Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Learning Outcomes Implement a strategic incentive program Detect when and what types of individual incentives are appropriate Differentiate how gains may be shared with employees under different group incentive plans like the Scanlon and Improshare gainsharing systems 2

Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Learning Outcomes Differentiate between profit sharing plans and explain advantages and disadvantages of these programs as an alternative to individual and group incentive systems Understand how to apply different incentive systems designed for professionals and executives 3

Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Strategic Reasons for Incentive Plans Variable pay programs: Tying pay to some measure of individual, group, or organizational performance Incentive pay plans Establish a performance threshold for employees to qualify for incentive payments Emphasize a shared focus on organizational objectives Creates an operating environment supporting shared commitment 4

Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure Types of Incentive Plans 5

Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Incentive Plans as Links to Organizational Objectives Purpose of incentive plan Encourages employees to assume ownership of their jobs, thereby improving effort and job performance Motivates employees to expend more effort than under hourly and/or seniority-based compensation systems Supports a compensation strategy to attract and retain top-performing employees 6

Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Requirements for a Successful Incentive Plan Identify important organizational metrics encouraging employee behavior Involve employees Incentive programs should seem fair to employees Find the right incentive payout Payout formulas should be simple and understandable Establish a clear link between performance and payout 7

Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Individual Incentive Plans Straight piecework: Employees receive a certain rate for each unit produced Differential piece rate: Employees whose production exceeds the standard amount of output receive a higher rate for all of their work Piecework Sets rates based on the completion of a job in a predetermined standard time Standard hour plan Supplemental to the base wage Bonus 8

Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Individual Incentive Plans Links an increase in base pay to how successfully an employee performs his or her job Merit pay Awards - Used to recognize productivity gains, special contributions or achievements, and service to the organization Recognition - Conduit that shows employees that the company appreciates their efforts, their unique gifts, and their contributions Incentive awards and recognition Performance standards for sales employees are difficult to develop because performance is affected by external factors Types - Straight salary plan, straight commission plan, Combination salary and commission plan, and Sales plus bonus plan Sales incentive 9

Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Group Incentive Plans - Team Compensation Team incentive plans: All team members receive an incentive bonus payment when production or service standards are met or exceeded Gainsharing incentive plan: Both employees and the organization share financial gains by a predetermined formula Scanlon plan Improshare 10

Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure Scanlon Plan Suggestion Process 11

Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Group Incentive Plans Profit sharing - Employer makes available to all regular employees, special current or deferred sums based on the organization’s profits Stock options - Organizations allow employees to buy stocks to increase productivity and assume partnership role in the organization This in turn leads to the increase in stock prices 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 12

Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Incentives for Professional Employees Professional employees Motivation is influenced by their increased mobility across companies Can receive compensation beyond base pay 13

Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Executive Pay Package Base salary Short-term incentives or bonuses Long-term incentives or stock plans BenefitsPerks 14

Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure Types of Long-Term Incentive Plans 15

Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Figure Types of Long-Term Incentive Plans 16

Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Executive Compensation: Ethics and Accountability Justification of bonuses Large financial incentives are a way to reward superior performance Business competition is pressure-filled and demanding Good executive talent is in great demand Effective executives create shareholder value Fact of business life, reflecting market compensation trends 17

Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Executive Compensation Reform Internal Revenue Service (IRS) makes executive pay a part of every corporate audit Securities and Exchange Commission issued pay disclosure rules requiring companies listed on the New York Stock Exchange and NASDAQ to disclose the true size of their top executive pay packages 18

Copyright ©2016 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. Executive Compensation Reform Financial Accounting Standards Board (FASB) requires stock options to be recognized as an expense on income statements Dodd-Frank Wall Street Reform and Consumer Protection Act (Pub. L ) was signed into effect giving share holders say on pay Voting shareholders of a company must ultimately approve of its executive salaries 19