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Notes of Incentives & compensation management
- 1. Herman Aguinis, Universityof Colorado at Denver Reward Systems: Definition Set of mechanisms for distributing Tangible returns and Intangible or relational returns As part of an employment relationship .
- 2. Herman Aguinis, Universityof Colorado at Denver Definition of Reward Management • This management discipline is concerned with the formulation and implementation of strategies and policies, the purposes of which are to reward employees fairly, equitably and consistently in accordance with their value to the organisation. • It deals with design, implementation and maintenance of reward systems (processes, practices, procedures) that aim to meet the needs of both the organisation and its stakeholders.
- 3. Herman Aguinis, Universityof Colorado at Denver Reward management is concerned with: • the formulation and implementation of reward strategies; • the overall design and maintenance of the reward system; • deciding how people should be rewarded financially with the help of job evaluation and market pricing; • deciding what non-financial rewards such as recognition should be provided; • base pay management – designing and managing grade and pay structures;
- 4. Herman Aguinis, Universityof Colorado at Denver • contingent pay – devising and managing schemes that reward people according to their merit or contribution; • the provision of pensions and employee benefits; • managing and controlling the reward system. 11/18/17
- 5. . Herman Aguinis, Universityof Colorado at Denver Tangible returns pay Hourly wages, Salary -of-Living Adjustment (COLA) To combat the effect of inflation in an attempt to preserve the employee buying power Additional pay based on employee level of performance - and long-term )
- 6. . Herman Aguinis, Universityof Colorado at Denver bonuses (short term) or stock options/ownership (long term) Tangible returns Serve as a Backup to employee salaries in the event when employee is sick, disabled, or no longer able to work . E.g. Disability pay, medical insurance, pension plans, savings plans. In fact, a recent survey including both employees in general and HR professionals in particular showed that health care/medical insurance is the most important benefit, followed by paid time off and retirement benefits E.g., housing, transportation, mobile , gym facility, phone bills.
- 7. . Herman Aguinis, Universityof Colorado at Denver E.g., vacation time, counseling, financial planning, flexible work schedules (e.g., telecommuting, non-paid time off). Intangible returns
- 8. Herman Aguinis, Universityof Colorado at Denver The 4Ps of Reward • Pay – Salary, bonus, shares, etc. • Praise – Positive feedback, commendation, staff-of- theyear award, etc. • Promotion – Status, career elevation, secondment, etc.
- 9. Herman Aguinis, Universityof Colorado at Denver • Punishment – Disciplinary action, withholding pay, or criticism, etc Returns and Their Degree of Dependency on the Performance Management System Returns Returns Return Cost of Living Adjustment Income Protection Work/life Focus Allowances Relational Returns Base Pay Contingent Pay Short-term - term Incentives
- 10. Herman Aguinis, Universityof Colorado at Denver . Degree of DependencyDegree of Dependency Degree of Dependency • Low • Low • Moderate • Moderate • Moderate • Moderate • High • High • High
- 11. Herman Aguinis, Universityof Colorado at D Business & HR strategy Reward strategy Total Reward Total Remuneration Job evaluation Grade & pay structure Market rate analysis Contingent pay Employee benefits Non-financial rewards Allowances Performance management Derivation of Total Reward
- 12. Herman Aguinis, Universityof Colorado at D Components of Total Reward (Armstrong 2009) Transactional tangible) ( rewards Relational (intangible) rewards Base pay Contingent pay Employee benefits Learning and development The work experience Total remuneration Non-financial rewards Recognition, achievement, growth Total reward
- 13. Herman Aguinis, Universityof Colorado at D Components of Total Remuneration • Base pay: Base pay is the fixed compensation paid to an employee for performing specific job responsibilities. It is typically paid as a salary, hourly (or in some situations piece rate). There is a tendency towards market orientation and the increasing role of qualifications. • Contingent pay: Individual contingent pay relates financial rewards to the – individual performance, organisation or team performance, – competence, – service, – contribution or – skill of individual employees.
- 14. Herman Aguinis, Universityof Colorado at D Consolidated pay: built into the base pay Variable pay: provided in the form of cash bonuses (increasing role nowadays). • Employee benefits: Elements of remuneration given in addition to the various forms of cash pay. Contingent pay • Individual contingent pay is a good motivator (but to what extent?) for those who receive it. • It attracts and retains better workers.
- 15. Herman Aguinis, Universityof Colorado at D • It makes labour related expenditures more flexible. • It can demotivate those who don’t receive it (depends on performance measurement) • Can act against quality and teamwork. Types of individual contingency pays • Performance-related: increases basic pay or bonuses related to assessment of performance
- 16. Herman Aguinis, Universityof Colorado at D • Competence-related: Pay increases related to the level of competence • Contribution-related: pay is related both to inputs and outputs • Skill-based: pay is related to acquisition of skills • Service-related: pay is related to service-time
- 17. Herman Aguinis, Universityof Colorado at D Team based pay • Pay is related to team performance • It can encourages teamwork, loyalty and cooperation • It can be demotivating on individual level (encourages social loafing)
- 18. Herman Aguinis, Universityof Colorado at D Organisaton-wide schemes • Profit-Sharing Plans – organization-wide programs that distribute compensation based on an established formula designed around profitability • Gain Sharing – compensation based on sharing of gains from improved productivity
- 19. Herman Aguinis, Universityof Colorado at D • Employee Stock Ownership Plans (ESOPs) – plans in which employees acquire stock, often at below-market prices Employee benefits • Attractive and competitive total remuneration • Provide for the personal needs • Increase commitment toward the organisation • Tax-efficient
- 20. Herman Aguinis, Universityof Colorado at D Main types of Employee benefits • Pension schemes • Personal (and family) security: different types of insurances • Financial assistance: loans, house purchase schemes, discount on company services… • Personal needs: holidays, child care, recreation facilities, career breaks… • Company cars and petrol • Intangible benfits: quality of working life… • Other benefits: mobile phones, notebooks…
- 21. Herman Aguinis, Universityof Colorado at D • Cafeteria systems Definition of the psychological contract “The perceptions of both parties to the employment relationship, organization and individual, of the reciprocal promises and obligations implied in that relationship” The state of the psychological contract is concerned with whether the promises and obligations have
- 22. Herman Aguinis, Universityof Colorado at D been met, whether they are fair and their implications for trust.
- 23. 23 Herman Aguinis, Universityof Colorado at Denver Variable Pay: Incentives for Variable Pay Assumptions Some people perform better and are more productive than others Better performing employees should receive more compensation Some jobs contribute more to organizational success than others Part of compensation should be tied directly to performance and results
- 24. 24 Herman Aguinis, Universityof Colorado at Denver Performance
- 25. 25 Herman Aguinis, Universityof Colorado at Denver
- 26. 26 Herman Aguinis, Universityof Colorado at Denver Developing Successful Pay-for- Performance Plans
- 27. 27 Herman Aguinis, Universityof Colorado at Denver Pay-for- Performance Plans Link strategic goals and employee performance Enhance results and reward employees financially Reward and recognize employee performance Promote achievement of HR objectives
- 28. 28 Herman Aguinis, Universityof Colorado at Denver Successful Variable Pay Plans
- 29. 29 Herman Aguinis, Universityof Colorado at Denver Effective Incentive Plans Plan Fits the Organizatio n Plan Rewards the Appropriate Actions Plan effectively Administere d
- 30. 30 Herman Aguinis, Universityof Colorado at Denver Why Variable Pay Plans Fail
- 31. 31 Herman Aguinis, Universityof Colorado at Denver Plan incentives are not seen as desirable Plan doesn’t reward doing a good job Plan doesn’t motivate Plan rewards teams/groups rather than individuals Plan doesn’t increase base pay Employees’ View of Variable Pay Plan
- 32. 32 Herman Aguinis, Universityof Colorado at Denver Developing Successful Incentive Plans
- 33. 33 Herman Aguinis, Universityof Colorado at Denver 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. Identify variable pay incentives separately from base pay. Successful Incentive Plans
- 34. 34 Herman Aguinis, Universityof Colorado at Denver Individual Incentives
- 35. 35 Herman Aguinis, Universityof Colorado at Denver Necessary Conditions For Individual Incentive Plans Individual performance must be identified Individual competitiveness must be desired Individualism must be stressed in the organizational culture
- 36. 36 Herman Aguinis, Universityof Colorado at Denver Categories of Variable Pay Plans
- 37. 37 Herman Aguinis, Universityof Colorado at Denver Individual Incentives • Piece-Rate Systems –Straight piece-rate system –Differential piece-rate system • Bonus • “Spot” Bonuses • Special Incentive Programs –Performance awards
- 38. 38 Herman Aguinis, Universityof Colorado at Denver –Recognition awards –Service awards Purposes of Special Incentives
- 39. 39 Herman Aguinis, Universityof Colorado at Denver
- 40. 40 Herman Aguinis, Universityof Colorado at Denver Why Organizations Establish Variable Pay Plans for Groups/Teams Group/Team- Based Variable Pay Plans Improve productivity Tie pay to team performance Improve customer service or production quality Increase employee retention
- 41. 41 Herman Aguinis, Universityof Colorado at Denver Design of Group/Team Incentive Plans
- 42. 42 Herman Aguinis, Universityof Colorado at Denver Group/Team Incentive Plan Issues Distribution of Group/Team Incentives Timing of Group/Team Incentives Decisions About Group/Team Incentive Amounts
- 43. 43 Herman Aguinis, Universityof Colorado at Denver Group/Team Incentives • 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.
- 44. 44 Herman Aguinis, Universityof Colorado at Denver – Many employees still expect to be paid according to individual performance.
- 45. 45 Herman Aguinis, Universityof Colorado at Denver Conditions for Successful
- 46. 46 Herman Aguinis, Universityof Colorado at Denver Group/Team Incentives
- 47. 47 Herman Aguinis, Universityof Colorado at Denver Types of Group/Team Incentives • 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
- 48. 48 Herman Aguinis, Universityof Colorado at Denver • Scanlon Plan
- 49. 49 Herman Aguinis, Universityof Colorado at Denver Organizational Incentives
- 50. 50 Herman Aguinis, Universityof Colorado at Denver Primary Objectives • Increase productivity and organizational performance • Attract or retain employees • Improve product/service quality • Enhance employee morale Drawbacks • Disclosure of financial information • Variability of profits from year to year • Profit results not strongly tied to employee efforts Profit Sharing
- 51. 51 Herman Aguinis, Universityof Colorado at Denver Framework Choices for a Profit-Sharing Plan
- 52. 52 Herman Aguinis, Universityof Colorado at Denver
- 53. 53 Herman Aguinis, Universityof Colorado at Denver Employee Stock Plans • 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.
- 54. 54 Herman Aguinis, Universityof Colorado at Denver • If the market price of the stock is below the specified option price, the stock option is “underwater” and is worthless to employees. Employee Stock Plans • Employee Stock Ownership Plan (ESOP) – A plan whereby employees gain significant stock ownership in the organization for which they work. – Advantages
- 55. 55 Herman Aguinis, Universityof Colorado at Denver • Favorable tax treatment for ESOP earnings • Employees motivated by their ownership stake in the firm – Disadvantages • Retirement benefit is tied to the firm’s future performance • Management tool to fend off hostile takeover attempts. Types of Sales Compensation Plans
- 56. 56 Herman Aguinis, Universityof Colorado at Denver • Salary-Only – All compensation is paid as a base wage with no incentives. • Commission – Straight Commission • Compensation is computed as a percentage of sales in units or dollars. • The draw system make advance payments against future commissions to salesperson. – Salary-Plus-Commission or Bonuses • Compensation is part salary for income stability and part commission for incentive. Effectiveness of Sales Incentive Plans
- 57. 57 Herman Aguinis, Universityof Colorado at Denver Frequent changes in sales plans An “entitlement” culture Pay without performance Poor quota setting Small differences in pay for top and bottom performers Causes of Ineffectiveness in Incentive Plans
- 58. 58 Herman Aguinis, Universityof Colorado at Denver Executive Compensation
- 59. 59 Herman Aguinis, Universityof Colorado at Denver Executive Salaries Executive Benefits Executive Perquisites (Perks ) Annual Executive Incentives and Bonuses Performance Incentives: Long Term vs. Short Term Elements of Executive Compensation
- 60. 60 Herman Aguinis, Universityof Colorado at Denver “Reasonableness” of Executive Compensation
- 61. 61 Herman Aguinis, Universityof Colorado at Denver Common Executive Compensation Criticisms Executive Compensation Considerations and Concerns Would another company hire this person as an executive? How does the executive’s compensation compare with that for executives in similar companies? What would an investor pay for the level of performance of the executive? Is the executive’s pay consistent with pay for other employees within the company?
- 62. 62 Herman Aguinis, Universityof Colorado at Denver
- 63. Herman Aguinis, Universityof Colorado at Denver Thank you for your attention!