Pay For Performance UCP

12 Pay for Performance and
Financial Incentives
Basic Factors in Determining
Pay Rates
Employee Compensation
fixed reward (like base
salary) and can also involve
1. Direct short-term and long-term
incentives (like overtime
and bonuses)
2. Indirect
other non-cash benefit (with indirect

monetary value) is considered
indirect compensation. These perks
include: Insurance (health, dental,
vision, etc.)
Incentive Pay Terminology
Pay-for Performance
Variable Pay
Profit Sharing
I.
Discuss the main incentives
for individual employees.
Individual Employee Incentive and
Recognition Programs
Piecework plans
Type of incentive program whereby the employee is paid based on each unit of
output. Employees are paid a certain rate per unit times the number of units
produced
o Straight piecework
o Standard hour plans
o Pros and Cons
Standard hour plans
An incentive plan that sets pay rates based on the
completion of a job in a predetermined “standard
time.”
If employees finish the work in less than the
expected time, their pay is still based on the
standard time for the job multiplied by their hourly
rate.
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Example
For example, a job has

hourly rate $6.50 per hour.
Standard production 40 units per day.
Standard hour is 8 hour per day.
An employee produced 60 units in a specific day. So his

earning for the day will be:
8 X $6.50 = $52 per day as per standard hour .
However, production exceeded 20 units or 50% . so total
earning will be = $52 + (50% x $52) = $78
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Merit Pay as an Incentive
Merit pay as an incentive
Any salary increase awarded to an employee based on his
or her individual performance.
Differential pay increases
Merit pay options
o Merit awards tied to both individual and
organizational performance.
Incentive for Professional Employees
Professional employees are those whose work

involves the application of learned knowledge to the
solution of the employer’s problems.
Lawyers, doctors, economists, and engineers.
Dual-career ladders
Non-financial and
Recognition-Base Awards
Social Recognition
Performance
Feedback
Job Design
not usually considered an
“incentive,” job can affect
employee motivation
II.
Discuss the pros and cons
of commissions versus
straight pay for
salespeople.
Types of Sales Incentive Plans
1. Salary plan
2. Commission plan
3. Combination plan
plan design benefits your top performing employees

Incentives for Salespeople (cont’d)
Combination plan
Pay is a combination of salary and commissions, usually
with a sizable salary component.
Plan gives salespeople a floor (safety net) to their
earnings.
Salary component covers company-specified service
activities.
Plans tend to become complicated, and misunderstandings
can result.
IV.
Describe the main
incentives for managers and
executives.
Incentives for Managers and
Executives
Short-term Incentives
Long-term incentives
Short-Term Incentives for Managers And Executives
Annual cash bonuses. Overtime
pay. Holiday, weekend and shift
Annual bonus work
Plans that are designed to motivate short-term

performance of managers and are tied to company
profitability.
Eligibility basis: job level, base salary, and impact on
profitability
Fund size basis : nondeductible formula (net income) or
deductible formula (profitability)
Individual awards: personal performance/contribution
Long-Term Incentives for Managers And Executives
Stock option
The right to purchase a specific number of shares of company
stock at a specific price during a specific period of time.
Some Other Executive Incentives
Golden parachutes
Payments companies make to departing executives in
connection with a change in ownership or control of a
company.
Guaranteed loans to directors
Loans provided to buy company stock.
A highly risky and now frowned upon practice.
Team/Group Variable Pay Incentive Plans
Team or group incentive plan
A plan in which a production standard is set for a specific
work group, and its members are paid incentives if the
group exceeds the production standard.
How to Design Team Incentives
Set individual work standards
Set work standards for each team member and then
calculate each member’s output.
Members are paid based on one of three formulas:
All members receive the same pay earned by the highest producer.
All members receive the same pay earned by the lowest producer.
All members receive same pay equal to the average pay earned by
the group.
Organizationwide Variable Pay Plans
Profit-sharing plans
Cash plans
Employees receive cash shares of the firm’s profits at regular
intervals.
Deferred profit-sharing plans
A predetermined portion of profits is placed in each employee’s
account under a trustee’s supervision.
Organizationwide Variable Pay Plans (cont’d)
Employee stock ownership plan (ESOP)

A corporation annually contributes its own stock—or
cash (with a limit of 15% of compensation) to be used
to purchase the stock—to a trust established for the
employees.
The trust holds the stock in individual employee
accounts and distributes it to employees upon
separation from the firm if the employee has worked
long enough to earn ownership of the stock.
Advantages of ESOPs 1. they gain retirement benefits
2. they feel a sense of job security
they feel more engaged and committed to
Employees
3.
their company's success.
ESOPs help employees develop a sense of ownership in

and commitment to the firm, and help to build teamwork.
No taxes on ESOPs are due until employees receive a
distribution from the trust, usually at retirement when
their tax rate is lower.
Shareholders of closely held corporations
Helps to diversify their assets by placing their shares of
company stock into an ESOP trust and allowing them to
purchase other marketable securities for themselves in
their place.
Advantages of ESOPs (cont’d)
The company
A tax deduction equal to the fair market value of the
shares transferred to the trustee.
An income tax deduction for dividends paid on ESOP-
owned stock.
The Employee Retirement Income Security Act (ERISA)
allows a firm to borrow against employee stock held in
trust and then repay the loan in pretax rather than after-tax
dollars.
Firms offering ESOP had higher shareholder returns than
did those not offering ESOPs.
Scanlon Plan
Scanlon plan (Joseph Scanlon, 1937)
Philosophy of cooperation
No “us” and “them” attitudes that inhibit employees from developing a
sense of ownership in the company.
Identity
Employees understand the business’s mission and how it operates in
terms of customers, prices, and costs.
Competence
The plan depends a high level of competence from employees at all
levels.
Sharing of benefits formula
Employees share in 75% of the savings (reduction in payroll expenses
divided by total sales).
Scanlon ratio= labor cost/ SVOP
(Sale value of production )
Gainsharing Plans
An incentive plan that engages many or all employees in a

common effort to achieve a company’s productivity
objectives.
It is a productivity measure, as opposed to profit-sharing
which is a profitability measure. There are three major
types of gainsharing :
Scanlon plan: This program dates back to the 1930s and
relies on committees to create cost-sharing ideas.
Designed to lower labor costs without lowering the level
of a firm's activity. The incentives are derived as a
function of the ratio between labor costs and sales value
of production (SVOP).

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12 Pay for Performance and

other non-cash benefit (with indirect

Copyright © 2017 Pearson Education, Ltd.

For example, a job has

An employee produced 60 units in a specific day. So his

Copyright © 2017 Pearson Education, Ltd.

Professional employees are those whose work

plan design benefits your top performing employees

Plans that are designed to motivate short-term

Employee stock ownership plan (ESOP)

their company's success.

ESOPs help employees develop a sense of ownership in

An incentive plan that engages many or all employees in a

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