1. A Human Resource Management Approach
STRATEGIC COMPENSATION
A Human Resource Management Approach
Chapter 5
Incentive Pay
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Prepared by David Oakes

2. Incentive Pay Compensation fluctuates according to Adds to base pay
A pre-established formula
Individual or group goals
Company earnings
Adds to base pay
Controls costs
Motivates employees
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3. Incentive Pay Categories
Individual
Group
Company-wide
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4. Performance Measures Individual incentive plans Quality of work output
Quantity of work output
Quality of work output
Monthly sales
Work safety record
Work attendance
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5. Group Incentive Performance Measures
Group incentive plans
Customer satisfaction
Labor cost savings
Materials cost savings
Reduction in accidents
Services cost savings
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6. Company-Wide Performance Measures
Company-wide incentive plans
Company profits
Cost containment
Market share
Sales revenue
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7. Types of Individual Incentive Plans
Piecework plans
Management incentive plans
Behavior encouragement plans
Referral plans
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8. Piecework Plans Awards based on individual
production v. objective standards
performance standards using
objective & Subjective criteria
Quantity and / or quality goals
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9. Individual Incentive Plan Advantages
Helps relate pay to performance
Promotes equitable distribution
of compensation
Helps retain best performers
Compatible with America’s
individualistic culture
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10. Disadvantages May promote inflexibility Unrealistic standards may
hamper employee motivation
Setting performance standards
is time consuming
Factors beyond employee’s
control may affect outcomes
Factors not rewarded may be
overlooked
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11. Group Incentive Plans Rewards employees for their
collective performance
Use has increased in industry
2 types
Team - based or small group
Gain sharing
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12. Allocation Methods Equal incentive payments
Differential payments based on
contribution to goals
Differential payments according
to base pay
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13. Gain Sharing Incentives based on company’s improved productivity
Based on open leadership
Involves employee participation
Includes bonuses
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14. Gain Sharing Plans 3 Common Forms Scanlon Plan Rucker Plan Improshare
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15. Scanlon Plan Joseph Scanlon, 1935 Emphasis on teamwork
Two - tiered cost savings suggestion
system
Production - level committees
Screening committees
Rewards = labor costs / SVOP
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16. Rucker Plan Allan W. Rucker, 1933 Emphasizes employee involvement
Uses a value - added formula
Value of sales price
Value of materials used
Total labor costs
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17. Improshare Mitchell Fein, 1973 Improved productivity through sharing
Incentive to finish products
Bonus based on a labor ratio
Includes a buy - back provision
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18. Company - Wide Incentive Plans
Rewards employees when company
meets performance standards
2 Types
Profit sharing plans
Employee stock option plans
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19. Profit Sharing Plans Current profit sharing plans
Deferred profit sharing plans
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20. Profit Sharing Formulas
Fixed-first-dollar-of-profits
Graduated first-dollar-of profits
Probability threshold formula
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21. Distribution Methods Equal payments Proportional payments based
on annual salary
Proportional payments based
on contribution to profits
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22. Incentive Pay Considerations
Based on individual or group
performance?
Acceptable level of risk?
Replace traditional pay?
Performance criteria evaluated?
Appropriate time horizon?
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23. Competitive Strategies
Lowest - cost
Lower output costs per employee
Individual & group incentive plans
Behavioral encouragement plans
Differentiation
Unique product or services
Creative, risk - taking employees
Long - term focus
Team - based incentives
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