Compensation: Incentive Plans: Profit Sharing
An incentive based compensation program to award employees a percentage of the company's profits.
How does Profit sharing work?
The company contributes a portion of its pre-tax profits to a pool that will be distributed among eligible employees. The amount distributed to each employee may be weighted by the employee's base salary so that employees with higher base salaries receive a slightly higher amount of the shared pool of profits. Generally this is done on an annual basis.
Brings groups of employees to work together toward a common goal (the success/benefit of the company).
Helps employees focus on profitability.
The costs of implementing the plan rise and fall with the company's revenues.
Enhances commitment to organizational goals.
The pay for each employee moves up or down together (no individual differences for merit or performance).
Focuses only on the goal of profitability (which may be at the expense of quality).
For smaller companies, these plans may result in drastic swings in earnings for employees which the employees may find difficult to manage their personal finances.
Adherence to the FLSA requires employers to recalculate each worker's "regular rate" of pay. To overcome this limitation, employers may restrict this type of compensation to exempt employees.
When does Profit sharing work best?
When company earnings are relatively stable (or steadily increasing).
What is the best way to implement Profit sharing?
Meet with executives to develop a clear understanding of profit sharing. Develop various formulas and models to be used in predicting future gains and the costs associated with sharing those gains. Prepare rules.Why Incentive Plans Cannot Work Paper - 1494 Words
Why Incentive Plans Cannot...
Why Incentive Plans Cannot Work Paper
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Lauren Hartigan
Human Resource Management
Professor Ferrari
Why Incentive Plans Cannot Work
The article titled Why Incentive Plans Cannot Work by Alfie Kohn was very interesting.
Rewards offer temporary compliance that can ultimately destroy relationships among employees. It hinders the ability to manage a company.
It creates short-term success and does not mean long-term commitment.
In this, I find that incentives do not alter the attitudes that underlie behaviors.
Incentives hinder creativity and create competition. I concur that incentives also undermine interest.
We see in this article that incentives don’t alter the attitudes that underlie behaviors.
We think the behaviorist theory and pay for performance will increase performance but it doesn’t.
Rewards succeed at only temporary compliance.
Once the rewards run out people go back to their old behaviors.
We call incentives “extrinsic” motivators, and they temporarily change what we do. Studies show that people, who expect to receive a reward for completing a task or for doing that task successfully, simply do not perform as well as those who expect no reward at all.
I will use the example of the Welders at Midwestern manufacturing company. An incentive system had been in effect for a long time then was eliminated.
At first production dipped but then over time production quickly rose, and eventually reached a level as high or higher than it had been before.
Financial incentives were virtually unrelated to the number of workers who were absent or who quit their jobs over a period of time. Training and a goal-setting program had a far greater impact on productivity than did pay for performance plans. (Kohn)
The topic of incentives are part of American culture as our parents had them in their workplace.
We read that the “Do this and you’ll get that” is part of American life. However these reward driven compensation systems can become a problem in the workplace. The fundamental flaw of behaviorism itself dooms the prospects of affecting long-term behavior change or performance change.
(Kohn) We learn that yes, the less one makes, the more concerned they are likely to be about financial maters but what one truly cares about isn’t money.
We also see that even if people who were principally concerned with their salaries, still doesn’t prove that money is motivating.
There is no firm basis for the assumption that paying people more will encourage them to do better work or more work.
Frederick Herzberg, a professor at the University of Utah’s Graduate School of Management said “just because too little money can irritate and demotivate doesn’t mean more money will bring increased satisfaction, nor motivation.”
Like mentioned if ones pay was cut in half, they would be flustered, their moral would suffer and as a result one’s performance would too. However, doubling that person’s pay wouldn’t necessarily result in better work.
I may have already deserved a higher pay and the raise gives me what I wanted for my work, but it may not pressure me to work even harder. However if my pay is raised and I am doing mediocre work, it may not motivate me to do better work. (Kohn)
We then read that punishment and rewards are actually two sides of the same coin. Both have a punitive effect because they are manipulative. The similarities of the “Do this and you’ll get that” is pretty much the same as “Do this or here’s what will happen to you” The reward may be desired but it’s because of certain behaviors which then leads to manipulation by their subordinates.
The experience of being controlled acts like a punishment over time. Nobody likes to be controlled.
However not receiving a reward one has expected is indistinguishable from punishment. If the incentive is withheld or withdrawn deliberately from somebody who had hoped to get it, is like a punishment.
The more...
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...This document contains three articles on the value of incentives. Please read all three.
Title: Why incentive plans cannot work.
Source: Harvard Business Review, Sep/Oct93, Vol. 71 Issue 5, p54, 7p, 2 charts, 4c
Author(s): Kohn, Alfie
Subject(s): INCENTIVES in industry
EMPLOYEE motivation
Abstract: Discusses reasons for the failure of incentive programs. Use of
rewards to institute
Studies showing the
ineffectivity of incentive plans t Lack of basis for money's
Rewards as ma Employee relationships as
casualties of rewards.
Note: This title is held locally.
Database: Business Source Premier
Section: In Questions
WHY INCENTIVE PLANS CANNOT WORK
When reward systems fail, don't blame the program -- look at the premise behind it.
It is difficult to overstate the extent to which most managers and the people who advise them
believe in the redemptive power of rewards. Certainly, the vast majority of U.S. corporations use
some sort of program intended to motivate employees by tying compensation to one index of
performance or another. But more striking is the rarely examined belief that people will...
...Incentive Plan Paper
University of Phoenix
Incentive plans can be both a positive and a negative for any organization.
Employees can either do what is right, and work towards not only preparing to help themselves, with the incentives being offered, but also achieve the company goal in light of the incentive plan.
On the other hand, some employees
may take advantage of the incentive plan and do just enough to receive their incentive, while not truly taking the organization's plans into account.
In the past not all employees used to be offered incentives.
It was reserved for employees that were top executives, piece workers, sales personnel, and. Today most corporations, both large and small, offer an incentive package that excludes no employees. Some kind of incentive pay is an imperative element of any compensation plan. Incentive pay expresses appreciation and establishes a sense partaking in the company's well-being that straight salary dollars, no matter how large, do not suggest. A well-designed incentive-pay plan can also helps to pull people together, help point them in the road the organization wants them to go, and gives that additional push that many companies...
...Incentive Plans Paper
LaKeisha Winters
University Of Phoenix
Atina Wright
June 23, 2010
Incentive Plans Paper
Verizon Wireless is the nations largest wireless provider in the world. Verizon is also number one in providing in store customer service to all customers. What makes Verizon the best is there employees and great customer service. After conducting several studies and continuing to
give first class service, Verizon realized that it is
service that the employees gives to the customer’s that keeps them coming back. Several years ago Verizon designed incentive plans to help motive there employees to go above standards and reach company goals.
When searching for an incentive plan there where several good plans and some that where bad. After testing some of the incentive plans out, Verizon decided to go with the Profit sharing method. This plan is designed to put money into a trust fund that will be divided by all of the employees every year.
The purpose for the plan is to motivate employees to work hard so that they company does well. When the company does well the employees bonuses will be larger.
Profit sharing and Verizon Wireless organizational goals work well together, the company is more profitable due to...
...Incentive Plans
Isabelle Alston
OMM 618: Human Resources Management
Companies’ presidents, CEOs, and managers for decades have used incentives to attract, reward, and retain employees. Dessler (2011) recognizes that most employees receive salary or hourly wage as well as other incentives (Dessler, 2011). Dessler (2011) reports a variety of incentive plans ranging from piecework plans to the
earning at risk pay plans (Dessler, 2011). While there are many incentive plans that can be discussed, this paper will only highlight the advantages and disadvantages of merit pay as an incentive and profit sharing plans.
Dessler (2011) defines merit pay as a salary increase awarded based on performance and becomes part of the employees’ base pay salary (Dessler, 2011). Dessler (2011) asserts that merit pay has advocates who argues that rewards tied to performance can motivate performance and detractors claim that merit pay undermine teamwork and misconception of pay as a whole (Dessler, 2011). As Dessler (2011) defines merit pay with advocates and detractors other authors such as Longenecker and Goff (1992) uses the term performance appraisal instead of merit pay. Longenecker and Goff (1992) states that merit pay or performance appraisal is believed to be effective by managers and...
...Incentive Plans
Incentive plans are compensation strategies that may encourage employees to increase their productivity and to perform beyond the general standards established by their companies. Researchers and HR professional identified 3 types of incentive plans: 1) 2) 3) enterprise. One of the oldest individual incentive plans is known as piecework.
Bohlander and Snell defined piecework as &an incentive plan under which employees receive a certain rate for each unit produced& (Bohlander & Snell, 2007, p. 442). Piecework's greatest advantage is that employees are paid based on their performances. However, piecework has several disadvantages. Piecework may not motivate employees especially when employees believe that the above average performance will provoke disapproval between the fellow coworkers. Furthermore, this plan does not apply for those situations &when quality is more important than quantity& (Bohlander, 2007, p. 443).
Group incentive plans (e.g. team compensation) differ from the individual ones as they encourage employees to cooperate each other in order to achieve companies' goals. Group incentive plans have several advantages, e.g. reducing jealousy between employees, learning new skills from others team members. However, group...
...Student performance improves when teachers given incentives upfront
A bonus payment to teachers can improve student academic performance — but only when it is given upfront, on the condition that part of the money must be returned if student performance fails to improve, research at the University of Chicago shows.
The study showed that students gained as much as a 10 percentile increase in their scores compared to students with similar backgrounds — if their teacher
received a bonus at the beginning of the year, with conditions attached. There was no gain for students when teachers were offered the bonus at the end of the school year, the research found.
“This is the first experimental study to demonstrate that teacher merit pay can have a significant impact on student performance in the U.S.,” said UChicago economist John List, an author of the study.
The study, “Enhancing the Efficacy of Teacher Incentives through Loss Aversion: A Field Experiment,”[-&0] published by the National Bureau of Economics Research, reflects the findings of other studies in psychology and behavioral economics.
“The results of our experiment are consistent with over 30 years of psychological and economic research on the power of loss aversion to motivate behavior: Students whose teachers in the ‘loss’ treatment of the experiment showed large and significant gains in their math test scores,” said List, the Homer J. Livingston Professor in Economics at UChicago....
...The best Laid Incentive Plan
Case Description
The case study presents an interesting concept of organizational behavior and performance measurement systems. The CFO and Chief Administrative Officer of Rainbarrel products, Hiram Phillip was very confident about the changes he brought in Rainbarrel. He had been in the company for only a year and had done lots of infrastructural changes. Some of the changes included cost cutting in budget, headcount reductions of
10 % across all units, introducing the ‘wall of shame’ policy for customer care representatives, on time shipment policy. He felt, according to his metrics and figures, he had single handedly improved the company’s performances by leaps and bounds. And today was the day where he would present his numbers to the executives in the corporate executive council meeting. Hiram was applauded by the CEO Keith Randall in the meeting and everything looked good and positive until when certain information started coming out. It came to light for instance the, Research and Development department had developed a breakthrough product that was not being brought to market as quickly as it should have been—because of Hiram's inflexible budgeting process. An employee survey showed that workers were demoralized. The customers were unhappy and were complaining about Rainbarrel’s service.
Although Hiram’s numbers looked remarkable on paper, there were lots of thing that Hiram was unaware of...
...Lesson Topic:
Pay - Different types of pay / who gets what type of pay.
Course / curriculum covered
AQA Preparation for Working Life.
Section 9.6 Economic and Financial Aspects of Life
Your teaching/ learning focus for this lesson:
Lesson Aim: To introduce learners to the different types of payment for work so they can understand the way businesses operate.
Students’ Learning Objectives will be:
1) All will
2) Most will
3) Some will
Students’ Outcomes
(What will the students have done to show you that the objective has been achieved)
Understand that there are different types of pay
Recognised some pay terms
Identify what type of pay is used when
Completed a matching exercise
Know the advantages and disadvantages of payment types
Answered questions about types of pay
Personalisation / Differentiation Strategies:
Those with greater knowledge can support those less able during the question and answer and group work
Support teacher (if available) can work with most needy in a group or 1:1 during exercises.
More advanced learners can be given additional exercises if they complete the individual or group work quickly.
Word search and worksheets can be done individually or in groups to meet needs
Group divisions can be chosen either to mix or separate abilities
Attainment/Assessment Objectives:
Levels/ sub levels or grades being targeted:...
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Among other Dutch companies that offer option incentive plans are: ING Group, and ABN-Amro.
Incentive plans are used to encourage employees to perform at high levels of productivity.
These issues almost always prompt a relook at the short- and long-term incentive plans as part of the IPO.
The five-year period covered by the incentive plans largely tracks the financial crisis.
In addition to paying a salary, most large companies reward their top executives through short term and long term incentive plans.
To what extent are companies incorporating sustainability measures into their incentive plans?
Similar incentive plans reappeared in early twentieth-century factories, with managers dangling the promise of cash rewards if their workers reached certain production levels.
Because there can be many variations to incentive plans, it is important to analyze the advantages and disadvantages of potential incentive plans prior to implementation.
Nearly two-thirds of all physicians now have annual incentive plans, according to the Hay Group, a Philadelphia-based management consultancy that surveyed 182 health care groups.
Management incentive plans can also be difficult to create.
Most of the executive incentive plans run by Barclays, including old plans that have been discontinued, run for three years, with equal tranches of shares released in each of the three years.
They wanted either a claw back of past bonuses and spoils from long-term incentive schemes, or the surrender of what he could earn from long term incentive plans that haven't yet vested.
The 2010 rise in executive compensation was largely due to new incentive plans that were designed to reward them, as were their old ones almost exclusively based on the financial performance of their firms.
Further, we anticipate that an increasing number of companies will incorporate strategic measures into both their short- and long-term incentive plans, as a way to encourage focus on the non-financial, as well as financial, drivers of value.
Although the use of stock options in management incentive plans can help focus executives on longer-term company growth, careful planning needs to be undertaken prior to implementing so as to reduce the many disadvantages that can occur.
At the moment, many companies meet disclosure requirements by providing reams and reams of data showing the number of options awarded to senior executives under various long-term incentive plans, all vesting at different prices and over different periods.
Right now it is very difficult to see the total amount that any executive takes home because the remuneration sections of annual reports are immensely long, complex and woolly, especially in regard to earnings from large and important long-term incentive plans.
In the spirit of Earth Day last Friday, I did some reading on what companies are doing these days to improve environmental sustainability, curious to see whether such programs are finding their way into incentive plans, and whether they are providing tangible results.
But the car wash experience really drove it home for me and will cause me to look at the incentive plans I create or approve from multiple angles and with a new level of scrutiny to increase the odds that the result is the intended consequence.
Our incentive plans work.
Most of the incentive-trust plans that Scroggin drafts are dynasty trusts generally spanning four generations.
This will give plans incentive to compete around their ability to expand coverage while still maintaining a competitive price.
Since employer-paid health insurance is exempt from income tax, there's an incentive for these plans to cover things like sunglasses and marital counseling.
Imposing a fee on insurance companies offering high-premium plans — which would create a strong incentive for more cost-efficient plans that would help reduce the growth of premiums.
It found about half of them offered some sort of long-term incentive bonus or option plans.
Of course, businesses might decide to keep their retirement plans as an incentive to attract or retain workers.
It is looking at cash-based incentive schemes or phantom option plans, which tie the cash bonus to the stock's performance.
My focus was on the role that tax preferences play in providing an incentive for employers to offer plans, and to design them in a way that uses behavioral nudges to increase saving.
"You don't have the choice of buying coverage that isn't outlandishly expensive, " giving people an incentive to find lower cost health plans.
HSAs and high-deductible plans give health care consumers an incentive to impose price discipline.
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