Lecture notes Chapter 5 group and org perf pay PDF

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Strategic Compensation Ted Mock Chapter 5 Group and Organization Performance Pay Group pay for performance plans include: gainsharing, goal sharing and other group bonus plans. Gainsharing: There are three types of gainsharing plans but they all have similarities to the original gainsharing plan which is called the Scanlon Plan. In all types of gainsharing plans, cost savings are quantified and then shared between the company and employees. Scanlon Plan – Developed in the 1930’s by Joseph Scanlon who was president of the United Steelworkers of America. The fundamental concept of the plan is to share organizational cost savings and productivity increases, that are generated through employee participation and involvement, with the employees. In other words, the employees receive a share of the financial improvements. In the traditional Scanlon Plan, employees (through their union) negotiate the targeted financial savings for the year. These targets are clearly defined and clearly understood – the process is transparent. Typically, employees receive 75% of the savings (in the form of a bonus) if the target is achieved. However, the split is negotiated and may not always be 75/25. The secret to the success of the Scanlon Plan is a cooperative relationship between workers, the union and the company. It requires a process whereby workers can contribute to problem solving and can make suggestions that improve productivity, improve quality and reduce waste. It also requires trust - workers must know that their suggestions will not lead to the elimination of their jobs. Variations on Scanlon Plan – Rucker plan (very similar to Scanlon); Improshare (no worker participation in goal setting); Family of measures plan (payouts are attached to achieving a variety of targets and goals, some of which may not be financial – this may lead to payouts being perceived as arbitrary rather than transparent – low procedural justice.) Issues: What employees should receive gainsharing payouts? Should individual employee performance be considered? How often should payouts be made? Can the plan be modified? These issues must be addressed and mechanisms for re-visiting the plan must be in place. Advantages of gainsharing: Self-funding – the plan produces the funds from which the payouts are made

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Strategic Compensation Ted Mock Leads to greater labour-management cooperation – positive spin-off effects Increased employee acceptance of change Leads to positive norms toward increases in productivity – affects the culture of the organization Lessened need for supervision – employees more capable of self-control and selfmonitoring because employees “internalize” company objectives. Increased employee commitment which reduces costs of turnover and absenteeism (MY OWN RESEARCH CONFIRMS THIS – FIRMS WITH GAINSHARING EXPERIENCE SIGNIFICANTLY LOWER EMPLOYEE TURNOVER) Disadvantages of gainsharing Costs – administration of program and time cost of employee involvement Expected results may not emerge – program may up being a dissatisfier and demotivator. Potential for “free rider” effect Firms that are well-managed may have less potential for cost and productivity gains Not well suited to firms that have a classical managerial strategy Goal Sharing Group performance reward system in which the work group or team receives a bonus when specified goals are attained. Advantages: Goal sharing can be applied much more broadly than gainsharing – more flexible. It can be tied to specific objectives that support company strategy. May contribute to group norms that value high productivity May promote a collaborative attitude – share knowledge; support new workers Disadvantages: Potentially arbitrary – both the targets and the amount of bonus my be set by management and may be modified or dropped at any time How does the company “value” the achievement of specific goals? Situational factors beyond employee’s control may impair goal achievement Most of these issues can be addressed through employee participation in the design of the plans but this requires a high-involvement managerial strategy. Goal sharing has received widespread acceptance because of its flexibility. However, without careful design, the plan can become a serious dissatisfier or demotivator. It may be seen as arbitrary – low procedural justice. Also, group success may be hindered by unrealistic goals or by group members who not fully contribute . Consider: Goal – is it achievable? Size of reward? (valence) Who should share reward? Should all participants receive equal share? Other options?

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Strategic Compensation Ted Mock Extenuating circumstances, situational factors and unforeseen factors? Other group plans: Pooled performance pay – eg. for group of sales reps, each member receives an equal share of the total earnings of the group. Therefore it is in the interest of every sales rep to help other sales reps succeed (very limited application) Team-based merit pay – individual rewards are based upon contribution to the success of the team. Individual contributions are rated by other team members. Rating criteria include contribution, communication, willingness to work, attendance at group meetings. All team members do not necessarily receive the same rewards (this is very different from the other forms of group based rewards) Company – wide reward plans Includes: Profit sharing and ESOP (employee stock ownership plans) which include employee stock bonus plan, employee stock purchase plan, employee stock option plan and a few lesser used stock plans. Profit sharing Formal plan whereby firm provides bonus payments to employees based upon the profitability of the firm. To be recognized as a true “employee” profit sharing plan, payments must be made to a wide cross-section of employees – not just management. Payout is usually made annually. Important note: the formula for determining the amount of profit sharing payouts varies greatly from firm to firm. Some firms payout a percentage of all profits while other firms will payout a percentage of profits over a target or planned level of profits. Other firms have other formulae. Types of profit sharing: Current distribution plan - Distributes profit sharing bonus at least annually. May be paid in cash or used to purchase company stock Deferred profit sharing plan (DPSP) – bonuses are accumulated and paid out to employee upon termination or retirement (some tax benefits to employee) Employee profit sharing plan (EPSP) – a federal income tax designation – unsheltered for of company supported savings – used only after “sheltered” limits have been exhausted Combination plan – includes partial current payout and defers the remainder

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Strategic Compensation Ted Mock Please see Box 6.2 on page 188 for descriptions of 3 very successful profit sharing plans. Note the different formula for calculating profit sharing pools and for determining employee eligibility. It is important to understand that every firm has a different plan – based upon strategic objectives of the plan and the culture of the organization. Advantages of profit sharing May help align actions of employees with goals of the firm May lead to positive group norms and values May contribute to positive, cooperative behavior May improve labour-management relations Support move to high involvement strategy Related to ability to pay – high profits=higher payout and low profits = lower or no payout Relatively simple to set up an administer and relatively easy to communicate the rules May increase loyalty, commitment, retention Disadvantages of profit sharing May cause free-riding Problems with “line of sight” – that is, employee is unable to see a connection between their actions and profitability of the firm. Many factors beyond the control of employees impact company profitability (consider impact of Enron on Canadian banks especially CIBC) Unions often reject “uncertain” rewards – only 2% of collective agreements in Canada contain profit sharing provision Employees may be discontent if profits go down and payouts decrease – this points to a problem regarding “entitlement” – annual profit sharing payouts may be viewed by employees as an entitlement and when they decrease, the plan becomes a source of dissatisfaction Obviously, it applies only to firms that operate in the “for-profit” sector Bottom line – if profit sharing is designed as part of a carefully integrated overall high involvement strategy, it has the potential to contribute to positive outcomes for the firm. Otherwise, it may have little positive impact on organizational results. Employee stock plans The employee stock plan that is receiving a great deal of media attention right now is WestJet commercials – where employees of the company state that they are “owners” of WestJet and, as a result, receive a great deal of respect from their peers. The commercials also demonstrate how the WestJet owner/employees have a different perspective on their company than ordinary employees – much higher level of OCB and a broader interest in company operations. Employee stock bonus plan – employees receive shares in the company at no cost to the employee – may be part of a profit sharing plan where profits are distributed in the form of shares

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Strategic Compensation Ted Mock Employee stock purchase plan – employees purchase shares in their firm – often through payroll deduction and often at below current market price for the stock. Sometime the company matches the employee’s contributions. Many variations on this plan Employee stock option plan – employee is given the option or the right to purchase a certain number of shares of the company’s stock at a fixed price within a certain time frame. See explanation on page 195. Advantages Encourages employees to “think like owners” – eg. WestJet commercials Disadvantages If share values are declining or not increasing, the plan has little positive impact Key points: The use of options to attract and compensate employees has increased dramatically during the past decade. They were extremely important during the dot.com craze of the late 90’s and during the Y2K crisis of the same period. Like profit sharing, stock plans can deliver positive outcomes for the firm if they are part of a carefully designed and integrated high involvement strategy.

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