Creative Compensation: Non-Monetary / Non-Traditional Compensation

Creative Compensation: Non-Monetary / Non-Traditional CompensationSome non-monetary compensation are;

  • Profit-sharing.
  • Stock Ownership Plans.
  • Gain Sharing.
  • Pay-for-performance (PFP).
  • Pay for Skills
  • Sharing through Royalty Payments/

The plans include:

Profit-sharing

As the name suggests, profit sharing involves the employee receiving a share of the company’s profits.

Employees receive a bonus that is normally based on some percentage (e.g., 10 to 30 percent) of the company’s profit. The employee’s basic pay is unaffected. Sharing profits with employees has been used as a means of incentive compensation.

Firms use it for many reasons;

The main reasons are to build a group incentive for increased productivity and better employee relations, to institute a flexible reward structure that reflects a company’s actual economic position, to enhance employees’ security and identification with the company, to attract and retain workers more easily, and to educate individuals about the factors that underlie business success.

This plan will not work when there are no profits to divide.

Stock Ownership Plans

Employee stock ownership plans (ESOPs) have become popular in business firms of the USA and Japan.

ESOPs enable employees to become owners or part owners of a company. Managers and workers see themselves as one group and the result is that everyone is highly committed and motivated.

Employees tend to be most satisfied with stock ownership when the company established its ESOP for employee-centered reasons rather than for strategic reasons.

Generally, ESOPs are established for any of the following reasons:

Almost everyone loves the concept of employee ownership as a kind of people’s capitalism. It brings management and workers as partners.

A firm borrows money from a bank using its stock as collateral, places the stock in an employee stock ownership trust, and as the loan is repaid, distributes the stock at no cost to employees.

  • It acts as an additional employee benefit.
  • As a part-owner, workers have a lot to say about their areas of expertise. They come up with ways to save money and improve productivity.

However, the sharing also can be a disadvantage because employees may feel forced to join, thus placing their financial future a greater risk.

Both their wages and financial benefits depend on the performance of the organization. ESOPs are not insured, and if a company goes bankrupt, its stock may be worthless.

Gain Sharing

It is a technique that compensates workers based on improvements in the company’s productivity.

Gainsharing is a bonus incentive system designed to improve productivity through employee involvement, with the gains from “working smarter” shared between the employer and the employees according to a predetermined formula.

It includes;

  1. a financial measurement and feedback system to monitor company performance and distribute gains in the form of bonuses when appropriate, and
  2. a focused involvement system to eliminate barriers to improved company performance.

Gainsharing most definitely is not profit sharing, although there are some similarities. Profit-sharing is generally tied to the company’s overall performance, whereas gainsharing focuses on the company’s most vital performance metrics. Payments come out of increased revenue or reduction in costs.

Profit-sharing typically runs on a quarterly or annual cycle, whereas gainsharing generally cycles on a monthly basis.

Gainsharing works best when company performance levels can be easily quantified.

Employee involvement significantly enhances the effectiveness of incentive pay. When used simultaneously, productivity gains from combining these techniques can exceed gains achieved separately. Gains must be verifiable and clearly stated at the outset.

Tyler and Fisher (1997) identify the following reasons for the failure of the gain sharing plan:

  1. Gainsharing does not work well in piecework operations.
  2. Some firms are uncomfortable about bringing unions into business planning.
  3. Some managers may feel they are giving up their prerogatives.

It is true of all incentive plans that, though, that none will work well, except in a climate of trustworthy labor-management relations and sound human resources management practices. These issues are discussed next.

Gainsharing VS Profit-sharing

Many people who confuse Profit Sharing and Gainsharing view them as being one and the same. Employees have, an opportunity to earn a bonus under both approaches, but that is where the similarity ends.

There are always exceptions, but the following provides a general outline of the major differences.

SubjectGainsharingProfit-Sharing
PurposeTo drive the performance of an organization by promoting awareness, alignment, teamwork, communication, and involvement.To share the financial success of the total organization and encourage employee identity with company success.
ApplicationThe plan commonly applies to a single facility, site, or stand-alone organization.The plan typically applies organization-wide; companies with multiple sites typically measure organization-wide profitability rather than the performance of a single site.
MeasurementPayout is based on operational measures (productivity, quality, spending, service), measures that improve the “line of sight” in terms of what employees do and how they are compensated.Payout is based on a broad financial measure of the organization’s profitability.
FundingGains and resulting payouts are self-funded based on the savings generated by improved performance.Payouts are funded through company profits.

Payment

Target

Payouts are made only when performance has improved over a historical standard or target.Payouts are typically made when there are profits; performance doesn’t necessarily have to show improvement.
Employee
Eligibility
Typically, all employees at a site are eligible for plan payments.Some employee groups may be excluded, such as hourly or union employees.
Payout
Frequency
The payout is often monthly or quarterly. Many plans have a year-end reserve fund to account for deficit periods.The payout is typically annual.
Form of PaymentPayment is cash rather than deferred compensation. Many organizations pay via a separate check to increase visibility.Historically, profit plans were primarily deferred compensation plans; the organization used profit sharing as a pension plan. Today we see many more cash plans.
Method of DistributionTypically, employees receive the same % payout or cents per hour bonus.The bonus may be a larger % of compensation for higher-level employees. The % bonus may be less for lower-level employees.
Plan Design & DevelopmentEmployees often are involved in the design and implementation process.There is no employee involvement in the design process.
CommunicationSupporting employee involvement and communication system is an integral element of Gainsharing and helps drive improvement initiatives.Since there is a little linkage between “what employees do” and the “bonus,” there is an absence of accompanying employee involvement initiatives.
Pay for Performance Plan versus EntitlementGains are generated only by improved performance over a predetermined base level of performance. Therefore, Gainsharing is viewed as a pay for performance initiative.Profit-sharing is often viewed as an entitlement or employee benefit.
Impact on BehaviorsGainsharing reinforces behaviors that promote improved performance. Used as a tool to drive cultural and organizational change.Little impact on behaviors since employees have difficulty linking “what they do” and their “bonus.” Many variables outside of the typical employee’s control determine profitability and the bonus amount.
Impact on AttitudesHeightens the level of employee awareness, helps develop the feeling of self-worth, builds a .senses of ownership and identity of the organization.Influences the sense of employee identity to the organization, particularly for smaller organizations.

 

Pay-for-performance (PFP)

Pay-for-performance (PFP) plan is a method of compensation where workers are paid based on productivity. It is a system of employee payment that links compensations to measure work quality or goal. PFP is money paid relating to how well one works.

Employees would be secured in knowing that their performance is evaluated objectively according to the standard of their work instead of the whims of a supervisor.

Union leader prefers a seniority-based pay system. Low-performing senior employees would object to having their income cut to match their performance level, while a high-performing new employee might prefer the new arrangement.

An effective pay for performance has its rewards for both employers and employees.

Many organizations conduct annual performance appraisals. These appraisals – when properly administered – are based on performance standards.

Standards are what an employer wants an employee to accomplish for meeting the company’s expectations. For a PFP system to be effective, employers must clearly communicate their expectations and conduct performance appraisals according to performance standards.

Too much subjectivity is one of the disadvantages of a PFP system because it results in inconsistent evaluations of job performance and, ultimately, an ineffective PFP system and dissatisfied employees.

The cost of implementing pay-for-performance policies can be high because the process involves the acquisition of information technology machines, software maintenance, and data collection.

However, if it is to be successful, there must be reasonable, achievable and measurable goals that are potentially achievable by any employee.

Achievements must be quantifiable, so a comprehensive system must be put in place to monitor and assess whether or not employees have met designated targets. Communication and transparency are essential; everyone must be aware of and understand, the criteria.

Training and education facilities should be in place to improve the performance of weaker employees and enable ambitious employees to widen their knowledge and skills and be able to hit targets.

Additionally, implementations must not become too cumbersome.

Pay for Skills

Skill-based pay is an approach to compensation where the wage rate is based on the qualifications of the individual doing the job, rather than on the job itself. It is typically accomplished through skill classes that determine pay levels for jobs. Skill-based pay is an alternative to job-based pay.

Skill-based pay is introduced to encourage employees to acquire a variety of skills. Without proper incentive systems, few workers are willing to acquire the necessary skills.

Employees will receive a pay increase for each new skill that they master.

In such a learning environment, the more workers learn, the more they earn. Under such a system, workers are paid not on the basis of the job they currently are doing, but rather on the basis of the number of jobs they are capable of doing, or on their depth of knowledge.

It is not easy to introduce a skilled-based pay system. It is difficult to measure skills for managerial jobs. Fair assessment and fair compensation, however, are essential to developing workers with a variety of intellectual skills. It is of much importance to develop and introduce accurate performance appraisal systems.

A number of studies have investigated the use and effectiveness of skilled-based pay.

An employee with a variety of skills can easily handle any changes as mentioned earlier.

Advocates of skill-based pay say that it can reduce staffing requirement, increase flexibility (because a single employee may have the skills to perform a variety of jobs), decrease overall labor cost and increase job satisfaction.

Downsizing requires more generalists and fewer specialists. Mastering several jobs will increase understanding and broaden perspectives. It facilitates communication across the organization because people gain a better understanding of other’s jobs. It lessens dysfunctional protection of territory behavior.

Such a program also motivates flat-line employees who have little opportunity for promotions.

Multiskilling can be the key to developing a competitive edge and fight global competition.

What are the downsides of skilled-based pay?

Skills can become obsolete.

When this happens, what should managers .do? Managers can cut employee pay or continue to pay for skills that are no longer relevant.

There is also the problem created by paying people for acquiring skills for which there may be no immediate need.

Tosi offers the following suggestions to make a skilled-based pay system a success :

  • A supportive HRM philosophy strengthens all employment activities. Such a philosophy is characterized by mutual trust and the conviction those employees have the ability and motivation to perform well.
  • HRM programs such as profit sharing, participative management, empowerment and job enrichment complement the skilled-based pay system.
  • Job rotation and job assignments may broaden employee skills.
  • There are opportunities to learn new skills.
  • Workers value teamwork and the opportunity to participate. The employees involved in developing and implementing ideas related to productivity.

Sharing through Royalty Payments

Labor is seeking to gain a greater share of the industry’s earnings by royalty demands.

These consist of payments, usually to a union organization of employees, based on a levy for each unit of output or for each hour worked.

The funds thus collected are to be used for a variety of purposes, for example, to aid the unemployed, to supplement payments to those injured on the job, and to support various other welfare activities.