Deloitte Consulting
SLLP (2014). Incentive Pay Practices Survey: Publicly Traded
Companies (February). Available: http://www.worldatwork.org, accessed February 12, 2015.
10. Dulles, F. R., & Dubofsky, M. (1984). Labor in America: A History (4th ed.). Arlington Heights, IL:
Harlan Davidson.
11. Peck, Variable Pay.
12. Lazear, E. P. (1998). Personnel Economics for Managers. New York: John Wiley & Sons.
13. Drucker, P. (1954). The Practice of Management. New York: Harper.
14. Fleishman, H. (2013). HubSpot launches $30,000 referral program for developers and designers.
(HubSpot Company News). Available: http://www.hubspot.com/company-news/, accessed
December 3, 2014.
15. Jackson, S. E. (1992). Team composition in organizational settings: Issues in managing an increasingly
diverse workforce. In S. Worchel, W. Wood & J. A. Simpson (Eds.), Group Process and Productivity
(pp. 138–173). Newbury Park, CA: Sage.
Z
ISBN 1-323-59381-0
16. Kanter, R. M. (1988). When a thousand flowers bloom: Structural, collective, and social conditions
for innovation in organizations. In B. M. Staw & L. L. Cummings (Eds.), Research in Organizational
Behavior (Vol. 10, pp. 169–211). Greenwich, CT: JAI.
17. Newell Rubbermaid (2015). Design Center. Available: http:// http://design.newellrubbermaid.com/
index.html, accessed January 31, 2015.
18. Worchel, S., Wood, W., & Simpson, J. A. (Eds.). (1992). Group Process and Productivity. Newbury
Park, CA: Sage.
19. Kanin-Lovers, J., & Cameron, M. (1993). Team-based reward systems. Journal of Compensation and
Benefits, January–February, pp. 55–60.
20. Schuster, J. R., & Zingheim, P. K. (1993). Building pay environments to facilitate high-performance
teams. ACA Journal, 2, pp. 40–51.
21. “Our Vision” in the “Morning Star Collegue Guidelines” Used by permission from The Morning Star
Company.
22. Hamel, G. (2011). First, let’s fire all the managers. Harvard Business Review (December). Available:
http://www.hbr.org, accessed January 31, 2015.
G
23. Greene, R. J. (2007). Team incentives. In D. Scott (Ed.), Incentive Pay: Creating a Competitive
A
Advantage. Phoenix, AZ: WorldatWork Press.
24. Silverman, R. E. (2014). How to pay employees for great ideas.
T The Wall Street Journal (December
4). Available: http://www.wsj.com, accessed December 10, 2014.
25. Belcher, J. G., Jr. (1994). Gain sharing and variable pay: TheEstate of the art. Compensation &
Benefits Review, May–June, pp. 50–60.
S
26. Doyle, R. J. (1983). Gain Sharing and Productivity. New York: American Management Association.
,
27. Peck, Variable Pay.
28. Milkovich, G. T., & Newman, J. M. (1993). Compensation (4th ed.). Homewood, IL: Irwin.
29. Ross, T. (1990). Why gain sharing sometimes fails. In B. Graham-Moore & T. Ross (Eds.), Gain
D
Sharing: Plans for Improving Performance (pp. 100–115). Washington,
DC: Bureau of National
Affairs.
E
30. Schuster, M. H. (2013). Gainsharing: Research and practice. WorldatWork Journal (Second Quarter):
A
30–39.
31. Lesiur, F. G. (Ed.). (1958). The Scanlon Plan: A Frontier in N
Labor–Management Cooperation.
Cambridge, MA: MIT Press.
D questions and fewer answers. Human
32. Bullock, R. J., & Lawler, E. E., III. (1984). Gain sharing: A few
Resource Management, 23, pp. 18–20.
R
33. Smith, B. T. (1986). The Scanlon Plan revisited: A way to a competitive tomorrow. Production
A
Engineering, 33, pp. 28–31.
34. Geare, A. J. (1976). Productivity from Scanlon type plans. Academy of Management Review, 1,
pp. 99–108.
1
35. Myers, D. W. (1989). Compensation Management. Chicago, IL: Commerce Clearing House.
36. Lawler, E. E., III, & Cohen, S. G. (1992). Designing a pay system
1 for teams. American
Compensation Association Journal, 1, pp. 6–19.
2
37. Boeing (2015). Employee Performance Incentive Plans Summary. Available: http://www.boeing.com,
accessed February 23, 2015.
3
38. Gates, D. (2015). Boeing managers to get annual bonuses of 12.5% to 22.5%. Seattle Times
T
(February 23). Available: http://www.seattletimes.com, accessed February 23, 2015.
39. WorldatWork and Deloitte Consulting LLP (2014). IncentiveSPay Practices Survey: Publicly Traded
Companies (February). Available: http://www.worldatwork.org, accessed February 12, 2015.
40. WorldatWork and Deloitte Consulting LLP (2014). Incentive Pay Practices Survey: Publicly Traded
Companies (February). Available: http://www.worldatwork.org, accessed February 12, 2015.
Strategic Compensation: A Human Resource Management Approach, Ninth Edition, by Joseph J. Martocchio. Published by Pearson.
Copyright © 2017 by Pearson Education, Inc.
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5
Person-Focused Pay
Learning Objectives
G
When you finish studying this chapter,
A you should be able to:
5-1. Define person-focused pay. T
5-2. Describe the usage of person-focused pay.
E
5-3. Name and explain the reasons companies adopt person-focused pay programs.
S
5-4. Summarize the varieties of person-focused pay programs.
,
5-5. Contrast person-focused pay with job-based pay.
5-6. Explain the advantages and disadvantages of person-focused pay plans.
D
E
A
CHAPTER WARM-UP!
N
If your professor has assigned this,Dgo to the Assignments section of mymanagementlab.com
to complete the Chapter Warm-Up! and see what you already know. After reading the
R
chapter, you’ll have a chance to take the Chapter Quiz! and see what you’ve learned.
A
Improved performance, the bottom-line purpose of training and development, is a strategic goal
1 companies strive to become learning organizations.
for organizations. Toward this end, many
A learning organization is a firm that1recognizes the critical importance of continuous performance-related training and development, and takes appropriate action. Learning organizations
2
view learning and development opportunities in all facets of their business. In a learning organization, employees are rewarded for3learning and are provided enriched jobs, promotions, and
compensation. Person-focused compensation
programs provide the basis for such rewards that
T
are tightly coupled with strategic training and development activities.
S
DEFINING PERSON-FOCUSED PAY:
COMPETENCY-BASED, PAY-FOR-KNOWLEDGE,
AND SKILL-BASED PAY
Person-focused pay plans reward employees for acquiring job-related, knowledge, skills, or
competencies rather than for demonstrating successful job performance. Person-focused pay
rewards employees for the promise of performance in the future; merit pay and incentive pay
reward employees for promise fulfilled (job performance). This approach to compensating employees often refers to three basic types of person-focused pay programs: pay-for-knowledge,
100
Strategic Compensation: A Human Resource Management Approach, Ninth Edition, by Joseph J. Martocchio. Published by Pearson.
Copyright © 2017 by Pearson Education, Inc.
ISBN 1-323-59381-0
5-1 Define personfocused pay.
[
= F N
skill-based pay, and competency-based pay. Sometimes, companies combine person-focused
pay programs with traditional merit pay programs by awarding pay raises to employees according to how well they demonstrate competencies.
Pay-for-knowledge plans reward managerial, service, or professional workers for successfully learning specific curricula. Skill-based pay, a term used mostly for employees who do
physical work, increases the workers’ pay as they master new skills. For example, both unions
and contractors who employ carpenters use skill-based pay plans. Carpenters earn additional pay
as they master more advanced woodworking skills (e.g., cabinet making).
Both skill- and knowledge-based pay programs reward employees for the range, depth,
and types of skills or knowledge they are capable of applying productively to their jobs. This
feature distinguishes pay-for-knowledge plans from merit pay, which rewards employees’ job
performance. Said another way, again, pay-for-knowledge programs reward employees for their
potential to make meaningful contributions on the job.
G
Human resource (HR) professionals can design person-focused
pay plans to reward employees for acquiring new horizontal skills, vertical skills,Aor a greater depth of knowledge or
skills. Employees can earn rewards for developing skills in one or more of these dimensions
T
based on the kind of skills the company wants to foster. Horizontal
skills (or horizontal knowledge) refer to similar skills or knowledge. For example,Eclerical employees of a retail store
might be trained to perform several kinds of record-keepingStasks. They may maintain employee
attendance records, schedule salespeople’s work shifts, and monitor the use of office supplies
(e.g., paper clips and toner cartridges for laser printers) for,reordering. Although focused on different aspects of a store’s operations, all three of these tasks are based on employees’ fundamental knowledge of record keeping.
D
Vertical skills (or vertical knowledge) are those skills traditionally considered supervisory
E These types of supervisory skills
(e.g., scheduling, coordinating, training, and leading others).
are often emphasized in person-focused pay plans designed
work teams beA for self-managed
1
cause team members often need to learn how to manage one another. Such work teams, which
N work groups, or semiautonomous
can be referred to as self-regulating work groups, autonomous
D functional areas to plan, design,
work groups, typically bring employees together from various
and complete one product or service. For example:
R
A
A manager of a food processing plant [who] wanted employees
who were “a combination
of self-reliant and resourceful.” In this plant, good hiring systems and excellent training systems were critical, including systems for training operators in maintenance skills. Several
1 training and certification. These
plants had adopted interesting innovations to promote good
innovations included:
1
ISBN 1-323-59381-0
2
š Several plants put all training on their intranet, so employees
could access it at any time.
š One plant used hundreds of “One-Point Lessons” (OPLs—one-page
sheets including
3
a digital photograph of the appropriate equipment). Because each OPL focused on
only one problem and its solution, OPLs were easyT
to search and use on the job.
š Several plants invested heavily in documentation S
of training and required practical
skills demonstration.2
Depth of skills (or depth of knowledge) refer to the level of specialization or expertise an
employee brings to a particular job. Some person-focused pay plans reward employees for increasing their depth of skills or knowledge. Human resource professionals may choose to specialize
in managing a particular aspect of the HR function (e.g., compensation, benefits administration,
training evaluation, or new employee orientation). To be considered a compensation specialist, HR
professionals must develop depth of knowledge perhaps by taking courses offered by WorldatWork
on job evaluation, salary survey analysis, principles of person-focused pay system design, merit
pay system design, and incentive pay system design, among others. The more compensation topics
HR professionals master, the greater will be their depth of knowledge about compensation.
Strategic Compensation: A Human Resource Management Approach, Ninth Edition, by Joseph J. Martocchio. Published by Pearson.
Copyright © 2017 by Pearson Education, Inc.
101
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