2918527 ppt of incentives plans modified

Unit II- Strategic Importance of Variable Pay

Variable Pay

Variable pay is any compensation plan that: Emphasizes a shared focus on organizational success Opens incentives to non-traditional groups Operates outside the base pay increase system

Included in the calculations of variable pay are: Individual incentive awards Individual recognition awards Group and team awards Scheduled lump-sum awards

The Challenge!

Variable Pay can be …

A Powerful Tool for the Positive

A Neutral – Neither Really Helping nor Hurting

A Tool with Potential to Inflict Damage on Morale, Trust and Performance

Employees Pay for Performance

Variable Pay

Variable Pay: Incentives for Performance

Variable Pay

Assumptions

Some people perform better and are more

productive than others

Better performing employees should

receive more compensation

Some jobs contribute more to organizational

success than others

Part of compensation should be tied

directly to performance and

results

Developing Successful Pay-for-Performance Plans

Pay-for-Performance Plans

Link strategic goals and employee

performance

Enhance results and reward employees financially

Reward and recognize employee

performance

Promote achievement

of HR objectives

Why Variable Pay Plans Fail

Plan incentives are

not seen as desirable

Plan doesn’t reward doing

a good job

Plan doesn’t motivate

Plan rewards teams/groups rather than individuals

Plan doesn’t increase base

pay

Employees’ View of

Variable Pay Plan

Successful Variable Pay Plans

Effective Incentive Plans

Does the Plan Fit the

Organization?

Does the Plan Reward the Appropriate

Actions?

Is the Plan Administered

Properly?

Incentives Programme

Wage incentives include all the plans that provide extra pay for extra performance in addition to regular wages for the job.

It implies monetary inducements offered to employees to perform beyond acceptance standards.

Standard Definition is :- “ Payment for Work of an acceptable quality produced over and above a specified quantity or standard”.

It can be applicable in any of the three forms i.e. are

Types of Incentives

Incentives

Positive & Negative Individual & collective Financial non-financial

Benefits of Incentive Compensation

1. Motivation2. Develops Loyalty and Commitment3. Discipline & Responsible staff with less supervision.4. Builds cordial relations.5. Increase in productivity6. Increase in degree of satisfaction7. Efficient utilization of resources.8. Helps in improvement of work flow work method and

man machine relationship9. Provides opportunity to be hardworker10. Due to innovative workforce it reduces the cost of

supervision.

Limitations of Incentive Plans

Can lead to negative impact on health of the labour due to excess work.

In order to produce more output quality is not considered many a times.

Introduction and administration of incentive plans require more clerical or administrative resources.

Jealousy and conflict Disturbance in workflow due to management leads to

conflict regarding compensation. Difficult to revise frequently in accordance to the

desired change.

Factors to be considered for introducing Incentive Plans

Demand of Products Quantitative Measurement Just and Fair Mutually beneficial Comparison with schemes in similar

organization Applicable to all categories of workers Practicable

Requirement of Good Wage incentive system1. Proper climate to encourage incentive system on trust basis.2. Workers Participation3. Scientific standards4. Guaranteed Minimum Wages5. Simplicity6. Equitable7. Economical8. Flexible

contd………….

9. Prompt Payment

10. Adequate Incentives

11. Ceilings on Earnings

12.Reasonable standards

13. Grievance Machinery

14. Clear Appraisal System

15. Follow Up.

Developing Successful Incentive Plans

Develop clear, understandable plans that are continually

communicated.

Use realistic performance measures.

Keep plans current and linked to organizational objectives.

Link results to payouts that recognize differences.

Identify variable pay incentives separately from base pay.

Successful Incentive

Plans

Emergence of Incentives concepts In order to increase productivity 2 options:-

Stricter supervision Incentive plans

FIGURE 13-1

Examples of Incentives

Types of Incentives PlansThe ILO classifies all the schemes of payment by results into four categories:

Earning vary inthe same proportionas output

Straight Piece WorkStandard Hour

Earnings vary less proportionatelythan output

Halsey PlanRowan PlanBarth SchemeBedaux Plan

Earnings vary ProportionatelyMore than outputs

High Piece RateHigh Standard Hour

Earnings differat different levelsof output

Taylor’s Differential Piece RateMerrick Differential Piece RateGantt Task SystemEmerson’s Efficiency plan

Wage and Incentive Plans

Time Wage Piece WageWage incentive

Plans

Group Incentives

Organization Incentives

1. Scanlon Plan

2. Profit sharing

3. Co-Partnership

4. Employers Stock option Plan

Individual Incentives

1. Preistman’s Plan

2. Rucker’s Plan

3. Towne Gain Sharing Plan

Based on Based on ProductiviProductivi

tyty

1. Taylor

2. Merrick

3. Gantt

4. Emerson Plan

Based on Based on Time Time

• Rowan

• Halsey

• Bedeaux


Piece-Rate Systems Straight piece-rate system Differential piece-rate system

Bonus“Spot” BonusesSpecial Incentive Programs

Performance awards Recognition awards Service awards

FIGURE 13-4 Purposes of Special Incentives

Why Organizations Establish Variable Pay Plans for Groups/Teams

Group/Team-Based

Variable Pay Plans

Improve productivity

Tie pay to team performance

Improve customer service or production

quality

Increase employee retention

Design of Group/Team Incentive Plans

Group/Team Incentive Plan Issues

Distribution of Group/Team Incentives

Timing of Group/Team Incentives

Decisions About

Group/Team Incentive Amounts

Group/Team Incentives (cont’d) Distributing Rewards

Same-size reward for each member Different-size reward for each member

Problems with Group/Team Incentives Rewards in equal amounts may be perceived as “unfair” by

employees who work harder, have more capabilities, or perform more difficult jobs.

Group/team members may be unwilling to handle incentive decisions for co-workers.

Many employees still expect to be paid according to individual performance.

FIGURE 13-5 Conditions for Successful Group/Team Incentives

Types of Group/Team Incentives Group/Team Results

“Self-funding” pay plans for groups/teams that reward through improved organizational results on the basis of group output, cost savings, or quality improvement.

Gainsharing (Teamsharing or Goal Sharing) The sharing with employees of greater-than-expected

gains in productivity through increased discretionary efforts. Improshare

Scanlon Plan

Organizational Incentives

Primary Objectives

• Increase productivity and organizational performance

• Attract or retain employees

• Improve product/service quality

• Enhance employee morale

Drawbacks

•Disclosure of financial information

•Variability of profits from year to year

•Profit results not strongly tied to employee efforts

Profit Sharing

FIGURE 13-6 Framework Choices for a Profit-Sharing Plan

Employee Stock Plans

Stock Option Plan A plan that gives employees the right to purchase

a fixed number of shares of company stock at a specified price for a limited period of time. If market price of the stock is above the specified option

price, employees can purchase the stock and sell it for a profit.

If the market price of the stock is below the specified option price, the stock option is “underwater” and is worthless to employees.


Employee Stock Ownership Plan (ESOP) A plan whereby employees gain significant stock

ownership in the organization for which they work. Advantages

Favorable tax treatment for ESOP earnings Employees motivated by their ownership stake in the

firm Disadvantages

Retirement benefit is tied to the firm’s future performance

Management tool to fend off hostile takeover attempts.

Types of Sales Compensation Plans Salary-Only

All compensation is paid as a base wage with no incentives.

Commission Straight Commission

Compensation is computed as a percentage of sales in units or dollars.

The draw system make advance payments against future commissions to salesperson.

Salary-Plus-Commission or Bonuses Compensation is part salary for income stability and part

commission for incentive.

Executive Compensation

Executive Salaries

Executive Benefits

Executive Perquisites(Perks)

Annual Executive Incentives and Bonuses

Performance Incentives: Long Term vs. Short Term

Elements of Executive

Compensation

“Reasonableness” of Executive Compensation

Executive Compensatio

n Consideration

sand

Concerns

Would another company hire this

person as an executive?

How does the executive’s

compensation compare with that for executives in similar

companies?

What would an investor pay for the level of performance

of the executive?

Is the executive’s pay consistent with

pay for other employees within the

company?

FIGURE 13-8 Common Executive Compensation Criticisms

Incentives Plans for Employees

FIGURE 13-1

Examples of Incentives

Wage and Incentive Plans

Time Wage Piece WageWage incentive

Plans

Group Incentives

Organization Incentives

1. Scanlon Plan

2. Profit sharing

3. Co-Partnership

4. Employers Stock option Plan



2. Rucker’s Plan


Based on Based on ProductiviProductivi

tyty

1. Taylor

2. Merrick

3. Gantt

4. Emerson Plan

Based on Based on Time Time

• Rowan

• Halsey

• Bedeaux


Under a system of individual incentives, all Under a system of individual incentives, all or a portion of an individual’s pay is tied to or a portion of an individual’s pay is tied to their performance.their performance.

Individual IncentivesIndividual Incentives

Based on Time

Based on Productivity

Based on Time

1. Halsey Plan

2. Rowan Plan

3. Bedeaux Plan

Halsey Plan

Developed by F.A Halsey Similar to weir Halsey Plan Principle is Time saved Bonus.

In this method bonus paid to a worker is equal to basic wage + Bonus on the time saved. A standard time is fixed on the basis of previous performance for the completion of a job. When the work is completed in less than the standard time the employee is entitle for the bonus.

Halsey Plan

Std Time= 10 HrsActual Time= 8 hrsRate per hr= Re 1Bonus= 33 ½ %

Solution:-Bonus = 33 ½%( time saved X

Rate per hour)= 33 ½%( 2 X 1) = 0.6

Total Wage = 8+0.6=Rs. 8.06

Features of Halsey Plan Std time is to be fixed Std rate of wage The rate of bonus 33 ½% or 50% No Penalty for employees not completing

work before the time. Calculated on Time saved. Employee completing work before std time

will be paid actual wages plus the calculated bonus.

Halsey Plan

Advantages Guarantee Minimum

wage Justified System Motivates Productivity improvement Easy & Convenient Maximum utilization of

time

Disadvantages Due to Guarantee wages

depends upon employees decisions.

Not suitable for administrative.

Rowan Plan

Developed by James Rowan Similar to weir Halsay Plan Principle is Time saved Bonus.

This method is similar to the Halsey Plan the only difference is in the calculation Process.

Rowan Plan

Std Time= 10 HrsActual Time= 8 hrsRate per hr= Re 1Bonus= 33 ½ %

Solution:-Bonus = Saved Time X Actual Time X Rate per hour Std Time

= 2/10 X 8 X 1= 1.60

Total Wage = 8+1.60=Rs. 9.60

Features of Rowan Plan Std time is to be fixed Std rate of wage No Penalty for employees not completing

work before the time. Calculated on Time saved. Employee completing work before std time

will be paid actual wages plus the calculated bonus.

Bonus is calculated in the ratio of time saved with std time.

Rowans Plan Advantages

Guarantee Minimum wage

Justified System Motivates Productivity improvement Maximum utilization of

time More bonus as compare

to Halsey. Calculate on ratio of time

saved with std time

Disadvantages Due to Guarantee wages

depends upon employees decisions.

Not suitable for administrative.

Difficult to understand by employees.

Bedeaux Plan

Developed on the basis of Time and motion study. Standard time is denoted in mins. It also take into consideration the rest time and fatigue time Every job is expressed in Bedeaux point (B) This point express an amt of work an avg worker can do in 1 min under normal

working condition. Time wages are paid untill 100% efficiency is achieved A bonus on time saved is 75% Earnings = Hrs worked X Rate/- hr X 75% of value of time saved Time save = S-T/ Bs X R Bs = mins eg. 6 hrs= 360Bs, 2hrs= 120 Bs.

Bedeaux Plan Advantages

Guarantee Minimum wage

Best for organization having std working condition

Disadvantages Costly as Bs are to be

calculated.

Difficult to understand by employees.

Based on Productivity

Based on ProductivityBased on Productivity

1. Taylor

2. Merrick

3. Gantt

4. Emerson Plan

Taylor’s Differential Piece Rate System

Developed by Frederick Winslow Taylor Two rates are set Low and High. Earlier the work completed High wages Vice a versa. More time is taken than also the low wage is

given.

Taylor’s Plan Advantages

Easy to understand Motivates employees Reduction in per unit cost

of production

Disadvantages Dissatisfaction among Tow categories efficient

and non efficient . Not suitable for unity of

work

Merrick’s Multiple Piece Rate Plan

Developed by M. Dwight V. Merrick Improved version than previous one Three Rates are set:-

Upto 83% of std Performance Upto Std Performance ( 10%) 110 Above Std Performance (20%) 120

Efficiency X Base piece Rate % X piece Rate

Efficiency = Time taken X 100 Actual Production X 100 Std Time Std Production

Merrick Differential piece-rateStraight piece-rates less than 83% of the Std outputs110% of the base-piece rate for 83%-100% of the Std outputs120% of the base-piece rate for more than 100% of the Std outputsCase 1 Output = 80 units

Efficiency = 80 *100 = 80% 100

Earnings: As the efficiency is less than 83%, only the base pie-rate applies:80*0.10 = 8.00

Case 2 Output = 90 unitsEfficiency = 90 *100 = 90%of

100Earnings: As the efficiency is 83% but less than 100%, 110% the base pie-rate applies:

90*110*0.10 = 9.90 100Case 3 Output = 110 unitsEfficiency = 110 *100 = 110%

100Earnings: As the efficiency exceeds 100%, 120% of the base piece-rate applies:

110*120*0.10 = 13.20 100

Emerson Efficiency Plan

Developed by Hemington Emerson Based on Effeiciency calculator Principle is Efficiency reached. Minimum efficiency to start with bonus 66.67 % From 66.67% to 100 % and more around 32 slabs for bonus. Below 66.67% = Nil , 66.67% to 80%=5 % 80 to 90-10%, 90 to 100= 20% Above 1 efficiency = 1 % Efficiency = Time taken X 100 Actual Production X 100

Std Time Std Production

Emerson Plan


wage No bonus to 66.675

below productivity

More efficient more is the bonus

Disadvantages Rate of Bonus is not

uniform

GANTT’s Task and Bonus Plan

Developed by Mr H.L Gantt in 1901 Mixture of Time rate and piece Rate Plan A std hourly rate is fixed Minimum Guarantee wages. Minimum Wage is Fixed on the basis of Time motion

study Achieving the target bonus varies 25% - 50% If unable to achieve target atleast minimum wages

will be paid.

Gantt Plan


wage Motivates Employees Based on Efficiency More efficient more is the

bonus

Disadvantages Nil

Halsey Plan Rowan PlanBedaux Plan

Time - Based

Output - Based

Taylor’s Differential Piece RateMerrick Differential Piece RateGantt Task SystemEmerson’s Efficiency plan

Group IncentivesGroup Incentives


2. Rucker’s Plan


Group IncentivesGroup Incentives

Improve Organizational PerformanceImprove Organizational Performance Organizational MeasuresOrganizational Measures Measured PeriodicallyMeasured Periodically

Group IncentivesGroup IncentivesSuitabilitySuitability

Group possesses same skills, abilities, Group possesses same skills, abilities, qualifications.qualifications.

Not possible to measure individuyal Not possible to measure individuyal performance.performance.

Result is achieved Result is achieved

through collective through collective

efforts.efforts.

Priestman’s Plan(Output Bonus Plan) Bonus is Paid to whole Group No distinction between efficient and inefficient Bonus is in proportion to exceed in the target

accomplished. E.g 20 % exceed over the target 20% on their

wages will be the bonus. Failure in achieving target fixed salary is

given.

Priestman’s Plan

Advantages Guarantee Fixed Salary

Bring team spirit

Collaborative process.

Disadvantages Focus on Group not on

individual It can cause

dissatisfaction No difference between

inefficient and efficient worker.

Rucker’s Plan

Bonus is Paid to whole Group in organization. No distinction between efficient and inefficient Bonus is in proportion to decrees in labour

cost. E.g:- Pg 137 Sakshi Vasudeva

Towne’s Gain sharing Plan Plan Introduced by H.R. Towne in U.S.A in 1886 This is adopted to encourage employees for

the cost reduction 50% of saving is distributed among Workers

in equal proportion. Percentage is fixed in advance Foreman are also given advantage.

Organization Incentive PlanOrganization Incentive Plan

1.Scanlon Plan

2.Profit sharing

3.Co-Partnership

4.Employers Stock option Plan

Scanlon Plan

2 basic features Financial incentives are used to increase

productivity and to reduce costs. Suggestions form employees for increasing

productivity.

Conditions for Scanlon: No of workers should be below 1000 Product line and cost are stable Healthy IR and good supervision Strong commitment from management


Employee Stock Ownership Plan (ESOP) A plan whereby employees gain significant stock

ownership in the organization for which they work. Advantages

Favorable tax treatment for ESOP earnings Employees motivated by their ownership stake in the

firm Disadvantages

Retirement benefit is tied to the firm’s future performance

Management tool to fend off hostile takeover attempts.

Reasons for ESOP

Attraction Motivation Retention Commitment Security benefit Performance based Reward Supplement Retirement Financial participation by employees in the

wealth creation.

Objectives

Employee commitment Additional Wealth for employees. Social Security and Retirement benefit Attract, Retention Introduce PMS Improve Relation

Advantages of implementing ESOP Control on Attrition Rate Gives a proper objective Enhances performance

E.G:- Infosys, Wipro, Global Trust Bank, Crysil, Castrol, NIIT, P& G, Zee Network.

Introduced By Mr. V.P Singh (Finance Minister) 1980- 5 % of the new issues could be reserved for employees of the company.

8 July 2003 Microsoft stunned the world by doing away with stock option.

Organizational Incentives

Primary Objectives

• Increase productivity and organizational performance

• Attract or retain employees

• Improve product/service quality

• Enhance employee morale

Drawbacks

•Disclosure of financial information

•Variability of profits from year to year

•Profit results not strongly tied to employee efforts

Profit Sharing

2918527 ppt of incentives plans modified

Documents