PowerPoint Presentation by Charlie Cook

Copyright © 2004 South-Western. All rights reserved.

 Objectives
After studying this chapter, you should be able to:
1. Discuss the basic requirements for successful
implementation of incentive programs.
2. Identify the types of, and reasons for
implementing, individual incentive plans.
3. Explain why merit raises may fail to motivate
employees adequately and discuss ways to
increase their motivational value.
4. Indicate the advantage of each of the principal
methods used to compensate salespeople.

Copyright © 2004 South-Western. All rights reserved. 10–2

 Objectives (cont’d)
After studying this chapter, you should be able to:
5. Differentiate how gains may be shared with
employees under the Scanlon, Improshare systems.
6. Differentiate between profit-sharing plans and
explain advantages and disadvantages of these
programs.
7. Describe the ESOP plans and discuss the advantages
of ESOP to employers and employees.

Copyright © 2004 South-Western. All rights reserved. 10–3

 Strategic Reasons for Incentive Plans

• Variable Pay
 Tying pay to some measure of individual, group, or
organizational performance.
• Incentive Pay Programs
 Establish a performance “threshold” to qualify for
incentive payments.
 Emphasize a shared focus on organizational
objectives.
 Create shared commitment in that every individual
contributes to organizational performance and
success.

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 Advantages of Incentive Pay Programs
• Incentives are most useful when:
 Focused on key performance targets that produce
employee and organizational gains.
 Variable costs of payouts are linked to the
achievement of competitively important results.
 Directly relating payouts to achieving operating
performance objectives (quantity and/or quality).
 Teamwork and unit cohesiveness are fostered by
basing payments to individuals on team results.
 Used to distribute success among those responsible
for producing that success.
Figure 10.1
Presentation Slide 10–1
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 Requirements for a Successful Incentive
Plan
• Identify important organizational metrics that
encourage employee behavior.
• Involve employees. Incentive programs should
seem fair to employees.
• Find the right incentive payout. Payout formulas
should be simple and understandable.
• Establish a clear link between performance and
payout.

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 Successful Incentive Plans
• Employees have a desire for an incentive plan.
• Employees are encouraged to participate.
• Employees see a clear connection between the incentive
payments they receive and their job performance.
• Employees are committed to meeting the standards.
• Standards are challenging but achievable.
• Payout formulas are simple and understandable.
• Payouts are a separate, distinct part of compensation.

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 Setting Performance Measures—the Keys

• Managers or supervisors should:

 Ensure that performance measures are consistent
with the strategic goals of the organization.
 Define the intent of performance measures.
 Involve employees at all levels.
 Consider the organization’s culture and workforce
demographics.
 Widely communicate the importance of
performance measures.

Source: Source: Adapted from Christian M. Ellis, “Improving the Impact of

Performance Management,” Workspan 45, no. 2 (February 2002): 7–8. HRM 2
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 Individual Incentive Plans

• Straight Piecework
 An incentive plan under which employees receive a
certain rate for each unit produced.
• Differential Piece Rate
 A compensation rate under which employees whose
production exceeds the standard amount of output
receive a higher rate for all of their work than the rate
paid to those who do not exceed the standard
amount.

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 Piecework drawbacks

• Problems with piecework systems:

 Piecework standards can be difficult to develop.
 Individual contributions can be difficult measure.
 Not easily applied to work that is highly mechanized
with little employee control over output.
 Piecework may conflict with organizational culture
(teamwork) and/or group norms.
 When quality is more important than quantity.
 When technology changes are frequent.
 When cross-training is required for scheduling
flexibility.

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 Individual Incentive Plans:

• Standard hour plan

 An incentive plan that sets pay rates based on the
completion of a job in a predetermined “standard
time.”
 If employees finish the work in less than the expected
time, their pay is still based on the standard time for the
job multiplied by their hourly rate.

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 Bonuses

• Bonus
 A bonus is an incentive payment given to employees
beyond their normal base wage. It is frequently given at
the end of the year and does not become part of base
pay. Bonuses have the advantage of providing
employees with more pay for their greater effort, while at
the same time the employees still have the security of a
basic wage.
• Spot bonus
 Unplanned bonus given for employee effort unrelated to
an established performance measure.

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 Merit Pay

• Merit Pay Program (merit raise)

 Links an increase in base pay to how successfully an
employee achieved some objective performance
standard.
 Merit raises can serve to motivate if employees
perceive the raise to be related to the performance
required to earn it.

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 Problems with Merit Raises
• Inadequate funding for merit increases.
• Vagueness in how to define and measure performance.
• Employees not believing that merit compensation is tied
to effort and performance
• Allowing organizational politics to influence merit pay
decisions.
• Failing to differentiate between merit pay and other types
of pay increases.
• Mistrust between management and employees.
• An “overall” merit pay plan that does not motivate.

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 Motivation Through Merit Raises

• Develop employee confidence and trust in

performance appraisal.
• Establish job-related performance criteria.
• Separate merit pay from regular pay.
• Distinguish merit raises from cost-of-living
raises.
• Withhold merit payments when performance
declines.

Presentation Slide 10–4

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 Lump-Sum Merit Pay

• Lump-sum Merit Program

 Program under which employees receive a year-end
merit payment, which is not added to their base pay.
 Advantages
 Provides financial control by maintaining annual salary
expenses and not escalating base salary levels.
 Provides a clear link between pay and performance.

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 Sales Incentives

Sales Incentive Plans

Straight Salary

Straight Commission

Salary and Commission

Combinations

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 Incentive Plans for Salespersons

• Straight Salary Plan

 Compensation plan that permits salespeople to be
paid for performing various duties that are not
reflected immediately in their sales volume.
 Encourages building customer relationships.
 Provides compensation during periods of poor sales.
 The principle limitation it may not provide sufficient
motivation for maximizing sales volume.

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 Incentive Plans for Salespersons

• Straight Commission Plan

 Compensation plan based upon a percentage of
sales.
 Disadvantages
 Emphasis is on sales volume rather than on profits.
 Customer service after the sale is neglected.
 Earnings tend to fluctuate widely between good and poor
periods of business.
 Temptation to grant price concessions to get sales.

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 Incentive Plans for Salespersons

• Combined Salary and Commission Plan

 A compensation plan that includes a straight salary
and a commission component.
 Advantages
 Combines the advantages of straight salary and straight
commission forms of compensation.
 Offers greater design flexibility to develop the most
favorable ratio of selling expense to sales.
 Motivates sales force to achieve specific company
marketing objectives in addition to sales volume.

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 Executive Compensation

• The Executive Pay Package

 Base salary
 Short-term incentives or bonuses
 Long-term incentives or stock plans
 Perquisites (perks)

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 Executive Compensation(cont’d)

Executive Base Salaries

• Executive base salaries represent between 30 and 40
percent of total annual compensation. An analysis of
executive salaries shows that the largest portion of
executive pay is received in long-term incentive rewards
and bonuses.
Executive Short-Term Incentives
• Annual bonuses represent the main element of
executive short-term incentives. A bonus payment may
take the form of cash or stock and may be paid
immediately (which is frequently the case).

Copyright © 2004 South-Western. All rights reserved. 10–22

Executive Compensation(cont’d)
• Most organizations pay their short-term incentive
bonuses in cash, in keeping with their pay-for
performance strategy. By providing a reward soon after
the performance and thus linking it to the effort on which
it is based, they can use cash bonuses as a significant
motivator.

10–23
 Executive Compensation(cont’d)

Executive Long-Term Incentives

Stock options are the primary long-term incentive offered
to executives. The principal reason driving executive
stock ownership is the desire of both the company and
outside investors for senior managers to have significant
stake in the success of the business.

Copyright © 2004 South-Western. All rights reserved. 10–24

 Executive Compensation(cont’d)

• Executive perks
• Are nonmonetary rewards given to executives. Perks are
means of demonstrating the executive importance to the
organization. A recent study, however, shows that perks
can facilitate company productivity by saving executive
time or improve or maintain executive health.
• Therefore, the cost of perks should be weighted against
the added efficiency and managerial effectiveness they
generate.

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 The “Sweetness” Of Executive Perks

HRM 4
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 Group Incentive Plans

• Team Incentive Plans

 Compensation plans where all team members receive
an incentive bonus payment when production or
service standards are met or exceeded.
• Establishing Team Incentive Payments
 Set performance measures upon which incentive
payments are based
 Determine the size of the incentive bonus.
 Create a payout formula and fully explain to
employees how payouts will be distributed.

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 The Pros of Team Incentive Plans

• Team incentives are effective when:

 They support group planning and problem solving,
thereby building a team culture.
 The contributions of individual employees depend on
group cooperation.
 They broaden the scope of the contribution that
employees are motivated to make.
 They reduce employee jealousies and complaints
over “tight” or “loose” individual standards.
 They encourage cross-training and the acquiring of
new interpersonal competencies.
Figure 10.4a
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 The Cons of Team Incentive Plans

• Team incentives are ineffective when:

 Individual team members perceive that “their” efforts
contribute little to team success or to the attainment
of the incentive bonus.
 Intergroup social problems—pressure to limit
performance and the “free-ride” effect— arise.
 Complex payout formulas are difficult for team
members to understand.

Figure 10.4b
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 Group Incentive Plans(cont’d)

• Gainsharing Plans
 Programs under which both employees and the
organization share the financial gains according to a
predetermined formula that reflects improved
productivity and profitability.
 These plans are based on a mathematical formula
that compares a baseline of performance with actual
productivity during a given period. When productivity
exceeds the baseline, an agreed-upon amount of
savings is shared with employees.

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 Designing Effective Gainsharing Programs

• Enlist total managerial support.

• Include all groups—labor, management, employees.
• Prevent political gamesmanship.
• Bonus formulas must be fair, precise and easily
calculated, offer frequent payouts, large enough to
encourage employee effort, and create a pay-for-
performance environment.
• Be certain that employees are predisposed to a
gainsharing reward system.
• Launch the plan during a favorable business period.

HRM 5
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 Bonus and Gainsharing Plans

• Scanlon Plan
 Employee and management committees cooperate in
cost-reduction improvements.
 The philosophy behind the scanlon plan is that
employee should offer ideas and suggestions to
improve productivity and in turn be rewarded for their
constructive efforts.
Improshare
• Gainsharing program for bonuses are based upon the
overall productivity of the work team. Improshare output
is measured by the number of finished products that a
work team produces in a given period.
Copyright © 2004 South-Western. All rights reserved. 10–32
 Lessons from the Scanlon Plan and
Improshare
Perhaps the most important lesson to be learned from the Scanlon
Plan and Improshare—or any gainsharing program—is that
management expecting to gain the cooperation of its employees in
improving efficiency must permit them to become involved
psychologically as well as financially in the organization. In fact,
psychological ownership (perceptions of having sufficient
information and control to do one’s job) can play a stronger role in
employee performance than financial ownership.

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 Enterprise incentive plans
• Enterprise incentive plans differ from individual and
group incentive plans in that all organizational members
participate in the plan’s compensation payout. Enterprise
incentive plans reward employees on the basis of the
success of the organization over an extended time
period—normally one year, but the period can be longer.

Common enterprise incentive plans include profit

sharing, stock options, and employee stock ownership
plans (ESOPs).

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 Enterprise Incentive Plans(cont’d)

• Profit Sharing
 Any procedure by which an employer pays, or makes
available to all regular employees, in addition to their
base pay, current or deferred sums based upon the
profits of the enterprise.
 Profit sharing intend to give the employees the
opportunity to increase their earnings by contributing
to the growth of their organization’s profits.
 Agreement over division of profits between company
and employees.

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 Enterprise Incentive Plans(cont’d)

• Stock Options
 Granting employees the right to purchase a specific
number of shares of the company’s stock at a
guaranteed price (the option price) during a specific
time period.
 organizations that offer stock option programs to
employees do so with the belief that there is some
incentive value to the systems. By allowing
employees to purchase stock, the organization hopes
they will increase their productivity, assume a
partnership role in the organization, and thus cause
the stock price to rise.

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 Enterprise Incentive Plans(cont’d)

• Employee Stock Ownership Plans (ESOPs)

 Stock plans in which an organization contributes
shares of its stock to an established trust for the
purpose of stock purchases by its employees.

 The ESOP holds the stock for employees, and they

are routinely informed of the value of their accounts.
Stock allocations can be based on employee wages
or seniority. When employees leave the organization
or retire, they can sell their stock back to the
organization, or they can sell it on the open market if
it is traded publicly.
Copyright © 2004 South-Western. All rights reserved. 10–37
 Advantages of ESOPs
• Employers can provide retirement benefits for their
employees at relatively low cost because stock
contributions are in effect subsidized by the federal
government.

• ESOPs can also increase employees’ pride of ownership

in the organization, providing an incentive for them to
increase productivity and help the organization prosper
and grow.

Copyright © 2004 South-Western. All rights reserved. 10–38

 Problems with ESOPs
• A major problem with the privately held company is its
potential inability to pay back the stock of employees
when they retire.

These employees do not have the alternative of

disposing of their stock on the open market. Thus, when
large organizations suffer financial difficulties and the
value of the companies’ stocks falls, so does the value of
the employees’ retirement plan.

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