Base Pay (Salary) Issues Adjustments Cost of living Merit increases Difficult to fairly differentiate and reward top performers in terms of base pay Top performers: 6% increase (2% COLA, 4% merit) Average performers: 4% increase (2% COLA, 2% merit) Bottom performers: 2% increase (2% COLA, 0% merit) Timing (performance - reward relationship) Difficult to see the connection between your performance last year and your pay this year

Pay for Performance Objectives Motivate performance Reinforce strategic goals Focus attention on specific goals Recognize differential employee contributions

Pay & Organizational Strategy Want to achieve a fit between strategy & pay practices Pay is a key indicator of organizational strategy, objectives & culture What behaviors do you reward & thereby encourage?

Pay for Performance All or a portion of pay will vary with measures of individual, team, department, division, &/or organization performance Turns a portion of fixed labor costs into a variable cost When performance declines, so does labor costs Signals a movement away from pay as an entitlement

Individual Incentives All or a portion of an individual’s pay is tied to their performance Piece-rate Commissions Specific goals

Team/Group Incentives Examples of incentives: Productivity improvements Customer satisfaction measures Financial performance Quality of goods or services

Team/Group Incentive Plans Advantages Availability of measures Cooperation is valued Teamwork Disadvantages Compensation at risk Individual’s performance – reward link is stretched (“line of sight” is lessened relative to individual incentives –it’s more difficult to see) Receipt of rewards depends upon others

Gainsharing Plans Employees earn bonuses based upon a predetermined gainsharing formula Initially intended to focus attention on costs Formula is tied to group or department performance measures Based upon factors controllable by the group Typically target a specific problem area Supplies expense, quality concerns Direct employee attention to the area/issue Timing: Monthly or quarterly payouts Reinforces the performance-reward link

GE Information Systems Team-based incentive with links to individual payouts Team and individual performance goals are set If the team hits its goals, the team members earn their incentive only if they hit their individual goals Incentive component is 12% to 15% of base pay and is paid monthly

Profit-Sharing Plans Employees receive an annual bonus based upon company wide performance measures Revenue minus expense = Profit Disadvantages “line of sight” is further stretched (performance-reward link is more difficult to see) Less direct control Advantages Encourages employees to think about all aspects of the business and act accordingly

PepsiCo’s SharePower Program What is the SharePower program and why did Pepsi implement it? What are the pro’s and con’s of the SharePower plan? Want to encourage and Ownership culture/mentality E’s to think like owners and be rewarded like owners Why is that important? In other words, how are owners likely to differ from employees In terms of thought processes and reward potential?

Implications of Pay-for Performance Employees will need more information Sharing of financial information Training to understand the financial information (SRC corp. example) Heightened pressure for performance Pay can go up or down Potential for unintended consequences Need for controls