Variable Pay

Some people perform better and are more productive than others
Better performing employees should receive more compensation
Variable Pay Assumptions
Part of compensation should be tied directly to performance and results
Some jobs contribute more to organizational success than others

1
Pay-forPerformance Plans
Link strategic goals and employee performance
Enhance results and reward employees financially
Reward and recognize employee performance
Promote achievement of HR objectives
Effective Incentive Plans
Plan Fits the Organization
Plan Rewards the Appropriate Actions
Plan effectively Administered
Plan incentives are not seen as desirable
Plan doesnt reward doing a good job
Employees View of Variable Pay Plan
Plan rewards teams/groups rather than individuals
Plan doesnt motivate
Plan doesnt increase base pay

5
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.
Successful Incentive Plans
Identify variable pay incentives separately from base pay.

6
Necessary Conditions For Individual Incentive Plans
Individual performance must be identified
Individual competitiveness must be desired
Individualism must be stressed in the organizational culture
Piece-Rate
Straight
Systems
piece-rate system Differential piece-rate system

Bonus Spot
Bonuses Special Incentive Programs

Performance
awards Recognition awards Service awards

9
10
Group/TeamBased Variable Pay Plans
Improve productivity
Tie pay to team performance
Improve customer service or production quality
Increase employee retention
11
Group/Team Incentive Plan Issues
Distribution of Group/Team Incentives
Timing of Group/Team Incentives
Decisions About Group/Team Incentive Amounts
12
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.

13
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

14
Profit Sharing
Primary Objectives
Increase productivity and organizational performance
Drawbacks
Disclosure of financial information
Attract or retain employees

Improve product/service quality Enhance employee morale
Variability of profits from year to year

Profit results not strongly tied to employee efforts
15
16
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.
17
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 firms future performance Management tool to fend off hostile takeover attempts.
18
Salary-Only
All compensation is paid as a base wage with no incentives. Straight Commission
Commission
Compensation is computed as a percentage of sales in units or dollars. The draw system make advance payments against future commissions to salesperson.
Compensation is part salary for income stability and part commission for incentive.
19
Salary-Plus-Commission or Bonuses
Frequent changes in sales plans
An entitlement culture
Pay without performance
Causes of Ineffectiveness in Incentive Plans
Poor quota setting
Small differences in pay for top and bottom performers

20
Executive Salaries
Executive Benefits
Executive Perquisites (Perks) Annual Executive Incentives and Bonuses
Elements of Executive Compensation
Performance Incentives: Long Term vs. Short Term

21
Would another company hire this person as an executive?
How does the executives compensation compare with that for executives in similar companies?
Executive Compensation Considerations and Concerns
Is the executives pay consistent with pay for other employees within the company?
What would an investor pay for the level of performance of the executive?
22

Variable Pay

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Variable Pay

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Some people perform better and are more productive than others

Better performing employees should receive more compensation

Variable Pay Assumptions

Part of compensation should be tied directly to performance and results

Some jobs contribute more to organizational success than others

Link strategic goals and employee performance

Enhance results and reward employees financially

Reward and recognize employee performance

Promote achievement of HR objectives

Effective Incentive Plans

Plan Fits the Organization

Plan Rewards the Appropriate Actions

Plan effectively Administered

Plan incentives are not seen as desirable

Plan doesnt reward doing a good job

Employees View of Variable Pay Plan

Plan rewards teams/groups rather than individuals

Plan doesnt motivate

Plan doesnt increase base pay

Develop clear, understandable plans that are continually communicated.

Use realistic performance measures.

Successful Incentive Plans

Identify variable pay incentives separately from base pay.

Necessary Conditions For Individual Incentive Plans

Individual performance must be identified

Individual competitiveness must be desired

Individualism must be stressed in the organizational culture

piece-rate system Differential piece-rate system

Bonuses Special Incentive Programs

awards Recognition awards Service awards

Group/TeamBased Variable Pay Plans

Tie pay to team performance

Improve customer service or production quality

Increase employee retention

Group/Team Incentive Plan Issues

Distribution of Group/Team Incentives

Timing of Group/Team Incentives

Decisions About Group/Team Incentive Amounts

with Group/Team Incentives

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

(Teamsharing or Goal Sharing)

Improshare Scanlon Plan

Attract or retain employees

Variability of profits from year to year

Stock Ownership Plan (ESOP)

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

Frequent changes in sales plans

Pay without performance

Causes of Ineffectiveness in Incentive Plans

Poor quota setting

Small differences in pay for top and bottom performers

Executive Perquisites (Perks) Annual Executive Incentives and Bonuses

Elements of Executive Compensation

Performance Incentives: Long Term vs. Short Term

Would another company hire this person as an executive?

Executive Compensation Considerations and Concerns

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