Group/Team based Incentives

Session-14

Introduction • Reward all team members equally based

on overall performance of the team• Performance is evaluated using an

objective standard• Fosters cohesiveness among the team

members• Motivate to think as a unit• Easy to measure the overall performance

of the team

The objectives are:-• Creation of the collective interest and

team sprit among the workers.• Creation of interest among the superiors

to improve performance.• Reduction of wastage in materials and

elimination of idle-time.

Conditions Under Which Team-Based Plans Are Most Likely to Succeed

• When work tasks are so intertwined that it is difficult to single out who did what.

• When the firm’s structure and systems facilitate the implementation of team-based incentives.

• When the objective is to foster entrepreneurship in self-managed work groups.

• A group of persons of different skills is required for the execution of the work due to its nature.

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Conditions for SuccessfulGroup/Team Incentives

Priestman’s production bonus

• A standard is fixed in terms of units or points• When actual output > Standard output,

workers will receive bonus in proportion to the increase

• Can operate for mass production of a standard product

Rucker plan

• Employees receive a constant proportion of the added value (which is defined as sales minus raw materials and services)

• The ascertainment of the ratio of earnings & added value is done.

• The rationale behind using this formula is that effects not controllable by employees, such as inflation and market factors, are not included in the formula.

• Rucker plan is known as share of production plan.

Rucker plan

It works in this manner: • a firm has costs for producing it's service or

product. • If a firm is able to keep those costs under control,

it's profitability will increase.• Employee input into how to better decrease

costs/improve efficiency is actively encouraged.• Resultant costs savings from employee input that

increase profitability are shared with employees in some form of bonus.

Scanlon plan• This is similar to Rucker plan• Instead of the ratio between earnings & added

value as considered in case of Rucker plan, the ratio between earnings & selling price of production is taken as the basis in case of Scanlon plan.

• This is a Cost saving productivity-incentive plan in which any saving (computed per unit of output) compared with an agreed upon standard labor cost is shared equally between the workers and the firm.

Scanlon planA simple piece of logic at the heart of the Scanlon plan: • If all employees have a personal and tangible financial

stake in the success of a corporation, they will contribute more actively to its success.

• In such a system, employees are made part of the process of allocating labor and capital resources within the company.

• Employees then collectively share a portion of any cost savings that they are able to generate through systematic improvements or more dedicated and productive labor.

Difference between Scanlon plan and Rucker plan

There are two major differences between the Scanlon and Rucker plans:

(a)Rucker plans tie incentives to a wide variety of savings, not just the labor savings focused on in Scanlon plans.Due to this greater flexibility Rucker plans are more amenable to linkages with individual incentive plans

(b)In Scanlon plan, rewards come from employee participation in improving productivity and reducing cost.In Rucker plan, the rewards come from the difference between the labour cost and sales value of production.

Towne plan• Standard cost of labour is set under this plan. • In addition to the wages earned, the workers

become qualified to receive bonus for any reduction in the labour cost as compared to the standard labour cost.

• 50% of the savings in labour cost is distributed among workers and supervisors in proportion to their wages.

Allocation Methods• Equal incentive payments

• Differential payments based on contribution to goals

• Differential payments according to base pay

Advantages

• Team spirit

development

• increased output

• Wastage minimization

• Better quality of work

• Automatic training

Disadvantages

• The bonus is shared by all, irrespective of the comparative efficiency of the workers in a group.

• competition between groups.

• successful groups can resist change.

• Free-riding effect• It can take time for

members of a group to work well with each other.

Organization wide incentive plans

Introduction • Reward employees on the basis of the

success of the organization over a specified time period

• Promote a culture of ownership• Develop a sense of belongingness,

cooperation and team work• Profit sharing, gain sharing and ESOP

Profit sharing

• A scheme whereby employers undertake to pay a particular potion of net profits to their employees on compliance with certain service conditions and qualification.

• The purpose is mainly to strengthen the loyalty of employees to the firm by offering them an annual bonus.

• The share of profit of the worker may be given in cash or in the form of shares in the company. 

• These shares are called bonus shares.• In India, the share of the worker is governed by the

Payment of Bonus act.

Merits:• Inspires the management

and the worker to be sincere, devoted and loyal to the firm

• It enables the workers to lead a rich life

• Likely to induce motivation in the workers and other staff for quicker and better work

• Workers  do not require close supervision.

• It attracts talented people

Demerits:• Profit sharing is, in

practice a fair weather plan. 

• Management may dress up profit figures and deprive the workers of their legitimate share in the profits.

• Workers tend to impair the solidarity of trade unions.

• Fixation of worker’s share in the profits of firm may prove to be a bone  of contention in the long run.

Gain sharing

when employees make a suggestion that improves the organization, a percentage of the organization’s gain from the suggestion is shared with the employees who made the suggestion Example:

Employees make suggestions Management reviews the submitted suggestions,

determines the improvement (gain) from each suggestion, and decides which suggestions to implement

A percentage of the gain from a suggestion is shared with the employees who made the suggestion

Gain sharing

– A gain sharing plan aims at increasing productivity or decreasing labour costs and sharing the resultant gains (usually a lump sum payment) with employees.

– It is based on mathematical formula that compares a baseline of performance with actual productivity during a given period.

– Gain sharing is built around the idea that the involved employees will improve productivity through more effective use of organizational  resources.

– Three major types of gain sharing plans are currently in use. Scanlon Plan, Rucker Plan and Improshare.

– Improshare stands for improved productivity through savings. This plan is similar to a piece rate except that it rewards all employees in an organization.

– Input is measured in hours and output in physical units. – A standard is calculated and bonuses are paid based on the extent to which the

standard is exceeded. – The employees and the organization each receive payment for 50 per cent of

the improvements.

•Unlike profit sharing plans which have deferred payments, gain sharing plans are current distribution plans. •They are directly related to individual   behaviour and are distributed on a monthly or quarterly basis. •Gain sharing  plans tend to increase the level of cooperation across workers and teams  by giving them a common goal. •Managers are not required to base their calculations on complex mathematical formulae, nor are they required to closely look into the specific contributions of individuals or independent  teams.  •It is easier for both to formulate bonus calculations and to achieve employees’ acceptance of those plans. •Gain sharing plans may fail due to reasons such as: poorly deigned bonus formulaelack of management support for employee participation poor communicationlack of trust or an apathy on the part of employees

Gain sharing

Employee Stock Plans• Stock Option Plan A plan that gives employees the right to

purchase a fixed number of shares of company stock at a specified price for a limited period of time.

• If market price of the stock is above the specified option price, employees can purchase the stock and sell it for a profit.• If the market price of the stock is below the

specified option price, the stock option is “underwater” and is worthless to employees.

Employee Stock Plans

Methods of distributing stock to employees: As a bonus directly to employees Example: for every 2 shares an employee buys, the company

gives the employee 1 share Example: employees can buy shares for 85% of the current stock

market price Into a trust Company contributes shares of stock into the trust Shares in the trust are allocated to individual employee accounts Employees become vested over time When an employee leaves the company (e.g., retirement), they

receive the current market value of their vested shares in the trust

Employee Stock Ownership Plan (ESOP): the company facilitates employees owning stock in the company

Employee Stock Ownership Plan (ESOP)

–Advantages• Favorable tax treatment for ESOP

earnings• Employees motivated by their

ownership stake in the firm–Disadvantages• Retirement benefit is tied to the firm’s

future performance• Risk for employees• Limited effect on productivity• Long-run financial difficulties

Conditions favoring corporate-wide plans

– Firm size– Interdependence of different parts of

the business– Market conditions– The presence of other incentives

Evaluation of Incentives

• Attention getter?• Understandable?• Establishes culture through values?• Improves communication?• Pays when it should?

(achievements versus failures)

• Improves individual performance?• Improves org. performance?