Performance Linked Incentive

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					Pay for Performance: Incentive
         MGT351 (Mhb)
   Strategic Reasons for Incentive Plan
• Incentive plan or variable pay is steadily growing as part of
  strategic compensation management.

• Incentive plans emphasize a shared focus on organizational

• Incentive rewards are based entirely on a pay- for-
  performance philosophy.

• Variable Pay: tying pay to some measure of individual, group
  or organizational performance.
         Types of Incentive Plan
• Individual Incentive Plan

• Team Incentive Plan

• Enterprise Incentive Plan
Advantages of Incentive Pay Programs
• Incentives focus employee efforts on specific performance
• Incentive payouts are variable costs linked to the achievement
  of results.
• Incentive compensation is directly related to operating
• Incentives foster teamwork and unit cohesiveness when
  payments to individuals are based on team results.
• Incentives are way to distribute success among those
  responsible for producing that success.
  Requirements of a Successful Incentive Plan

• For an incentive plan to succeed, employees must have some
  desire for the plan.
• Employees must be able to see a clear connection between
  the incentive payments they receive and their job
Characteristics of a successful incentive plan:
• Financial incentives are linked to valued behaviour
• The incentive program seems fair to employees
• Productivity and quality standards are challenging but
• Payout formulas are simple and understandable.
    Some Individual Incentive Plan
  -straight piecework
  - differential piecework
• difficult to develop for many types of jobs
• can work against organizational culture of promoting
   workforce cooperation, creativity, etc.
• It may not be always be an effective motivator, if employees
   believe that an increase in output will provoke disapproval
   from fellow workers.
    Some Individual Incentive Plan
• Standard Hour Plan: incentive plan that sets rates based on
  the completion of a job in a predetermined standard time.
• Bonuses: Incentive payment that is supplemental to the base
  - bonuses may be determined based on the basis of cost
  reduction, quality improvement or other performance criteria
  established by the organization
  - at executive level performance criteria may include earnings
  growth or company specific agreed upon objectives.
  - When some special employee contribution is to be rewarded
  a spot bonus is used.
    Some Individual Incentive Plan
• Merit Pay: the merit increase is normally given on the basis of
  an employee’s having achieved some performance standard.
• Merit raises can serve to motivate if employees perceive the
  raise to be related to the performance required to earn them.
• Increase granted on the basis of merit should be
  distinguishable from any cost-of-living or other general
• Unlike bonus, merit raise may be perpetuated year after year
  even when performance declines.
• One of the major weaknesses of merit raises lies in the
  performance appraisal system.
                Some Individual Incentive Plan
                   Sales Incentive
• The enthusiasm and drive required in most type of sales work
  demand that sales employees be highly motivated. That is
  why financial incentives are widely used for sales people.
Types of Sales Incentive Plan:
• Straight salary plan
• Straight commission plan
• Combined salary and commission plan.
                 Some Individual Incentive Plan
           Executive Compensation
• One significant feature of executive compensation is that they
  receive large incentive rewards.
• Large amount (in millions) of money they receive for their
Four basic components of executive compensation
• Base pay
• Short-term incentives or bonuses
• Long-term incentives or stock plans
• Perquisites
Hank Swartout- Precision Drilling, Canada – 74,824,335 (2005)
      Some Group Incentive Plans
• Team Compensation Plan : Compensation plan in which all
  team members receive an incentive bonus payment when
  production or service standards are met or exceeded.

• Gainsharing Incentive Plan: Programs under which both
  employees and the organization share financial gains
  according to a predetermined formula that reflects improved
  productivity and profitability.
                 Some Individual Incentive Plan
             Enterprise Incentive Plans
• Profit Sharing : any procedure by which an employer pays, or
  makes available to all regular employees, in addition to base
  pay, special current or deferred sums based on the profits of
  the enterprise.
• Stock Options : Stock option plans grant to employees the
  right to purchase a specific number of shares of the
  company’s stock at a guaranteed price (the option price)
  during a designated time period.
• Employee Stock Ownership Plans (ESOP): Stock plans in
  which an organization contributes shares of its stock to an
  established trust for the purpose of stock purchases by its

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