© 2010 South-Western, a part of Cengage Learning All rights reserved.

Strategic Reasons for Incentive Plans Variable Pay Tying pay to some measure of individual, group, or organizational performance. Incentive Pay Programs Establish a performance “threshold” to qualify for incentive payments. Emphasize a shared focus on organizational objectives. Create shared commitment in that every individual contributes to organizational performance and success. © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Types of Incentive Plans FIGURE 10.1 Types of Incentive Plans © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Incentive Plans as Links to Organizational Objectives Incentive Plan Purposes Encourage employees to assume “ownership” of their jobs, thereby improving effort and job performance. Motivate employees to expend more effort than under hourly and/or seniority-based compensation systems. Support a compensation strategy to attract and retain top-performing employees. Incentive Plan Effectiveness There is evidence of a relationship between incentive plans and improved organizational performance. © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Individual Incentive Plans Straight Piecework An incentive plan under which employees receive a certain rate for each unit produced. Differential Piece Rate A compensation rate under which employees whose production exceeds the standard amount of output receive a higher rate for all of their work than the rate paid to those who do not exceed the standard amount. © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Individual Incentive Plans (cont’d) Standard Hour Plan An incentive plan that sets pay rates based on the completion of a job in a predetermined “standard time.” If employees finish the work in less than the expected time, their pay is still based on the standard time for the job multiplied by their hourly rate. © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Individual Incentive Plans (cont’d) Bonus Incentive payment that is supplemental to the base wage for cost reduction, quality improvement, or other performance criteria. Spot bonus Unplanned bonus given for employee effort unrelated to an established performance measure. © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Lump-Sum Merit Pay Lump-Sum Merit Program Program under which employees receive a year-end merit payment, which is not added to base pay. Advantages: Provides financial control by maintaining annual salary expenses and not escalating base salary levels. Contains employee benefit costs for levels of benefits normally calculated from current salary levels. Provides a clear link between pay and performance. © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Incentive Awards and Recognition Often used to recognize productivity gains, special contributions or achievements, and service to the organization. Employees feel appreciated when employers tie awards to performance and deliver awards in a timely, sincere and specific way. Noncash Incentive Awards Are most effective as motivators when the award is combined with a meaningful employee recognition program ( personalised gifts, theater tickets, gifts, Personalised clothing) © 2010 South-Western, a part of Cengage Learning. All rights reserved.

2 Customize Your Noncash Incentive Awards Compensation specialists recognize that a successful noncash incentive program will offer employees a wide selection of awards—awards that appeal to a diverse workforce and the uniqueness of individual employees. “One-size-fits-all” is not the approach to take. What appeals to younger employees may not be attractive to older employees. For example, one marketing firm characterizes recognition and rewards based on generations as follows: Traditionalists (61+). These individuals are less likely to spend money on themselves. Attractive awards include entertainment venues, vacations, and technology items. They also appreciate health and wellness opportunities. Boomers (41–60). Personal recognition is important. These individuals want to feel appreciated for their work contributions and are likely to change jobs if they feel under valued or go unrecognized. Boomers favor incentive rewards in the areas of travel, luxury gifts, health and wellness options, and personalized plaques and awards. Generation X (25–41). This group values a balanced lifestyle of work and play. Generation X employees value gadgets and high-tech items along with flexible schedules and discretionary time off. A flexible “day-off-work” would appeal to this group. Generation Y (14–25). These employees desire immediate performance feedback. Employee-of-the-Month programs appeal to these employees as do “spot” recognition plans. Gift cards, gift certificates to “trendy” stores, and movie tickets are appropriate as rewards for the immediate recognition of performance. © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Sales Incentives Sales Incentive Plans Straight Salary Straight Commission Salary and Commission Combinations © 2010 South-Western, a part of Cengage Learning. All rights reserved. 5

Incentive Plans for Salespersons Straight Salary Plan Compensation plan that permits salespeople to be paid for performing various duties that are not reflected immediately in their sales volume. Straight Commission Plan Compensation plan based upon a percentage of sales. Combined Salary and Commission Plan A compensation plan that includes a straight salary and a commission component (“leverage”). © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Incentives for Professional Employees Executive Compensation The Executive Pay Package Base salary Short-term incentives or bonuses Long-term incentives or stock plans Benefits( health insurance, life insurance, vacations) Perquisites (perks)--- special non monetary benefits given to executives , means of demonstrating executives importance to organisation, badge of credit) © 2010 South-Western, a part of Cengage Learning. All rights reserved.

3 The “Sweetness” of Executive Perks © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Enterprise Incentive Plans Profit Sharing Any procedure by which an employer pays, or makes available to all regular employees, in addition to their base pay, current or deferred sums based upon the profits of the enterprise. example- Lincoln Electric company © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Enterprise Incentive Plans (cont’d) Stock Options Granting employees the right to purchase a specific number of shares of the company’s stock at a guaranteed price (the option price) during a designated time period. The value of an option is subject to stock market conditions at the time that option is exercised. Example- apple computer, yahoo. Coca-cola © 2010 South-Western, a part of Cengage Learning. All rights reserved.

5 Employee Stock Option Plans What Is a Stock Option? A stock option gives an employee the right to buy a certain number of shares in the company at a fixed price for a certain number of years. The price at which the option is provided is called the “grant” price and is usually the market price at the time the options are granted. Employees who have been granted stock options hope that the share price will go up and that they will be able to “cash in” by exercising (purchasing) the stock at the lower grant price and then selling the stock at the current market price. How Stock Option Plans Work Here is an example of a typical employee stock option plan. An employee is granted the option to purchase 1,000 shares of the company’s stock at the current market price of $5 per share (the “grant” price). The employee can exercise the option at $5 per share—typically the exercise price will be equal to the price when the options are granted. Plans allow employees to exercise their options after a certain number of years or when the company’s stock reaches a certain price. If the price of the stock increases to $20 per share, for example, the employee may exercise his or her options to buy 1,000 shares at $5 per share and then sell the stock at the current market price of $20 per share. Companies sometimes revalue the price at which the options can be exercised. This may happen, for example, when a company’s stock price has fallen below the original exercise price. Companies revalue the exercise price as a way to retain their employees. © 2010 South-Western, a part of Cengage Learning. All rights reserved.

Enterprise Incentive Plans (cont’d) Employee Stock Ownership Plans (ESOPs) Stock plans in which an organization contributes shares of its stock to an established trust for the purpose of stock purchases by its employees. Example– South west airlines , Columbia forest products. © 2010 South-Western, a part of Cengage Learning. All rights reserved.