Human Resorce

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


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.


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.


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).


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


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


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


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


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


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


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


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


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


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.


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)


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.



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


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”


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



Gainsharing PlansGainsharing Plans

Philosophy of

cooperation

Involvement system

Identity

Scanlon Plan Components

Competence

Benefits sharing formula


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.


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.


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


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


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.


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.


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


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)


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