Pay-for -performance

Prepared by:PR10MS212PR10MS234

Why Incentives?

• People join a firm because of Pay

• People stay in a firm (or leave) because of Pay

• Employees more readily agree to develop job skills because of Pay

• Employees perform better on their jobs because of Pay

Pay-for-performance

Designing a pay-for-performance plan

• The effectiveness of a pay model depends upon three things- efficiency, equity and compliance.

1. Efficiency: it involves three general areas of concern.

(i) Strategy:• Does the pay-for-performance plan support corporate objectives?• The plan should link well with HR strategy and objectives.• The reward should not be on the basis of status quo.• Finally, management has to address the most difficult question like- How

much of an increase makes a difference? How does it take to motivate an employee?

(ii) Structure:• Structure of the organization should be sufficiently decentralized to allow different

operating units to create flexible variations on a general pay for performance plan.• Different operating units may have different competences and different

competitive advantages, so the organization should not have a rigid pay-for-performance system that detracts from these advantages.

(iii) Standards:• The key to designing a pay-for-performance system rests on standards:• Objectives• Measures• Eligibility• Funding

2. Equity/Fairness :• The second design objective is to ensure that the system is fair to

employees. Two types of fairness are concerns of employees:• Distributive justice: Fairness in the amount that is distributed to the

employees. Managers have little influence over the size of employee’s pay check. It is influenced more by external market conditions, pay policy decisions of organization and occupational choices.

• Procedural justice: Fairness of the procedure used to determine the amount of reward employee receives. Managers have control over this type and the organizations that use fair procedures and supervisors are perceived as more trustworthy and command higher levels of commitments.

• A key element in fairness is communication regarding what is expected from employees.

3. Compliance: The pay for performance system should comply with existing laws as a good reward system enhances the reputation of the firm.

Types of Pay-for-performance

1) Shop-floor incentive: Shop-floor incentive schemes are based on the principle of payment-by-performance(PBR).

• F. W. Taylor(1911), stated that the object of shop-floor incentive scheme was to reward the input of labor within closely-defined tasks and by so doing, to stimulate people to work at a faster pace and increase their output.

• This is in accordance with the instrumentalist view of motivation which is closely associated with ‘Taylorism’.

• The view that employees will only work harder if they get more money still dominates thinking about shop-floor incentive schemes, although the advent of high technology in the shape of computer-integrated manufacture has meant that what were formerly skilled craft workers have now become technicians.

2) Sales force incentive:

• Any company with a consumer-facing (or, indeed, a business-to-business) aspect will constantly be looking to increase their sales figures.

• Targets are set for sales people, but there is frequently little incentive to push beyond these targets once an employee is drawing a salary.

• Developing effective incentive schemes to encourage your sales people to perform to the best of their abilities is an important aspect of running a successful consumer facing business.

• The major benefits here are two-fold; in the first instance your turnover obviously increases as your sales go up. Secondly, a good sales incentive scheme that goes beyond the regular bonus structure will be a vital tool for keeping hold of your most talented, in demand sales staff.

3) Exécutive pay

• Executive pay is financial compensation received by an officer of a firm, often as a mixture of salary, bonuses, shares of and/or call options on the company stock, etc.

• Over the past three decades, executive pay has risen dramatically beyond the rising levels of an average worker's wage. Executive pay is an important part of corporate governance, and is often determined by a company's board of directors.

4) Team based Pay

• It is one of the incentive plans which has lot of attributes to be a failure reports many companies.

• First, team comes in many varieties such as, full-time teams(work group organized as a team), part-time teams(that cut across functional departments) and full-time teams which are temporary. With so many varieties. It is hard to have a consistent type of compensation plan.

• A second problem with rewarding teams is called the “level problem”.• Third problem is the complexity of a plan which varies from organization

to organization. • Company makes sure that all its team pay comes from performance

measures under the control of the team but there are uncontrolled elements factored into the process of setting performance standards.

• Team-based pay plans simply are not communicated which is the factor in compensation success or failure.

Types of team based Pay• Profit-sharing

• Gain-sharing

• Employees Stock Ownership Plan(ESOP)

(a) Profit-sharing plan• Profit sharing, when used as a special term, refers to

various incentive plans introduced by businesses that provide direct or indirect payments to employees that depend on company's profitability in addition to employees' regular salary and bonuses.

• The profit sharing plans are based on predetermined economic sharing rules that define the split of gains between the company as a principal and the employee as an agent.

• For example, suppose the profits are x, which might be a random variable. Before knowing the profits, the principal and agent might agree on a sharing rule s(x). Here, the agent will receive s(x) and the principal will receive the residual gain x-s(x).

b) Gain-sharing plan:• Gain-sharing is best described as a system of

management in which an organization seeks higher levels of performance through the involvement and participation of its people.

• As performance improves, employees share financially in the gain. It is a team approach; generally all the employees at a site or operation are included.

• Gain-sharing measures are typically based on operational measures i.e., productivity, spending, quality, customer service.

• Gain-sharing applies to all types of business that require employee collaboration and is found in manufacturing, health care, distribution, and service, as well as the public sector and non-profit organizations.

(c) Employee Stock Ownership Plan(ESOP):

• Some companies believe that employees can be linked to the success or failure of the company through ESOP.

• Companies like PepsiCo, Lincoln Electric, Coca-Cola and others goals to increase employee involvement in the organization which may increase the performance.

• ESOPs don’t make sense as an incentive since the effects are generally long-term.

Title