Chapter Fifteen Incentive Plans

Learning Objectives Outline various incentive plans used to motivate production workers, sales personnel, and professional and managerial employees on an individual basis Discuss the problems associated with individual incentive plans Describe the conditions under which group incentive plans are particularly effective List the objectives of productivity, gainsharing and profit-sharing plans Describe the suggestion plan system and indicate some of the problems involved in implementing such plans Identify the incentives that may be used in a positive reinforcement program

Figure 15.1 Four major types of incentive plans tie financial rewards to performance

Individual Incentive Plans Provide financial or nonfinancial rewards to employees who make substantial contributions to organizational effectiveness. There are many kinds of incentive plans, offering various rewards on different bases: Incentives for Production Employee Stock Ownership Plans Sales Personnel Incentive Plans Incentives for Managerial and Professional Employees

Incentive for production Piece-rate plan: compensation is based on the number of units produced. a. Under straight piece‑rate plans, the worker is paid an additional set amount for each unit produced above the standard. b. Under differential piece‑rate plans, the worker who exceeds standard production is compensated at a higher rate for all work than are those workers who satisfy only the minimum standard.

Incentive for production Under production‑bonus systems, workers who surpass minimum production standards are given a bonus payment. a. The bonus payments are based on cost savings associated with higher productivity. b. An example is the standard‑hour plan, under which the worker is paid the standard rate even on completing a task in less than standard time.

Incentive for production Under the measured day‑rate plan, employees are periodically rated on several factors and pay is raised or lowered accordingly and remains constant until the next rating. Overall, individual incentive plans are declining in use, due to the rise in popularity of productivity gainsharing plans.

Individual Incentive Plans (cont’d) Other Types of Incentive Plans: Commissions: for sales personnel, based on the number of volume sold. Spot bonuses: for managerial and professional employees, that are cash awards Royalty compensation: for scientists and inventors

Individual Incentive Plans (cont’d) Employee Stock Ownership: employee can buy a certain number of shares of company stock at a given price by a specified date.

Team incentive plans Are individual plans applied to small groups of workers The purpose of group incentive plans is to encourage teamwork and cooperation needed to attain high productivity or performance.

Productivity Gainsharing Plans Attempt to stimulate production efficiency by allowing employees to share labor and production cost savings through bonuses. They may be applied to a wide variety of businesses and are usually found in some hybrid version. Improshare The Scanlon plan

Improshare Focuses on the number of hours saved for a given number of units produced. It subtracts the actual hours needed to produce them from the originally allocated hours. 1. The savings realized by producing in a shorter period of time than expected are shared by the firm and the workers.

Scanlon plan SP is a gainsharing plan that allows employees to share the savings of labor costs during periods of high productivity.

Profit-Sharing Plans Is an incentive system in which some portion of the organization’s earnings is distributed to employees to supplement their pay. Current distribution (or cash) plans: some percentage of profits is distributed in cash at regular intervals. Deferred distribution: some percentage of profits is deposited in a trust made available to the employee at retirement or termination. Combined plans

Other Types of Plans Suggestion Plans: rewards employees who offer useful ideas for improving organizational effectiveness (the rewards are usually cash payments but sometimes merchandise or travel). Positive Reinforcement Programs: rely primarily on nonfinancial incentives or reinforcers (such as praise, recognition, and avoidance of punishment) to shape desired worker behavior.

External Influences State laws Laws set forth rules for computing base and overtime pay and specify the records that must be kept Profit-sharing plans must be approved by the Treasury Department to comply with State income tax laws

Internal Influences Contemporary thought about incentive Management philosophy and organizational culture and climate. It is currently felt that these variables are important in determining the “fit” between a given incentive system and a particular organization Size of the unit for which performance gains are measured (individual, group, organization) Participation employees in designing plans

Role of the HR Department Play a key role in the training and communications necessary for long-term success of these plans. Communicate with employees about the purposes and philosophy underlying any incentive program.

Key Terms Incentive plan Variable pay Individual incentive plan Piece-rate plan Differential piece-rate plan Production bonus Standard-hour plan Measured day-rate plan Commission Spot bonus Royalty compensation Esops Stock option plan Stock appreciation rights Team incentive plan Productivity gainsharing Improshare Scanlon plan Spot gainsharing Profit-sharing Suggestion plan Positive reinforcement program