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10-1
Individual Incentive Plans
Offer a promise of pay for some objective, pre-established level of performance
Common feature - An established standard against which employee performance is compared to determine magnitude of incentive pay
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10-2
Group Incentive Pay plans
1. Team based
2. Gain Sharing pay plans
1.Team based pay plans
- Small group IPP depends on criteria
- 3 methods
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10-3
2. Gain-Sharing pay Plans
Department or work unit
Depends on enhancement of comp perf in
Cust satisfaction, reduced cost, imp prod, good safety records.
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10-4
Types of Gain-Sharing Plans
1.Rucker PlanGood labor union & Mgt relations.
Financial incentives based on Total
earnings of hourly employees &
production value.( 1% PV to 1% bonus)
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10-5
2. Scanlon Plan
–Designed to lower labor costs
without lowering level of a
firm’s productivity.
–Incentives are derived as a
function of ratio between labor
costs and sales value of
production (SVOP)
–SVOP includes sales revenue
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10-6
Ex: 8,00,000/20,00,000= 0.4
= 40%
= 40/100 * 40,00,000
= 16,00,000
Gain = ATLC – ATLC
= 16,00,000 – 10,00,000
= 6,00,000
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10-7
Emp participation is necessary
Philosophy is to promote Group cooperation.
2 elements are a) emp involve ment b) bonus calculation
- Prod committee
- Scanlon committee
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10-8
3. Improshare (Improved
productivity through sharing)
–Standard is developed that
identifies expected hours
required to produce an acceptable
level of output
–Any savings arising from
production of agreed-upon output
in fewer than expected hours is
shared by firm and workers.
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10-9
Exhibit 10.14: Three Gain-Sharing Formulas
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10-10
Exhibit 10.15: Examples of a Scanlon Plan
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10-11
Profit-Sharing Plans
Predetermined index of profitability
– Employees may not feel their jobs directly impact profits
The trend in recent variable-pay design is to combine the best of gain-sharing and profit-sharing plans
– The plan must be self funding
– Along with having the financial incentive, employees feel they have a measure of control
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10-12
Earnings-at-Risk PlansSuccess sharing plan
– Employee base pay is constant
Variable pay increases in successful years
No reduction in base pay and no variable pay in poorly-performing years
Risk sharing plan
– Employee base pay varies
Base pay often reduced in poor performance years
Shifts part of risk of doing business from company to employee
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10-13
Exhibit 10.16: Group Incentive Plans:Advantages and Disadvantages
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10-17
Example of GroupIncentive Plan - Saturn
Earnings-at-risk plan where base pay is 93% of market
Employees meet individual objectives to capture at-risk component
All team members must meet objectives for any to get at-risk money
A profit sharing component is based on corporate profits
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10-19
Group Incentive Plans: Examples
All incentive plans can be described by common features
– The size of the group that participates in the plan
– The standard against which performance is compared
– The payout schedule
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10-20
Explosive Interest in Long-term Incentive Plans
Long-term incentives (LTIs) focus on performance beyond the one-year time line used as the cutoff for short-term incentive plans
Recent explosive growth in long term plans is spurred in part by a desire to motivate longer-term value creation
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10-21
Long-Term Incentive Plans
Employee Stock Ownership Plans
(ESOPs)
Performance Plans (Performance
Share and Performance Unit)
Broad-Based Option Plans (BBOPs)
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10-22
Exhibit 10.18: Long-Term Incentives andTheir Risk/Reward Tradeoffs