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33 Cards in this Set

  • Front
  • Back

Main Types of Performance Pay Plans




Employee Stock Plans

Define Gain Sharing Plans

Group performance pay plan that shares cost savings or productivity gains generated by a work group with all members of that group

Define Goal Sharing Plans

A group performance pay plan in which a work group receives a bonus when it meets pre specified performance goals

Define Profit Sharing Plans

An organizational performance pay plan in which a firm provides bonus payments based on the profitability of the firm

Define Employee Stock Plans

An organizational performance pay plan in which employees acquire shares in the firm that employs them

Types of Gain-Sharing Plans

Scanlon Plan

Rucker Plan


Family of Measures Plan

Define Scanlon Plan

Gain sharing plan that creates mechanisms for employee participation in developing productivity improvements and that shares the financial benefits of those improvements with the employee group that generated them

Example: labour costs is 50% of sales value of production. If lowers to 47%, employees share productivity gain of 3%

Why do some Scanlon Plans include additional costs besides labour

Many possible cost savings do not show up in labour costs

It is usually possible to decrease labour costs by increasing other costs

Define Rucker Plan

Gain-sharing plan similar to the Scanlon plan but that expresses labour costs as a percentage of value added

Employees benefit from reductions in raw materials motivating them to reduce these costs

Define Improshare

Gain-sharing plan that focuses on labour hours per unit of output and that does not usually include worker participation

Doesn't take other cost savings into account

Define Family of Measures Plan

Gain-sharing plan that uses a variety of measure to determine the extent to which a bonus is justified

Issues when designing gain-sharing plans

1. Defining the group or work unit to be included in the plan

2. Establishing the bonus formula

3. Defining the baseline against which to measure improvement

4. Deciding on the share between the company and the employees

5. Deciding on the split among employees

6. Deciding on the frequency of payout

7. Developing procedures for communicating results

8. Deciding whether and how to incorporate employee participation

What types of baselines are there?

Fixed Baseline

Rolling Baseline (uses fixed period)

Ratcheting Baseline (adjusts every year that there is a productivity gain)

Types of Goal-Sharing Plans



Financially Funded

What are single-goal plans

Focus attention on one key goal

May cause other behaviours to be neglected

What are multi goal plans

Focus is on multiple goals

Two criteria of financial funded plans

Total amount of goal sharing bonus available is typically based on some indicator such as company profit, while the actual amount of payout is based on the achievement of specified goals

Benefit is not paying out when not profitable but makes less certain, diminishing motivation

Issues in Designing Goal-Sharing Plans

1. Define the group to which goal sharing applies

2. Decide on the nature of the goals to be sought

3. Determine levels and time frames for goal achievement

4. Establish the bonus amounts

5. Decide on the split of the bonus among employees

Ways to allocate bonus among employees



Individual Performance

Equal Distribution


Types of Profit Sharing Plans

Current distribution

Deferred Profit Sharing


Define Current Distribution Profit Sharing

Distributes the profit-sharing bonus to employees in the form of cash or shares, at least annually

Define Deferred Profit-Sharing Plan

Bonuses are allocated to employee accounts but not actually paid out until a later date, usually on termination or retirement

What profit sharing plan is tax deferred?

Deferred Profit sharing plans. Therefore, it must be registered with the government

Key Issues when designing profit-sharing plans

The formula for bonus determination (fixed or discretionary)

Employee eligibility

The basis for allocating the profit-sharing bonus across employees

Payout frequency

Communicating financial results and profit sharing

Types of Employee Stock Plans

Stock bonus plans

Stock purchase plans

Stock option plans

Define Stock bonus plans

Employees receive company stock at no cost to themselves

Define Share Appreciation rights

A plan through which employees are awarded shares in their employer at no cost to themselves if the price of employer shares rises during a specified period

Example: employee is allocated 1000 shares. If share price is $20 and rises during timeline to value of $25, then employee will receive a bonus of 200 actual company shares

Issues: taxation issues when shares are vested. Seen as a capital gain which is good in good market, bad in declining economy

Define Stock Purchase Plans

Employees provide some kind of direct payment in return for company shares

Usually do not have to pay the full amount

Is deemed as employment income but taxed as capital gain rate which is half of employment income rate

Define Stock Option Plans

Employees receive options to purchase company stock at a future time at a fixed price.

Example: If company stock is trading at $10 a share, then 1000 options with an exercise price of $11 might be issued. I year later, the employee has the option of purchasing 1000 shares at $11

Define Phantom Share Plan

A plan through which employees participate in the appreciation of company shares and any associated dividends, without ever owning any company shares

Issues in designing stock plans

Eligibility for inclusion

Criteria for allocating stock among employees

The type of holding period

Types of non monetary reward plans

Informal - encouragement from supervisors day-to-day

Formal - formal recognition

5 types of non monetary awards

Social Reinforcers

Merchandise Awards

Travel Awards

Symbolic Awards

Earned Time Off