Incentive Pay and BenefitsMGTO 231Human Resources Management
Dr. Jeroen KUILMAN
Total CompensationTotal Compensation
Base CompensationBase Compensation
Incentive PayIncentive Pay
BenefitsBenefits
Elements of Compensation
At the End of this Session, You will be Able to Answer the Following Questions:
Why don’t we design a compensation system that totally follows the incentive pay notion, i.e. “paying for performance”? Any potential drawbacks of the idea of “pay of
performance”?
What are the considerations in designing a benefit package?
Incentive Pay: Paying for Performance
Incentive Pay
Some basic concepts
Types of pay-for-performance plans
Potential drawbacks
Incentive Pay and System Incentive pay is specifically designed to energize,
direct, or control employees' behavior
An incentive system specifies the regulations to execute the rewards
A component of a compensation system
Basic Assumptions Individual employees and work teams differ in
how much they contribute to the firm A large degree of the firm’s overall performance
depends on the performance of individuals and groups within the firm
To attract, retain, and motivate high performers and to be fair to all employees, the firm needs to reward employees on the basis of their relative performance
Incentive Pay: Paying for Performance
Incentive Pay
Some basic concepts
Types of pay-for-performance plans
Potential drawbacks
Three Basic Types Individual-based plans Group-based plans Organization wide plans
Three Basic Types Individual-based plans Group-based plans Organization wide plans
Individual-Based Plans Identify and reward the contributions of
individual employees Most widely used in industry Three basic components
Merit pay Piece-rate system or standard hour plan Bonuses and sales commissions
Merit pay An increase in base pay, normally given once a
year (remember what we have discussed in Performance Appraisals)
Could take into account compa-ratio Piece-rate system
A compensation system in which employees are paid per unit produced
Individual-Based Plans
Standard hour plan Employees are paid extra if work is done in less
than standard time Bonuses and sales commissions
Often a one-time reward, not rolled into the base compensation.
Individual-Based Plans
Test Your Knowledge Julian works making baskets in a basket factory.
Yvonne works on IT systems integration at a credit card company. The best pay plans for these individuals would be ________ and _______, respectively.
a. Merit pay, individual bonus
b. Sales commissions; merit pay
c. Piecework, merit pay
d. Individual bonus, sales commissions
Advantages Performance that is rewarded is likely to be
repeated (reinforced) Expectancy theory: people tend to do those things
that are rewarded Can shape an individual’s goals over time Helps the firm achieve individual equity
Disadvantages The quantity-quality tradeoff The power of supervisors becomes very
influential For survival, employees will follow the orders of
the supervisors Doing what they think the top-management want
them to do in order to impress top-management
Individual-Based Plans are Most Likely to Succeed when
The contributions of individual employees can be accurately isolated
The job demands autonomy Cooperation is less critical to successful
performance OR competition is to be encouraged
Three Basic Types Individual-based plans Group-based plans Organization wide plans
Group-based plans Normally reward all team members equally
based on group outcomes Very common in team ballgame: soccer, basketball
(Man. United, LA Lakers, South China, etc.) Some may be allowed to decide how the bonus
will be distributed within group Can be in the form of:
Gain sharing Bonuses and awards
Gain sharingGroup incentive program
that measures improvements in productivity and effectiveness and distributes a portion of each gain to employees.
Group bonuses and team awards
Group-based plans
Advantages Foster group cohesiveness
Imagine how Man. United will be if only those who make the goal will be financially awarded
May increase the level of cooperation across workers by giving everyone a common goal
The performance measure on groups has shown to be more accurate and reliable than that on individuals
Disadvantages Problems of social loafing
The sum of individuals’ output is higher than the whole group output
Free-riding effect Inter-group competition leading to a decline in
overall performance We have important information and you are not
allowed to access it.
Disadvantages What potential disadvantages will there be for
the idea of gain sharing? Protection of low performers because they are
hardly detected Not fair for those units which have long been cost
effective
Team-based plans are most likely to succeed when
It is difficult to single out who did what or identify the relative contribution
In flat organizations where team works are common and highly emphasized
Employees are committed to their work and are intrinsically motivated Social-loafing is less likely
Three basic types Individual-based plans Group-based plans Organization wide plans
Organization Wide Plans The most macro type of incentive programs Reward employees based on the entire
corporation’s performance In the forms of
Profit sharing Employee stock ownership plan (ESOP)
Profit Sharing Uses a formula to allocate a portion of declared
profits to employees It is not to directly reward workers for productivity
improvements Some may be given in terms of retirement benefits,
other may be given in terms of bonuses
ESOP Employee stock ownership plan (ESOP)
Rewards employees with company stocks An outright grant or a favorable price that may be
below market value Next media, PCCW, etc.
Advantages Financially flexible for the firms – they can
automatically adjust the labor downward during economic downturns
Increase employee commitment The employees become part of the owners under
the concept of profit sharing and ESOP
Disadvantages Employees may have little sense of control on
their compensation Limited effect on productivity
The connection between individual goal and firm performance is not so tight
Test Your Knowledge For each of the following jobs, identify the best type
of incentive (i.e., individual, group, or organizational). Be prepared to explain your answer.
1. Director of Marketing, Pepsi
2. Recruiter, HSBC
3. Cashier, Park n Shop
4. Salesperson, G2000
Balanced Scorecard A combination of
performance measures directed toward the company’s long- and short-term goals and used as the basis for awarding incentive pay.
Balanced Scorecard
Table 12.2
At the End of this Session, You will be Able to Answer the Following Questions:
Why don’t we design a compensation system that totally follows the incentive pay notion, i.e. “paying for performance”? Any potential drawbacks of the idea of “pay of
performance”?
What are the considerations in designing a benefit package?
Incentive Pay: Paying for Performance
Incentive Pay
Some basic concepts
Types of pay-for-performance plans
Potential drawbacks
Potential Drawbacks Do only what you get paid for Decrease intrinsic motivation Decrease job satisfaction Increase stress Negative effects due to competitions between
individuals or groups
Problems of measurement Judgment bias, and not all performance can be
easily measured Sometimes difficult to disentangle individual
and group performance. Credibility gap
Some workers do not believe in the performance-reward contingency
Potential Drawbacks
Total CompensationTotal Compensation
Base CompensationBase Compensation
Incentive PayIncentive Pay
BenefitsBenefits
Elements of Compensation
At the End of this Session, You will be Able to Answer the Following Questions:
Why don’t we design a compensation system that totally follows the incentive pay notion, i.e. “paying for performance”? Any potential drawbacks of the idea of “pay of
performance”?
What are the considerations in designing a benefit package?
Which Benefits to Provide? Firms have three considerations
The organization’s goals Employee expectations (relates to min.) Cost of employee benefits (relates to max.)
Benefits in Hong Kong Usually around 15-20 % of total labor costs Common benefits
Subsidized meals/food allowances Health and dental plans Transportation allowance Mandatory Provident Fund (MPF)
5% of wage to a maximum of HKD 1,000 a month. **Note: Ocean Park spends 6% on pension costs
Communicating Benefits As was shown in the video, the value of the benefit
package is often not well communicated to employees.
Communication can be done through a variety of means (see also Figure 13.7)
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