WELCOME TO CHECK POINT 34

HOW CAN YOU BENEFIT FROM CHECK POINT 34?

LEAN MANAGEMENT GUIDELINES FOR CHECK POINT 34

THE PURPOSE OF FINANCIAL INCENTIVES

Business owners and managers must develop a cost-effective package of financial incentives to ensure a high level of employee motivation and effective organizational performance.

Financial Incentives represent an additional method of attracting employees to a company. This method equips management with a distinct means of remunerating employees according to their individual or group performance. Financial incentives expressed in monetary terms provide employees with an additional motivational force. The magnitude of this force relates to two factors outlined below.

MOTIVATIONAL FACTORS RELATED TO FINANCIAL INCENTIVES

IMPORTANCE OF MONEY AS A COMPENSATION FACTOR

To determine the effect of the Motivational Force on the employee, it is important to have some knowledge of the existing level of human needs. Despite various attitudes toward the motivational ability of monetary compensation, there is much evidence that Money (Dollars, Euros, Or Rubles) is an attractive and important motivational factor.

The level of expectancy of Additional Remuneration depends substantially upon the employee's confidence related to two factors outlined below.

FACTORS IN THE EMPLOYEE'S EXPECTANCY OF ADDITIONAL REMUNERATION

WHAT CAN MANAGEMENT DO TO MOTIVATE EMPLOYEES?

Management can assist employees to build their confidence by means of additional Training and steady Encouragement during the working process. Management can also increase the level of general confidence of employees by creating a Healthy Atmosphere within the company.

ADDITIONAL INFORMATION ONLINE

FINANCIAL INCENTIVE PLANS

FOUR TYPES OF FINANCIAL INCENTIVE PLANS

FINANCIAL INCENTIVES FOR PRODUCTION EMPLOYEES

THE PIECE-RATE PLAN

The Piece-Rate Plan, or the Piece-Work Plan, is probably the oldest and the most popular method of providing financial incentives to operators. Under this plan, each operator's wages are calculated on the basis of his or her production output, or a piece rate. 

Thus, for example, if a welder gets $2 for welding a frame, then he or she will earn $40 for welding 20 frames per day, or $60 for welding 30 frames.

The Piece-Rate Plan necessitates development of Production Standards, or Production Norms, for various operations. Production norms are usually expressed in terms of two parameters outlined below. (24)

TWO MAIN PARAMETERS FOR PRODUCTION NORMS

THE PIECE-RATE PLAN AS AN ADDITIONAL INCENTIVE

Under the Fair Labor Standards Act most companies are obliged to guarantee their workers a minimum hourly wage. This implies that the prevailing minimum hourly rate will be paid to the worker regardless of his or her production output.

It may be useful, therefore, to introduce a Piece-Rate Plan as an additional incentive in conjunction with the minimum hourly wage in order to stimulate the motivation of production employees and to increase overall productivity within the company. (24)

THE STANDARD-HOUR PLAN

The Standard-Hour Plan is similar to the Piece-Rate Plan, with one basic difference.

In the Piece-Rate Plan the operator is paid a specific rate per unit produced. In the Standard-Hour Plan, the operator is guaranteed a minimum hourly wage and is further rewarded with a bonus based on performance above a pre-determined norm.

If, for example, an operator completes a certain job in eight hours that normally takes ten hours, it means that two hours, or 20% of time, were effectively saved. Such an operator can be, therefore, awarded a time bonus based on time saved. Thus, if the normal wage rate is $10 per hour, the operator should be paid an additional 20%, or $2 per hour extra, for an appropriate working period. (24)

THE PAY-FOR KNOWLEDGE PLAN

The Pay-For-Knowledge Plan is a skill-based compensation plan, designed to compensate employees in accordance with their individual abilities to perform certain tasks and jobs.

The Pay-For-Knowledge Plan encourages the Diversification Of Employees and provides them with an additional incentive to acquire new skills, to invest more time in learning new methods, to attend evening schools, or continuing education programs. This plan may provide the company with numerous important advantages, as outlined below. (24)

ADVANTAGES OF THE PAY-FOR KNOWLEDGE PLAN

THE GROUP INCENTIVE PLAN

The Group Incentive Plan is designed to offer a financial incentive to a team of production employees.

One of the approaches of the Group Incentive Plan is to set a Group Production Standard for the whole team and to provide equal compensation to each member in accordance with the team's performance. Such a plan may prove to be effective when a particular task requires a team effort and cooperation among employees.

The Group Incentive Plan also stimulates a more effective on-the-job training since each member of the team is motivated to train new members in order to increase overall production output. The final compensation for a group effort can be based on a Group Piece-Rate Plan, or a Group Standard-Hour Plan.

Each of the abovementioned financial incentive methods has certain advantages and disadvantages. The first two methods, however, are more advantageous if workers prefer individual financial incentives. The Group Incentive Plan does not reward each worker on his or her personal effort. (24)

FINANCIAL INCENTIVES FOR MANAGERS

Financial Incentives For Managers relate to the additional compensation system designed specifically for the company's managerial staff. Such incentives are highly important since managers play a critical role in maintaining the company's performance at a desired level. All financial incentives for managers may be categorized as illustrated below. (24)

FINANCIAL INCENTIVES FOR MANAGERS

SHORT-TERM FINANCIAL INCENTIVES FOR MANAGERS

Short-Term Financial Incentives For Managers are usually offered in the form of an Annual Cash Bonus. The value of a cash bonus may vary from 10% to 50% or more of a particular manager's monthly salary.

There are several methods of determining the actual value of the cash bonus. Perhaps, one of the most effective methods is to divide the bonus in two parts. One part is based on the individual performance, and the other part is based on the company's performance. (24)

IMPORTANT ADVICE ABOUT BONUSES

According to F. Dean Hildedrand, Jr. :

"Regardless of the method being used, it is important to remember that truly outstanding performers should never be paid less than their normal reward, regardless of organizational performance! 

Moreover, high performers should always be paid substantially larger bonuses than regular performers. These performers are usually the people which the company cannot afford to lose, and their performance should, therefore, be always adequately compensated by the organization's incentive system.

Marginal, or below average performers should never receive awards that are normal or average, and poor performers should be awarded nothing. The money saved on these people should be given to the above average performers." (25)

LONG-TERM FINANCIAL INCENTIVES FOR MANAGERS

Long-Term Financial Incentives For Managers are designed to motivate and compensate senior managerial staff for the long-term growth and success of the company.

Long-term financial incentives for managers are particularly useful in encouraging executives to stay and grow with the organization for their mutual benefit. Long-term incentives are based on providing executive managers with an opportunity to accumulate Capital or Stock over an extended period.

LONG-TERM FINANCIAL INCENTIVES FOR MANAGERS

Stock
 Options

The 
Book 
Value 
Plan

Stock Appreciation Rights

The Performance Achievement Plan

The 
Restricted
 Stock 
Plan

The 
Phantom
 Stock 
Plan

STOCK OPTIONS

Stock Options provide the right to purchase a certain number of shares of a company's stock at a pre-arranged price during a specific period of time. Stock options will be attractive to an executive who assumes that the price of the company's stock will increase. (24)

THE BOOK VALUE PLAN

The Book Value Plan serves as an alternative to a stock plan and permits purchase of the company's stock at its current book value. Executives, who participate in a Book Value Plan, can earn dividends on stock in their possession and benefit from future increases in stock value. (24)

STOCK APPRECIATION RIGHTS PLAN

Stock Appreciation Rights Plan provides the right to enjoy the full benefit of stock holding without an obligation to purchase actual stock. Thus, according to this plan, it is the executive manager's choice whether to acquire the stock or simply to receive compensation for its appreciated value later. (24)

THE PERFORMANCE ACHIEVEMENT PLAN

The Performance Achievement Plan entails awarding executives with shares of the company's stock, if they accomplish a pre-determined range of financial objectives. According to this plan, such objectives may include specific improvement of the company's annual net income or an increase of return on shareholders' equity. (24)

THE RESTRICTED STOCK PLAN

The Restricted Stock Plan generally provides the right to obtain shares of the company's stock free of charge but with certain restrictions. According to this plan, these restrictions are specified in the Internal Revenue Code and impose a minimum period of service by the executive managers in order to avoid forfeiture of the stock. (24)

THE PHANTOM PLAN

The Phantom Stock Plan has nothing to do with the Phantom jet. This plan provides executive managers with special "units" that are equivalent to shares of the company's stock. Thus, according to the Phantom Stock Plan, managers are entitled to receive a monetary compensation equal to the appreciation of the "phantom" stock in their possession. (24)

Financial Incentives For Sales Employees generally include three types illustrated below. (24)

FINANCIAL INCENTIVES FOR SALES EMPLOYEES

Note:
       
Sales Force Compensation is discussed in detail in Tutorial 5.

THE STRAIGHT SALARY PLAN

The Straight Salary Plan may provide the sales person with a guaranteed income at the end of the month. The employer may also prefer to have a fixed and predictable level of sales expenditure. One of the main disadvantages of the Straight Salary Plan, however, is that it does not motivate the sales person to "go the extra mile" to substantially increase the level of sales. (24)

THE STRAIGHT COMMISSION PLAN

The Straight Commission Plan is developed with the prime purpose of motivating sales people in generating additional sales and producing results. Thus, the Straight Commission Plan offers attractive compensation to high-performing sales people. This, in essence, is the prime objective of the company - to increase sales because, without sales, there is nothing except monthly overhead.

One of the drawbacks of this plan, however, is that it de-motivates sales people to serve small and not-so-profitable accounts. In addition, this plan does not provide stable income to sales people, and it may fluctuate depending upon the external economic conditions. (24)

THE SALARY-COMMISSION COMBINATION PLAN

The Salary-Commission Combination Plan is gaining popularity as an effective way to compensate and motivate sales people to produce extraordinary results. This method offers the sales person a stable minimal level of income to pay the bills at the end of the month, as well as the opportunity to earn additional commissions.

The Salary-Commission Combination Plan may consist of any combination of salary and commission, depending on the type of industry and the type of products or services. Some products or services are a "quick sale", while other may take a much longer time, e.g. capital equipment, or different projects. Thus, the split can be 80% salary and 20% commission, or it may be 60%-40%, or 40%-60%, or 20%-80%, or anything else.

One of the main disadvantages of the salary-commission combination plan is its possible complexity of administration and monitoring results.(26)

FINANCIAL INCENTIVES FOR PROFESSIONALS

Financial Incentives For Professionals should be combined with mentally stimulating work programs. The development of financial incentives for professionals often requires a special approach.

Professionals, such as engineers, accountants, or scientists, are often motivated by the quality of work, or challenge of a project, rather than solely by a monetary reward. It is essential, therefore, to ensure that professional employees are given the opportunity to utilize their skills effectively and be provided with equitable financial incentives. These incentives may be expressed in the form of a special bonus for motivation, financial support for further educational purposes, or special plans as illustrated below. (24)

FINANCIAL INCENTIVES FOR PROFESSIONALS

THE PROFIT-SHARING PLAN

The Profit-Sharing Plan is a method whereby a company offers organization-wide incentives to virtually all its employees. There are several methods of providing financial incentives to employees under the Profit-Sharing Plan. However, the most popular method is probably the Cash Plan, according to which a certain percentage of profits (between 15% and 20%) is distributed as a profit share to employees according to their status in the company and level of contribution to the attainment of such a profit. (24)

THE DEFERRED PROFIT-SHARING PLAN

The Deferred Profit-Sharing Plan entails depositing a certain percentage of profits earned by the company during a specified period into a special trust fund for the benefit of employees . Furthermore, the Deferred Profit-Sharing Plan provides a distinctive tax advantage since employees receive the additional income only upon retirement, disability, severance or death, when they or their survivors are usually taxed at lower rates. (24)

THE EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)

The Employee Stock Ownership Plan (ESOP) is another method whereby the company offers an organization-wide incentive to all employees. Under this plan, a company contributes shares of its own stock, or the cash equivalent, to a special trust account that is established with the purpose of purchasing the same stock for the company's employees.

These contributions are usually made once a year in proportion to total employee remuneration but not exceeding 15% of its' value. The cash and stock are held in such a trust account for the benefit of employees and distributed to them upon retirement or separation, provided the employee is eligible for stock ownership. (27)

The Employee Stock Ownership Plan has certain tax advantages, as outlined below. (24)

TAX ADVANTAGES OF THE EMPLOYEE STOCK OWNERSHIP PLAN

THE PRODUCTION SHARING PLAN

The Production Sharing Plans, also known as the Gain-Sharing Plans, are the final example of providing financial incentives to employees on an organization-wide basis.

One form of this plan is the Scanlon Plan, developed in 1937 by Joseph Scanlon. The Scanlon Plan takes into account the required level of compensation related to the normal labor cost per unit or product manufactured.

If, for instance, it becomes possible to reduce this cost as a result of improved production cooperation among employees within a particular production team, it will create additional savings. This plan points to a distribution of such savings, fully or partially, among all the members of the team in the form of a bonus. (29)

Sometimes, it is acceptable to allocate 75% of the savings to the production team and the balance of 25% to management. This plan has a twofold function outlined below.

THE PURPOSE OF THE SCANLON PLAN

THE RUCKER PLAN

Another gain-sharing plan, developed by Rucker, ties incentives to a wide variety savings rather than just labor savings. The Rucker Plan is thus more complex to formulate and to administer than the Scanlon Plan. (24)