1. © 2010 McGraw Hill Ryerson 11-1 COMPENSATION Third Canadian Edition Milkovich, Newman, Cole

2. © 2010 McGraw Hill Ryerson 11-2 Pay-for-Performance Plans  pay that varies with some measure of individual or organizational performance  also called variable pay plans  these plans have a positive impact on performance if they are designed well

3. © 2010 McGraw Hill Ryerson 11-3 Short Term Pay-for-Performance Plans  Merit Pay  Lump-Sum Bonuses  Individual Spot Awards  Individual Incentives  Merit Pay  Lump-Sum Bonuses  Individual Spot Awards  Individual Incentives

4. © 2010 McGraw Hill Ryerson 11-4 Individual Incentive Plans Method of Rate Determination Units of production per time period Time period per unit of production (1)(2) (4)(3) Straight piecework planStandard hour plan Halsey 50 - 50 methodTaylor differential piece rate system Merrick multiple piece rate system Pay constant function of production level Pay varies as function of production level Relationship between production level and pay

5. © 2010 McGraw Hill Ryerson 11-5 Advantages of Individualized Incentive Plans  substantial contribution to: increased productivity lower production costs increased earnings of workers  less direct supervision is required to maintain output than under pay for time  payment for results (if accompanied by improved organizational and work measurement) enable labour costs to be estimated more accurately than under pay for time helps costing and budgetary control

6. © 2010 McGraw Hill Ryerson 11-6 Disadvantages of Individualized Incentive Plans (1 of 2)  conflict between employees seeking to maximize output and managers concerned about deteriorating quality levels  attempts to introduce new technology may be resisted by employees concerned about the impact on production standards  reduced willingness of employees to suggest new production methods for fear of subsequent increases in production standards

7. © 2010 McGraw Hill Ryerson 11-7 Disadvantages of Individualized Incentive Plans (2 of 2)  increased complaints that equipment is poorly maintained, hindering employee efforts to earn larger incentives  increased turnover among new employees discouraged by the unwillingness of experienced workers to cooperate in on- the-job training  elevated levels of mistrust between workers and management

8. © 2010 McGraw Hill Ryerson 11-8 Team / Group Incentive Plans  Gain-Sharing Plans  Profit Sharing Plans  Earnings-at-Risk Plans

9. © 2010 McGraw Hill Ryerson 11-9 Sample Group/Team Performance Measures (1 of 2) Customer-Focused Measures  Time to Market Measures On time delivery Cycle time New product introductions  Customer Satisfaction Measures Market share Customer satisfaction Customer growth and retention Account penetration Financially-Focused Measures  Value Creation Revenue growth Resource yields Profit margins Economic value added  Shareholder Return Return on invested capital Return on sales / earnings Earnings per share Growth in profitability

10. © 2010 McGraw Hill Ryerson 11-10 Sample Group/Team Performance Measures (2 of 2) Capability-Focused Measures  HR Capabilities Employee satisfaction Turnover rates Total recruitment costs Rate of progress on developmental plans Promotability index Staffing mix/head-count ratio  Other Asset Capabilities Patents and copyrights Distribution systems Internal Process-Focused Measures  Resource Utilization Budget-to-actual expenses Cost allocation ratios Reliability / rework Accuracy / error rates Safety rates  Change Effectiveness Program implementation Teamwork effectiveness Service / quality index

11. © 2010 McGraw Hill Ryerson 11-11 Different Types of Variable Pay Plans Cash Profit Sharing Stock Ownership or Options Balanced Scorecard Productivity / Gain- Sharing Team / Group Incentives

12. © 2010 McGraw Hill Ryerson 11-12 Gain-Sharing Plans  under gain-sharing plans, employees share in cost- savings or productivity gains

13. © 2010 McGraw Hill Ryerson 11-13 Key Elements in Designing a Gain-Sharing Plan  strength of reinforcement  productivity standards  sharing the gains  scope of the formula  perceived fairness of the formula  ease of administration  production variability

14. © 2010 McGraw Hill Ryerson 11-14 Three Gain-Sharing Formulas Scanlon Plan (single ratio volume) Rucker PlanImproshare Numerator of ratio (input factor) Payroll costsLabour costActual hours worked Denominator of ratio (outcome factor) Net sales (+/- inventories) Value addedTotal standard value hours

15. © 2010 McGraw Hill Ryerson 11-15 Profit-Sharing Plans  variable pay plans requiring a corporate profit target to be met before any payouts occur

16. © 2010 McGraw Hill Ryerson 11-16 Earnings-at-Risk Plans  incentive plans sharing profits in successful years and reducing base pay in unsuccessful years

17. © 2010 McGraw Hill Ryerson 11-17 Advantages of Group Incentive Plans  positive impact on organization and individual performance of about 5 – 10 percent per year  easier to develop performance measures than for individual plans  signals that cooperation, both within and across groups, is a desired behaviour  teamwork supported by most employees  may increase participation of employees in decision making process

18. © 2010 McGraw Hill Ryerson 11-18 Disadvantages of Group Incentive Plans  line of sight may be lessened employees may find it more difficult to see how their individual performance affects their incentive payouts.  may lead to increased turnover among top individual performers because they must share with lesser contributors  increases compensation risk to employees because of lower income stability

19. © 2010 McGraw Hill Ryerson 11-19 Long-Term Incentive Plans Employee Stock Ownership Plans (ESOPs) Stock Options Broad-Based Option Plans (BBOP)

20. © 2010 McGraw Hill Ryerson 11-20 Special Groups in Compensation Management  supervisors  top management  corporate directors  professional employees  sales staff  contingent workers

21. © 2010 McGraw Hill Ryerson 11-21 Components of an Executive Compensation Package 1. base salary 2. short-term (annual) incentives or bonuses 3. long-term incentives and capital appreciation plans 4. executive benefits 5. executive perquisites

22. © 2010 McGraw Hill Ryerson 11-22 Examples of Long-Term Incentives for Executives 1. Appreciation-Based Plans stock options stock appreciation rights 2. Full-Share Plans restricted stock plans restricted stock units/phantom stock plans Deferred share units 3. Performance-Based Plans performance share / unit plans

23. © 2010 McGraw Hill Ryerson 11-23 Pay Components for Professional Employees  dual career ladders  maturity curves  performance bonuses attaining professional licenses  perks flexible work schedules Campus-like environment

24. © 2010 McGraw Hill Ryerson 11-24 Key Factors in Designing a Sales Compensation Plan  the nature of the people who enter the sales profession  organizational strategy  competitor practices  product/service being sold

25. © 2010 McGraw Hill Ryerson 11-25 Key Issues in Contingent Workforce Compensation  equity/fairness relative to permanent employees  boundaryless careers

26. © 2010 McGraw Hill Ryerson 11-26 Conclusion  the design and effective administration of pay-for-performance plans is key to their success  special employee groups compensation must address high potential for conflict in these jobs compensation treatment differs from that for other employees