February 5, 2022

Many organizations are concerned about the rising cost of employee benefits and question their value to the organization an

Discussion 5.1

Many organizations are concerned about the rising cost of employee benefits and question their value to the organization and to the employees. In your opinion, what benefits are of greatest value to employees? To the organization? Why? What can management do to increase the value to the organization of the benefits provided to employees?

Discussion 5.2

When OSHA was enacted in 1970, it was heralded as the most important new source of protection for the U.S. worker in the second half of the twentieth century. From the information in this chapter, what is your opinion about the effectiveness or the ineffectiveness of the act? Should it be expanded, or it should businesses have more freedom to determine safety standards for their workers?

Case Study 5.1 4 pages

There are two (2) case studies per chapter. You are to respond to one (1) case from Chapter 9 and one (1) case study from Chapter 10.

Chapter 9 – Managing Compensation: (Choose one case study)

Case Study 1 – Pay Decisions at performance Sport, pg. 377 and answer the questions

Case Study 2 – An In-N-Out Pay Strategy: Costa Vida's Decision to Boost Pay. pg. 378 and answer the questions

Chapter 10 – Pay for Performance: Incentive Rewards (Choose one case study)

Case Study 1 – United States Auto Industry Back on Top…of CEO Pay, pg. 413 and answer the questions

Case Study 2 – Team Based Incentives: Not Your Usual Office, pg. 414 and answer the questions

Weekly Summary 5.1

Write 2 pages from the chapter 9 and chapter 10 attached PPT

Chapter 9: Managing Compensation

Case Study 1: Pay Decisions at Performance Sports

Katie Perkins’s career objective while attending Rockford State College was to obtain a degree in small

business management and to start her own business after graduation. Her ultimate desire was to

combine her love of sports and a strong interest in marketing to start a mail-order golf equipment

business aimed specifically at beginning golfers.

After extensive development of a strategic business plan and a loan in the amount of $75,000 from the

Small Business Administration, Performance Sports was begun. Based on a marketing plan that stressed

fast delivery, error-free customer service, and large discount pricing, Performance Sports grew rap- idly.

At present the company employs 16 people: eight customer service representatives earning between

$11.25 and $13.50 per hour; four shipping and receiving associates paid between $8.50 and $9.50 per

hour; two clerical employees each earning $8.25 per hour; an assistant manager earning $15.25 per

hour; and a general manager with a wage of $16.75 per hour. Both the manager and assistant manager

are former customer service representatives.

Perkins intends to create a new managerial position, purchasing agent, to handle the complex duties of

purchasing golf equipment from the company’s numerous equipment manufacturers. Also, the mail-

order catalog will be expanded to handle a complete line of tennis equipment. Since the position of

purchasing agent is new, Perkins is not sure how much to pay this person. She wants to employ an

individual with five to eight years of experience in sports equipment purchasing.

While attending an equipment manufacturers’ convention in Las Vegas, Nevada, Perkins learns that a

competitor, East Valley Sports, pays its customer service representatives on a pay-for-performance

basis. Intrigued by this compensation philosophy, Perkins asks her assistant manager, George Balkin, to

research the pros and cons of this payment strategy. This request has become a priority because only

last week two customer service representatives expressed dissatisfaction with their hourly wage. Both

complained that they felt underpaid relative to the large amount of sales revenue each generates for

the company.

Questions

1. What factors should Perkins and Balkin consider when setting the wage for the purchasing agent

position? What resources are available for them to consult when establishing this wage?

2. Suggest advantages and disadvantages of a pay- for-performance policy for Performance Sports.

3. Suggest a new payment plan for the customer service representatives.

Case Study 2: An In-N-Out Pay Strategy: Costa Vida’s Decision

to Boost Pay

For many businesses in today’s belt-tightening economy, decisions on pay need to be strategic to ensure

that employees are treated fairly and to ensure that businesses can remain viable. This requires knowing

what your competitors pay their employees and knowing your own salary budget. But knowing what

your competitors are paying can be both valuable and painful.

As a primary stakeholder and former CEO of Costa Vida, a fast-growing chain of fresh Mexican

restaurants, Nathan Gardner knew he was competing against some restaurant chains with competitive

compensation systems. Costa Vida is a fresh Mexican grill featuring Baja-inspired foods that are made

from scratch daily. Following a trip to Cabo San Lucas on the Baja Coast in Mexico, Costa Vida founders

JD and Sarah Gardner were inspired with a vision: Bring the freshly made local cuisine with the vibrant

lifestyle to the United States. They started their first restaurant in 2001, and after just 13 years, Costa

Vida has more than 50 franchises in Arizona, California, Colorado, Idaho, New Mexico, Missouri,

Oklahoma, Texas, Washington, Utah, and as of 2013 two stores in Canada. One of the main challenges

Costa Vida faces is the fierce competition for customers as well as employees. “You’d be surprised how

much of a difference having good employees in all areas of the business makes,” commented Nathan.

“For the fast-casual food industry,” remarked Nathan, “you are dependent upon your people. If you

don’t treat your people well, they won’t treat your customers well. If your customers aren’t treated

well, you have no business.” For months, Nathan agonized over how he could develop a competitive

compensation plan that matched the objectives of the organization, but that fell in line with the tight

budget of each in- dividually owned franchise unit. He stated, “We, of course, leave the final

compensation decision to the franchise owner, but we do all we can to educate and persuade our

franchisees to be competitive and fair. In the long run, this is how they can maintain a superior level of

customer satisfaction.”

Nathan pointed out that a strong benchmark for them has been In-N-Out Burger. In-N-Out started in

California and is known for its great compensation package. They start out all their new “associates”

(aka employees) at a minimum of $10 an hour. They also offer flexible schedules to accommodate

school and other activities, paid vacation, free meals, and a 401k retirement plan. For full-time

associates they provide medical, dental, vision, life, and travel insurance coverage. Their reason for

paying so high is based on a strategy that lower turnover and more committed workers will lead to

better service. “What In-N-Out does for their employees is truly amazing,” commented Nathan. “We

often see employees moving from one fast-food chain to another, but we rarely see employees coming

from In-N-Out.”

Nathan had a tough challenge ahead in trying to convince his franchise owners and managers to think

more strategically about their pay systems. He needed to help them realize that paying wages and

offering other compensation benefits that were better than their competitors may mean lower profit

margins up front, but that the returns would be greater in the long run. He also needed to offer

evidence to show that this was not just about being fair, but it was about being strategic. The restaurant

business is a fast and fierce industry and companies come and go all the time. What was it going to take

for Costa Vida to stay for the long haul?

Questions

1. Why is it important for pay to be externally fair?

2. Why is it important for pay to be internally fair?

3. What should Costa Vida’s compensation strategy look like? Hint: What are the company objectives

and how can employee pay help to achieve those objectives?

4. What should the pay structure look like? What pay mix would you recommend?

5. How should Nathan communicate a new compensation strategy to his franchisee owners and

managers?

6. What effect will paying higher wages have on Costa Vida in the short term? What effect will it have in

the long term? Explain.

Chapter 10: Pay-for-Performance: Incentive Rewards

Case Study 1: United States Auto Industry Back on Top … of

CEO Pay

During the financial crisis, many executives’ pay was stifled, reduced, or even withheld. Among the

hardest hit was the U.S. auto industry. Shareholder groups, union leaders, political officials, and the

general public all demanded change in the way auto industry executives were getting rich while their

cars were get- ting poor. For example, Ford made some major cuts for its executives and its employees.

This is why people were shocked to find out that for 2011 the CEO of Ford, Alan Mulally, was to receive

$56.5 million in stock awards. Even today, it is one of the richest pay packages ever given to a top

executive in the auto industry—and it is even after all the clamor over sky-high executive paychecks. Is it

too much?

That depends on who you ask. For most, it seems unreasonable that a boss would make more than

1,000 times the pay of the average worker. However, if you ask Ford workers who have seen Mulally

steer Ford back from the edge of bankruptcy, they probably would not complain too much. If you asked

Ford’s shareholders, it would be hard for them to overlook the fact that Ford shares have gone from

$1.56 when Mulally first took over to $14 a share. If you ask Ford dealers, they may be too busy selling

one of the strongest lineups of cars around to answer.

Of course, no one really knows if Ford would have been sitting in such a good position regardless of

Mulally. On the other hand, there are plenty of companies that would be willing to pay $50 million if

they knew their company would rebound as Ford has under Mulally.

Questions

1. Are CEOs and key corporate executives worth the large pay packages they receive? Explain.

2. Do you agree with Peter Drucker that corporate executives should receive compensation pack- ages

no larger than a certain percentage of the pay of hourly workers? Explain.

3. Will the Dodd–Frank Wall Street Reform and Consumer Protection Act giving shareholders the right to

vote on executive pay influence the size of these packages in the future? Explain.

Case Study 2: Team-Based Incentives: Not Your Usual Office

Done-Deal Paper Inc. operates throughout central Pennsylvania with offices in Scranton, Harrisburg, and

Altoona. Providing paper and paper needs to most of Central Pennsylvania, Done-Deal is one of the top

two competitors in the area.

In January 2014, Conner Carell, office manager of one of the branch offices for Done-Deal somehow

convinced company president and CEO Bailey Zucker that they needed to change the way their sales

representatives were incentivized. He argued, “putting our sales reps into teams will not only increase

cooperation, but it will increase sales … right now there are too many sales being lost that could have

been won through a team effort.” Most of the time, sales made to clients required multiple interactions

by multiple reps anyway. Bailey agreed with Conner and pointed out that teamwork can also improve

morale and synergy. Based on these assessments, Conner organized his twenty sales reps into four

teams of five reps. Sales teams would pool their commissions regard- less of who initiated and worked

on the sale. After the first year of this team-based incentive program, sales commissions across the four

groups varied dramatically. For instance, the highest paid employees in a team made, on average,

$50,000 more than the lowest paid team members.

During August 2012, Conner sent to all 20 sales reps a survey requesting feedback on the satisfaction

with teams and, specifically, the team-based incentive rewards program. While survey results were

generally positive, not everyone was happy in the office. Problems could be grouped into the following

categories:

1. Some sales representatives believed that various team members did not “buy into” the team concept

and were simply “free riding”—benefiting from the efforts of higher performing reps.

2. There was a general feeling that some teams were assigned difficult regions that prevented them

from achieving higher sales.

3. Teams did not always display the motivation and synergy expected, since “bickering” was prevalent

between stars and their lesser performing peers. Average performers complained that star reps made

them look bad.

4. At least a third of the sales staff felt the incentive rewards program was unfair and asked for a return

to individual sales incentives.

Questions

1. Do results from the survey illustrate typical com- plaints about teams and specifically about team

incentive rewards? Explain.

2. If appropriate, what changes would you recommend to improve the incentive reward program? Be

specific.

3. Would management have benefited from employee involvement in the initial design and

implementation of the program? Explain.

Learning Outcomes

Implement a strategic incentive program
Detect when and what types of individual incentives are appropriate
Differentiate how gains may be shared with employees under different group incentive plans like the Scanlon and Improshare gainsharing systems

Learning Outcomes

Differentiate between profit sharing plans and explain advantages and disadvantages of these programs as an alternative to individual and group incentive systems
Understand how to apply different incentive systems designed for professionals and executives

Strategic Reasons for Incentive Plans

Variable pay: Tying pay to some measure of individual, group, or organizational performance
Attached to fixed costs allowing flexibility to increase, decrease, or maintain future payments to employees as business conditions warrant
Allows the organization to align its employees’ interests and outcomes with the organization

Strategic Reasons for Incentive Plans

Incentive pay plans
Establish a performance threshold for employees to qualify for incentive payments
Emphasize a shared focus on organizational objectives
By broadening the opportunities for incentives to employees
Creates an operating environment supporting shared commitment
Through belief that every individual contributes to organizational performance and success

Figure 10.1 – Types of Incentive Plans

Incentive Plans as Links to Organizational Objectives

Purpose of incentive plan
Encourages employees to assume ownership of their jobs, thereby improving effort and job performance
Motivates employees to expend more effort than under hourly and/or seniority-based compensation systems
Supports a compensation strategy to attract and retain
top-performing employees

Advantages of Incentive Pay Programs

Focus employees on specific Performance targets
Incentive payouts are variable costs linked to the achievement of results
Base salaries are fixed costs unrelated to output
Directly related to operating performance
Encourage teamwork when payments are related to team results

Advantages of Incentive Pay Programs

Distribute success among those related to producing that success
Increase equity and justice
Means to reward or top performers when salary budgets are low

Requirements for a Successful Incentive Plan

Identify important organizational metrics encouraging employee behavior
Involve employees
Incentive programs should seem fair to employees
Find the right incentive payout
Payout formulas should be simple and understandable
Establish a clear link between performance and payout

Setting Performance Measures

Should distinguish between individual and group contributions
Should avoid biases based on likes and dislikes, different personalities, and political agendas
Should distinguish between one group’s contribution over another

Problems With Incentive Plan

Can be traced to the choice of performance measures
Overly quantitative, complex measures should be avoided
Selection of performance measure need to evaluate the extent to which employees involved can influence the measurement
Avoid intensifying performance goals continuously trying to exceed previous results
Leads to employee frustration and perception that the standards are unattainable

Figure 10.3 – Measurement DOs and DON’Ts

Administering Incentive Plans

Thorough planning must be combined with a cautious approach
Effective administration of incentive plans requires:
To motivate performance implying that poor performance must go unrewarded
Annual salary budgets to be large enough to reward and reinforce exceptional performance
Determination of overhead costs associated with plan implementation and administration

Individual Incentive Plans – Piecework

Straight piecework: Incentive plan under which employees receive a certain rate for each unit produced
Differential piece rate: Employees whose production exceeds the standard amount of output receive a higher rate for their work than the rate paid to those who do not exceed the standard amount

Individual Incentive Plans – Piecework

Benefits of piecework
Wage payment for each employee is simple to compute
Permits organizations to predict its labor costs with accuracy
Since the costs are the same for each unit of output
Computing the piece rate
Based on hourly wage rates that would otherwise be paid for the type of work being performed

Disadvantages of Piecework

Not an effective motivator
Desire for peer approval outweighs the desire for more money
Difficult to distinguish or measure individual contributions
Not applicable to highly mechanized work where employee has little control over output
Works against organizational culture as it can infringe on employee’s time, productivity, and total pay earned

Individual Incentive Plans – Standard Hour Plan

Sets rates based on the completion of a job in a predetermined standard time
Popular in service departments in automobile dealerships
Equipment maintenance and product quality can be at risk as employees strive to work faster to earn additional income

Individual Incentive Plans – Bonus

Supplemental to the base wage
Provides employees with more pay for exerting greater effort along with having the security of basic wage
Acts as tool to increase future performance
Spot bonus: Unplanned bonus given for employee effort unrelated to an established performance measure
Useful for retention and motivation of overburdened employees, during lean financial times

Individual Incentive Plans – Merit Pay

Links an increase in base pay to how successfully an employee performs his or her job
Becomes part of base pay once issued regardless of future performance
Serves as motivator to employees perceiving a raise to be related to the performance required to earn it
Merit guidelines: Used for awarding merit raises that are tied to performance objectives

Problems with Merit Raises

Money available for merit increases may be inadequate to satisfactorily raise all employees’ base pay
Managers may have no guidance in how to define and measure performance
Employees may not believe that compensation is tied to effort and performance
Unable to differentiate between merit pay and other types of pay increases

Problems with Merit Raises

Employees and managers may hold different views of the factors contributing to job success
Creates feelings of pay inequity

Individual Incentive Plans – Awards and Recognition

Awards
Used to recognize productivity gains, special contributions or achievements, and service to the organization
Tangible awards presented with the right message and style can make employees feel appreciated
Simultaneously underscoring a company
Recognition
Conduit that shows employees that the company appreciates their efforts, their unique gifts, and their contributions

Individual Incentive Plans – Sales Incentives

Unique needs of sales incentive plans
Performance standards for sales employees are difficult to develop because performance is affected by external factors
Sales volume may not be an accurate indicator of the effort salespeople have expended, hence salespeople are entitled to a degree of stability in their income

Types of Sales Incentive Plans

Permits salespeople to be paid for performing various duties that are not reflected immediately in their sales volume

Straight salary plan

Based on percentage of sales

Straight commission plan

Includes a straight salary and commission

Combination salary and commission plan

Pays a salary plus a bonus achieved by reaching targeted sales goals

Sales plus bonus plan

Group Incentive Plans – Team Compensation

Team incentive plans: All team members receive an incentive bonus payment when production or service standards are met or exceeded
Advantages
Establishes a psychological climate that fosters cooperation and a collective desire to fulfill organizational goals and objectives
Promotes a pay-for-performance philosophy

Group Incentive Plans – Team Compensation

Approaches in establishing team incentive payments
Set performance measures upon which incentive payments are based
Determine the size of the incentive bonus
Create a payout formula and should be explained to employees in detail

Group Incentive Plans – Team Compensation

Problems associated with team compensation
Individual team members may perceive that their efforts contribute little to team success or to the attainment of the incentive reward
Intergroup social problems
Complex payout formulas or insufficient payout reward

Group Incentive Plans – Gainsharing Incentive Plan

Programs under which both employees and the organization share financial gains by a predetermined formula
Reflects improved productivity and profitability
Increase in productivity is gained when:
Greater output is obtained with less or equal input
Equal production output is obtained with less input

Variations of Gainsharing Plans

Bonus incentive plan using employee and management committees to gain cost-reduction improvements

Scanlon plan

Gainsharing program where bonuses are based on the overall productivity of the work team

Improshare

Figure 10.4 – Scanlon Plan Suggestion Process

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