In the early 1980s, a White House Conference on Productivity was held to discuss the problem of declining productivity. The final report of that conference concluded that the major reward systems of the next few years will be:
- sharing business information with employees
- participative work practices
- employment security
- pay for performance
As a follow-up to this effort, the American Productivity Center and the American Compensation Association conducted a survey in 1986 to determine the extent to which companies were utilizing different reward systems.
The 741 service companies that responded included 6 airlines, 119 hospitals, 3 hotel companies, and 11 restaurant organizations.
Over half of the respondents reported sharing business information with their employees on a frequent basis. This is most commonly done through the use of a newsletter or bulletin board.
Approximately half of all companies use participative work practices. The most widely used are small problem- solving groups and suggestion systems.
Almost 1/3 of the respondents use formal or informal strategies for employment security. These include such things as a written commitment to no layoffs and a guaranteed minimum number of work days or hours.
The most widely used nontraditional rewards were lump-sum bonuses, individual incentives, and profit sharing. Approximately 30 per cent of service firms surveyed reported using one or more of these rewards. 2/3 of all profit- sharing plans in the service sector have been adopted since the early 1980s.
Types of profit sharing
Profit-sharing plans can be deferred, cash, or a combination. The vast majority of profit-sharing plans are deferred. In a deferred plan, employees place contributions into a trust that is invested on their behalf. Payouts occur on termination, retirement, disability or death. The advantage is that taxes on the profits are not paid until the employee withdraws them. In a cash plan, profits are usually paid out annually and taxes are paid on the income at that time. A combination plan pays some share of the profits regularly and defers some.
In a typical deferred plan, all employees over 21 years old who work at least 1,000 hours a year and have been with the company a certain minimum period of time (one year, for example, in Marriott's plan) can participate. The company can choose to contribute to a share of the profits to the plan or may ask the employees to match the company's contribution. With the Marriott plan, the company puts in USD 1.50 for every USD 1.00 the employee puts in. Employees then can withdraw their money after a stated period of time. If the average length of service is three years, for example, the company may stipulate that employees wait four years before they can get the money. In this way, the plan acts as a device to encourage employees to stay. It is usual to specify a number of years, 10 to 15, before the employee has the right to all the money in his or her account.
Other rewards
The greatest growth in the past five years has been in the use of pay for knowledge, gain sharing, and small group incentives.
In a pay-for-knowledge plan, employees are paid on the basis of the number of jobs they can do rather than the number of tasks they actually perform on a given day.
Gain sharing refers to the idea of sharing increased profits or cost savings with all employees in a particular unit or department. If profit sharing is company-wide, it is known as a profit-sharing plan rather than gain sharing.
Small group incentives are similar to gain sharing. However, bonuses are paid on the basis of the performance of a group rather than on an individual formula. As such, the formula used can vary from group to group or department to department.
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