Performance Based Pay Strategic implications of pay for performance Assumptions of incentive plans Individual and group incentive systems Managing merit pay systems

Strategic Implications of Merit Pay Global need for positive push Rewarding the right behaviors

Assumptions of Incentives Why pay individuals differently Pay ranges Broad banding Ability, expectancy, instrumentality Performance variation Performance measurement The trust factor

Individual Plans Merit pay Awards and bonuses Piece rates Commissions

Group Plans Profit sharing Gain sharing Advantage: Employee involvement Disadvantage: The risk factor, lack of control, sense of inequity Gain sharing Disadvantage: Trust essential, union opposition, not useful in piece work

Gain Sharing & Profit Sharing Based on local productivity Benefit comes close in time to actual performance Profit Sharing Based on total firm financial performance Benefit is deferred to annual administration or even put into pension system

Employee Stock Ownership Plans Every employee a part owner Works better when done for reasons of management commitment than for financial reasons It does not automatically improve employee performance, attitudes or sense of control

Incentive System Failure Hardly noticeable rewards Inadequate performance appraisal Ambiguous links between performance and reward Higher union wages Adaptation problem

Incentive System Success Clearly noticeable rewards Accurate appraisal Managers adept in appraising and feedback Visible link between performance and reward Wide range of increases

Administrative Issues Concerns: Fairness, Risk, Efficiency Communication Pay Secrecy Pay satisfaction

Merit Pay Systems Adapted From Hills, Bergmann, & Scarpello, Compensation Decision Making, 2 Ed.

Backwards & Forwards Summing up: Today are topics began with the strategic implications of pay for performance, we then examined assumptions underlying incentive systems and several individual and group merit pay plans. We concluded with a look at the management issues in applying the incentive systems. What makes some plans fail, why do they work Looking Ahead: Next time we dig into the topic of benefits — health, holidays and pension at our next session.