INCENTIVE PLANS FOR MANAGERS

Because of the complex and variable nature of most

managerial jobs, there is much room for different levels and
qualities of human performance.

The place to begin the design of an executive incentive

compensation system is with the types of behaviour desired
by the organization. Various business firms are having
difficulties in properly targeting the behaviour desired. It has
been noted that two of the most common problems in designing
executive incentives are :-

1. De-coupling the system from overall industry

performance

2. Developing one-dimensional systems.

In regard to the former, executives have been rewarded for

increasing firm growth 15 percent within an industry whose
average growth 20%. On a relative basis, the executive is less
well than others in the same category. With respect to the latter
problems, many plans are excessively narrow. If the reward is
based on improving return on assets, for example the executive
is tempted to lease equipment rather than by, and to eliminate
investments critical to long-term growth.

In targeting the desired behaviour, criteria will vary according to

levels of responsibility. For top executives, the emphasis should
be on :-

(a) Entrepreneurial behaviour

(b) Risk taking
(c) Profits
(d) Degree of market penetration
(e) New product development
For lower level executive, the emphasis is often on smooth
administration and co-operative relationship with others;
bonuses may be based on unit ratings of performance with a
fixed percentage of base salary constituting the incentive.

Income tax considerations weigh on managerial incentive

schemes.

(a) Case bonuses based on profits or individual

performance evaluation are perhaps the most common
type of incentive for executive.

(b) Performance objectives can be set for the executive

and rewards allocated according to degree of
achievement.
Each of the above plans is geared to stimulate more effective
managerial behaviour for long terms benefits organization. With
inflation & high individual tax rates, the popularity of various
‘perks’ or perquisites has increased. Among these are :-

(a) Use of company automobiles

(b) Club membership
(c) Personal financial planning service
(d) Use of Company airplanes
(e) Annual at physical at plush health resorts.
(f) Major medical insurance with no deductibles.
Many of these are not taxable as income received.
HUMAN PROBLEMS IN INCENTIVE PLANS
The traditional, official posture of organized labour is one of
opposition to individual incentive plans. The union desires
solidarity among members and uniform compensation on
the same job is often deemed pre-requisite to this
cooperation. At the least, the union will stand guard over
the processes of establishing and administrating work
standards, ready at any movement to process a grievance
proslyeting a decision which leads to less pay for its
members. In addition to this more formal problem, there are
a number of human relations problems growing out of
incentive systems. Among these are :-

the rate buster

(1) the reaction to changes in methods, equipment
and material.
(2) the reaction to lack of uniformity in tightness of
standards
(3) informal restriction of out put
All these problems resolve around employee fear of
management and desire for security.

A rate buster is an employee who produces far in excess of

standard, and consequently in excess of the production of most
of the members of a workgroup. There is a feeling among most
employees that management will stand for paying only so much
incentive, and that if one or more employees make excesses
incentives, the rates will be cut. There is great informal
pressure upon all employees to conform to the production level
of most of the group. It, therefore, follows that the employee
who does not conform has to have a strong personality, and
often a strong physique, in order to resist these pressures.

The rate buster is usually ostracized by other workers and

operates as if isolated. The values of additional money have
been balanced against the values of group acceptance, with
the decision going to the former. In theory, management should
look with favour upon the rate buster and pay double or triple
wages when they are earned.

In practice, management often prefers NOT to have a rate

buster, feeling that she or he is a disruptive influence in the
shop; and indeed there have been times when rate buster has
been transferred to other jobs in order to smoothen relations.
But if the standards are properly established, there is little
justification for not paying the production genius all that is
earned.

Related to group pressure on the rate buster is the general

pressure on management to abandon pay programmes that
reward a minority of the entire group.
An even more difficult problem lies in the many small and
seemingly insignificant changes, in methods, equipment, and
materials that occur in most firms. These change are initiated
by both management and labour, through informal and formal
means. No one change appears to justify a change in rate, but
the cumulative effect of many changes can be disastrous. Often
there is only one remedy: complete restudy of all jobs under the
incentive plan. The accuracy of work standards has a tendency
to deteriorate with passage of time from the very first day of
installation.

A third human problem issues from inconsistencies in the

accuracy of standards. The supervisor has the additional
problem of awarding easy and tough jobs on an equitable
basis. If awarded on a systematic basis, such as seniority or
taking turns, one must predict in advance the classification of
each job. This often means balance of its easiness in relation to
how long it will last.

Various factors have been identified as contributing to lack of

uniformity in work standard. Newly studied jobs are likely to
have tighter rates while older ones have been affected by many
small changes. Rates set during times of prosperity tend to be
looser than those established during recessions; time study
personnel are psychologically affected by the environment. The
smaller the profit margin on an item, the lighter the rate is likely
to be. Jobs that involve higher levels of skill tend to have looser
rates since they cannot be as closely studied low-skilled tasks.
In department where there is greater group cohesiveness,
which leads to sanction on the rate buster and greater
cooperation in informally sharing work & falsifying time card,
standards are likely to be looser. In departments with higher
percentage of union membership the rates are likely to be
looser in recognition of that threat. Strategic, isolated, and
dangerous jobs tend to be favoured with looser rates. Thus, the
causes are limitless and the possibilities for trouble and
problems of administration are great.