CHAPTER #5

REWARDS FOR ATTAINING A WORK OBJECTIVE

Incentive Pay

Three Major Assumptions

1. Differences in contributions by individuals or teams.

2. Firms overall performance depends on performance of individuals or work teams.

3. To attract, retain and motivate high performance.

Traditional Pay Incentive Pay

Fixed hourly rateFixed salary

Pay based on performance

Individual plansGroup plansCompanywide

plans

Contrasting Incentive Pay with Traditional Pay

PIECEWORK…TWO TYPES

1. Production2. 2. individual performance plus

subjective criteria

Individual Incentives

Two economic advantages

More incentive plans

Management incentives For reaching firm’s goals look www. aflcio.com

Behavioral encouragement For attendance record or safety

Referral plans Recruitment of new clients or ees

Group Incentives #110

Reward for collective performanceTeam based

Gain sharing Work teams Project teams Task forces Scanlon plans Rucker value added plan

Value added formula Improshare Labor hour formula and buy-back provision #116

Companywide Incnetives

Profit sharing plans Use of funding formulas and then plan for

distribution Equal payments Proportional payments based on contribution

Employee stock options Equity segment of ownership

Company stockStock optionESOP’s

Designing Incnetive Pay Programs

Five key factors1. Should it be based on group or

individual incentives?2. Should incentive pay replace base

salary?3. Level of risk ees are willing to accept?4. How shall performance be judged?5. Time horizon for goals ?

Linking incentive pay with strategy

Lowest cost strategy?

Differentiation strategy?

Exercise for class application

Google firms with both types of strategies low cost and differentiation and low cost

What type of incentive plans do they offer their employees?

What are the advantages and disadvantages of both programs????