Post on 28-Nov-2014
PowerPoint Presentation by Charlie CookThe University of West Alabama
PowerPoint Presentation by Charlie CookThe University of West Alabama
Chapter 12
Pay for Performance and Financial Incentives
Chapter 12
Pay for Performance and Financial Incentives
Part Four | CompensationPart Four | Compensation
Copyright © 2011 Pearson Education, Inc. publishing as Prentice HallCopyright © 2011 Pearson Education, Inc. publishing as Prentice Hall
Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 12–2
Motivation, Performance, and PayMotivation, Performance, and Pay• IncentivesIncentives
Financial rewards paid to workers whose production exceeds a Financial rewards paid to workers whose production exceeds a predetermined standard.predetermined standard.
• Frederick TaylorFrederick Taylor
• Linking Pay and PerformanceLinking Pay and Performance Understanding the motivationalUnderstanding the motivational
bases of incentive plansbases of incentive plans
Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 12–3
The Hierarchy of NeedsThe Hierarchy of Needs• Maslow’s Hierarchy of Needs:Maslow’s Hierarchy of Needs:
Physiological (food, water, warmth)Physiological (food, water, warmth)
Security (a secure income, knowing one has a job)Security (a secure income, knowing one has a job)
Social (friendships and camaraderie)Social (friendships and camaraderie)
Self-esteem (respect)Self-esteem (respect)
Self-actualization (becoming a whole person)Self-actualization (becoming a whole person)
• Maslow’s prepotency process principle:Maslow’s prepotency process principle: People are motivated first to satisfy each lower-order need People are motivated first to satisfy each lower-order need
and then, in sequence, each of the higher-level needs.and then, in sequence, each of the higher-level needs.
Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 12–4
Herzberg’s Hygiene–Motivator Herzberg’s Hygiene–Motivator TheoryTheory• Hygienes (extrinsic job factors)Hygienes (extrinsic job factors)
Satisfy lower-level needsSatisfy lower-level needs Inadequate working conditions, salary, and incentive pay can cause Inadequate working conditions, salary, and incentive pay can cause
dissatisfaction and prevent satisfaction.dissatisfaction and prevent satisfaction.
• Motivators (intrinsic job factors)Motivators (intrinsic job factors) Satisfy higher-level needsSatisfy higher-level needs Job enrichment (challenging job, feedback, and recognition) addresses Job enrichment (challenging job, feedback, and recognition) addresses
higher-level (achievement, self-actualization) needs.higher-level (achievement, self-actualization) needs.
• Premise:Premise: The best way to motivate someone is to organize the job so that doing it The best way to motivate someone is to organize the job so that doing it
provides feedback and challenge that helps satisfy the person’s higher-provides feedback and challenge that helps satisfy the person’s higher-level needs.level needs.
Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 12–5
Behavior Modification /Behavior Modification /Reinforcement TheoryReinforcement Theory
• B. F. Skinner’s PrinciplesB. F. Skinner’s Principles
Behavior modification means changing behavior through rewards or punishments that are contingent upon performance..
Behavior that Behavior that leads to a positive consequence (reward) leads to a positive consequence (reward) tends to be repeated, while behavior that leads to a tends to be repeated, while behavior that leads to a negative negative consequence (punishment) consequence (punishment) tends not to be tends not to be repeated.repeated.
Behavior can be changed by providing properly scheduled Behavior can be changed by providing properly scheduled rewards (or punishments).rewards (or punishments).
Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 12–6
Incentive Pay TerminologyIncentive Pay Terminology• Pay-for-Performance PlanPay-for-Performance Plan
Ties employee’s pay to the employee’s performanceTies employee’s pay to the employee’s performance
• Variable Pay PlanVariable Pay Plan Is an incentive plan that ties a group or team’s pay to some Is an incentive plan that ties a group or team’s pay to some
measure of the firm’s (or the facility’s) overall profitabilitymeasure of the firm’s (or the facility’s) overall profitability Example: profit-sharing plansExample: profit-sharing plans
May include incentive plans for individual employeesMay include incentive plans for individual employees
Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 12–7
Individual Incentive PlansIndividual Incentive Plans• Piecework PlansPiecework Plans
The worker is paid a sum (“piece rate”) The worker is paid a sum (“piece rate”) for each unit he or she produces.for each unit he or she produces.
Straight pieceworkStraight piecework
Standard hour planStandard hour plan
Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 12–8
Pros and Cons of PieceworkPros and Cons of Piecework• Easily understandable, equitable, Easily understandable, equitable,
and powerful incentivesand powerful incentives
• Employee resistance to changes Employee resistance to changes in standards or work processes in standards or work processes affecting outputaffecting output
• Quality problems caused by Quality problems caused by an overriding output focusan overriding output focus
• Possibility of violating minimum Possibility of violating minimum wage standardswage standards
• Employee dissatisfaction when Employee dissatisfaction when incentives either cannot be earned incentives either cannot be earned or are withdrawnor are withdrawn
Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 12–9
Individual Incentive Plans (cont’d)Individual Incentive Plans (cont’d)• Merit PayMerit Pay
Merit pay or raise is any salary increase the firm awards to an employee based on his/her individual performance.
it is different from a bonus in that it usually becomes part of the employee’s base salary, whereas a bonus is a one-time payment.
Becomes permanent ongoing reward for past performanceBecomes permanent ongoing reward for past performance
Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 12–10
Incentives for Professional Incentives for Professional EmployeesEmployees• Professional EmployeesProfessional Employees
Are those whose work involves the application Are those whose work involves the application of learned knowledge to the solution of the of learned knowledge to the solution of the employer’s problems.employer’s problems.
Lawyers, doctors, economists, and engineersLawyers, doctors, economists, and engineers
• Possible IncentivesPossible Incentives Bonuses, stock options and grants, profit sharingBonuses, stock options and grants, profit sharing
Better vacations, more flexible work hoursBetter vacations, more flexible work hours
Improved pension plansImproved pension plans
Equipment for home officesEquipment for home offices
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Nonfinancial and Recognition Nonfinancial and Recognition AwardsAwards• Effects of Recognition-Based AwardsEffects of Recognition-Based Awards
Recognition has a positive impact on performance, Recognition has a positive impact on performance, either alone or in conjunction with financial rewards.either alone or in conjunction with financial rewards.
Day-to-day recognition from supervisors, peers, and Day-to-day recognition from supervisors, peers, and team members is important.team members is important.
• Ways to Use RecognitionWays to Use Recognition Social recognitionSocial recognition
Performance-based recognitionPerformance-based recognition
Performance feedbackPerformance feedback
Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 12–12
FIGURE 12–1 Social Recognition and Related Positive Reinforcement Managers Can Use
• Challenging work assignments
• Freedom to choose own work activity
• Having fun built into work
• More of preferred task
• Role as boss’s stand-in when he or she is away
• Role in presentations to top management
• Job rotation
• Encouragement of learning and continuous improvement
• Being provided with ample encouragement
• Being allowed to set own goals
• Compliments
• Expression of appreciation in front of others
• Note of thanks
• Employee-of-the-month award
• Special commendation
• Bigger desk
• Bigger office or cubicle
Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 12–13
Online and IT-Supported AwardsOnline and IT-Supported Awards• Information Technology and IncentivesInformation Technology and Incentives
Enterprise incentive management (EIM)Enterprise incentive management (EIM)
Software that automates planning, calculation, Software that automates planning, calculation, modeling, and management of incentive modeling, and management of incentive compensation planscompensation plans
Enabling companies to align their employees Enabling companies to align their employees with corporate strategy and goalswith corporate strategy and goals
• Online Award ProgramsOnline Award Programs Programs offered by online incentives firms that Programs offered by online incentives firms that
improve and expedite the awards processimprove and expedite the awards process
Broader range of awardsBroader range of awards
More immediate rewardsMore immediate rewards
Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 12–14
Incentives for SalespeopleIncentives for Salespeople• Salary PlanSalary Plan
Straight salariesStraight salaries Best for: prospecting (finding new clients), Best for: prospecting (finding new clients),
account servicing, training customer’s sales force, account servicing, training customer’s sales force, or participating in national and local trade showsor participating in national and local trade shows
• Commission PlanCommission Plan Pay is a percentage of sales results.Pay is a percentage of sales results.
Keeps sales costs proportionate to sales revenuesKeeps sales costs proportionate to sales revenues May cause a neglect of nonselling dutiesMay cause a neglect of nonselling duties Can create wide variation in salesperson’s incomeCan create wide variation in salesperson’s income Likelihood of sales success may be linked to external Likelihood of sales success may be linked to external
factors rather than to salesperson’s performancefactors rather than to salesperson’s performance Can increase turnover of salespeopleCan increase turnover of salespeople
Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 12–15
Incentives for Salespeople (cont’d)Incentives for Salespeople (cont’d)• Combination PlanCombination Plan
Pay is a combination of salary and Pay is a combination of salary and commissions, usually with a sizable commissions, usually with a sizable salary component.salary component.
Plan gives salespeople a floor Plan gives salespeople a floor (safety net) to their earnings.(safety net) to their earnings.
Salary component covers company-Salary component covers company-specified service activities.specified service activities.
Plans tend to become complicated, Plans tend to become complicated, and misunderstandings can result.and misunderstandings can result.
Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 12–16
Incentives for Managers and Incentives for Managers and ExecutivesExecutives• Executive Total Reward PackageExecutive Total Reward Package
Base salary (cash)Base salary (cash)
Short-term incentives (bonuses)Short-term incentives (bonuses)
Long-term incentives (e.g., stock options)Long-term incentives (e.g., stock options)
Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 12–17
Short- and Long-Term IncentivesShort- and Long-Term Incentives• Short-Term Incentives: The Annual BonusShort-Term Incentives: The Annual Bonus
Plans intended to Plans intended to motivate short-term performance motivate short-term performance of managers and tied to company profitability.of managers and tied to company profitability.
Issues in awarding bonuses Issues in awarding bonuses Eligibility basisEligibility basis Fund size basisFund size basis Fund Size refers to the total amount of bonus money
the firm makes available. Individual performance awardIndividual performance award
Long-term incentivesLong-term incentives Stock optionsStock options Performance sharesPerformance shares
PerksPerks
Stock OptionStock Option• option is the right to purchase a specific number of
shares of company stock at a specific price during a specific period of time; the executive thus hopes to profit by exercising his/her option to buy the shares in the future but at today’s price.
• Performance Share- stock compensation, employee may be granted performance shares, which they receive only upon the achievement of specified goals.
Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 12–18
Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 12–19
Team/Group Incentive PlansTeam/Group Incentive Plans• Team (or Group) Incentive PlansTeam (or Group) Incentive Plans
Incentives are based on team’s performance.Incentives are based on team’s performance.
With a team-based incentive plan you are offering a reward to the entire group for generating positive results.
When using a team-based incentive, it is important to be sure that everyone on the team is doing their part to help the group reach its goals
Eg:
Profit SharingProfit Sharing
Vacation
Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 12–20
Pros and Cons of Team IncentivesPros and Cons of Team Incentives• ProsPros
Reinforces team planning and problem solvingReinforces team planning and problem solving Helps ensure collaborationHelps ensure collaboration Encourages a sense of cooperationEncourages a sense of cooperation Encourages rapid training of new membersEncourages rapid training of new members
• ConsCons Pay is not proportionate to an individual’s effortPay is not proportionate to an individual’s effort Rewards “free riders”Rewards “free riders”
Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 12–21
Organizationwide Incentive PlansOrganizationwide Incentive Plans• Profit-Sharing PlansProfit-Sharing Plans
Current profit-sharing (cash) plansCurrent profit-sharing (cash) plans
Employees receive cash shares of the firm’s profits Employees receive cash shares of the firm’s profits at regular intervals.at regular intervals.
Plans involve employees receiving a share of the company’s annual profits.
Gainsharing PlansGainsharing Plans
incentive plans that engage many or all employees in a common effort to achieve a company’s productivity objectives.
Gainsharing is quite different from Profit Sharing.
• Gainsharing very directly spells out what people need to do to drive the gains.
• A Profit Sharing system pays out if the company beats the goals set to trigger the Profit Sharing payout, but it doesn't tell people what they need to do to make the profits happen
Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 12–22
Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 12–23
Gainsharing PlansGainsharing Plans
Philosophy of
cooperation
Involvement system
Identity
Scanlon Plan Components
Competence
Benefits sharing formula
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Implementing a Gainsharing PlanImplementing a Gainsharing Plan
1.1. Establish general plan objectives.Establish general plan objectives.
2.2. Choose specific performance measures.Choose specific performance measures.
3.3. Decide on a funding formula.Decide on a funding formula.
4.4. Decide on a method for dividing and distributing Decide on a method for dividing and distributing the employees’ share of the gains.the employees’ share of the gains.
5.5. Choose the form of payment.Choose the form of payment.
6.6. Decide how often to pay bonuses.Decide how often to pay bonuses.
7.7. Develop the involvement system.Develop the involvement system.
8.8. Implement the plan.Implement the plan.
Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 12–25
At-Risk Variable Pay PlansAt-Risk Variable Pay Plans• Put some portion of the employee’s Put some portion of the employee’s
base salary pay at risk. base salary pay at risk.
If employees meet or exceed If employees meet or exceed their goals, they earn incentives. their goals, they earn incentives.
If they fail to meet their goals, they If they fail to meet their goals, they forego some of the pay they would forego some of the pay they would normally have earned.normally have earned.
Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 12–26
Organizationwide Incentive Plans Organizationwide Incentive Plans (cont’d)(cont’d)• Employee Stock Ownership Plan (ESOP)Employee Stock Ownership Plan (ESOP)
• is the practice of companies giving staff members shares in their company as part of their salary.
• The benefits for the company include increased cash The benefits for the company include increased cash flow, tax savings, and increased productivity from highly flow, tax savings, and increased productivity from highly motivated workers.motivated workers.
• The main benefit for the employees is the ability to The main benefit for the employees is the ability to share in the company's successshare in the company's success
Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 12–27
Advantages of ESOPsAdvantages of ESOPs• For the CompanyFor the Company
Can take a tax deduction equal to the fair market value Can take a tax deduction equal to the fair market value of the shares transferred to the ESOP trusteeof the shares transferred to the ESOP trustee
Gets an income tax deduction for dividends paid Gets an income tax deduction for dividends paid on ESOP-owned stockon ESOP-owned stock
Can borrow against ESOP in trust and then repay Can borrow against ESOP in trust and then repay the loan in pretax rather than after-tax dollarsthe loan in pretax rather than after-tax dollars
• For the EmployeesFor the Employees Develop a sense of ownership in and commitment to the firm.Develop a sense of ownership in and commitment to the firm. Do not pay taxes on ESOP earnings until they receive Do not pay taxes on ESOP earnings until they receive
a distribution.a distribution.
• For the Shareholders of Closely-Held CorporationsFor the Shareholders of Closely-Held Corporations Can place assets into an ESOP trust which will allow them to Can place assets into an ESOP trust which will allow them to
purchase other marketable securities to diversify their holdingspurchase other marketable securities to diversify their holdings
Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 12–28
Implementing an Effective Implementing an Effective Incentive PlanIncentive Plan1.1. Ask: Does it make sense to use an incentive here?Ask: Does it make sense to use an incentive here?
2.2. Link the incentive with your strategy.Link the incentive with your strategy.
3.3. Make sure the program is motivational.Make sure the program is motivational.
4.4. Set complete standards.Set complete standards.
5.5. Be scientific in analyzing the effects of the plan.Be scientific in analyzing the effects of the plan.
Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 12–29
Why Incentive Plans FailWhy Incentive Plans Fail• You get what you pay for.You get what you pay for.
• ““Pay is not a motivator.”Pay is not a motivator.”
• Rewards punish.Rewards punish.
• Rewards break relationships.Rewards break relationships.
• Rewards weaken intrinsic motivation.Rewards weaken intrinsic motivation.
Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 12–30
TABLE 12–3 Express Auto Compensation System
Express Auto Team Responsibility of Team Current Compensation Method
1. Sales force Persuade buyer to purchase a car.
Very small salary (minimum wage) with commissions. Commission rate increases with every 20 cars sold per month.
2. Finance office Help close the sale; persuade customer to use company finance plan.
Salary, plus bonus for each $10,000 financed with the company
3. Detailing Inspect cars delivered from factory, clean, and make minor adjustments.
Piecework paid on the number of cars detailed per day.
4. Mechanics Provide factory warranty service, maintenance, and repair.
Small hourly wage, plus bonus based on(1) number of cars completed per day and(2) finishing each car faster than the standard estimated time to repair
5. Receptionists/ phone service personnel
Primary liaison between customer and sales force, finance, and mechanics
Minimum wage
Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 12–31
K E Y T E R M S
financial incentives
fair day’s work
scientific management movement
expectancy
instrumentality
valence
behavior modification
variable pay
piecework
straight piecework
standard hour plan
merit pay (merit raise)
annual bonus
stock option
golden parachutes
team (or group) incentive plan
organizationwide incentive plans
profit-sharing plan
Scanlon plan
gainsharing plan
at-risk variable pay plans
employee stock ownership plan (ESOP)
Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 12–32
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