Chapter 4:

Is Incentive Pay
Unfair?
JENG JUSTINIANO

4-1
 Incentive Pay Assumptions
Effective incentive pay systems are based on three
assumptions:
 Individual employees and work teams differ in
how much they contribute to the company, both
in what they do as well as in how well they do it
 The company’s overall performance depends to
a large degree on the performance of individuals
and groups within the company
 To attract, retain, and motivate high performers
and to be fair to all employees, a company
needs to reward employees on the basis of their
relative performance
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 Individual Incentive Plan Disadvantages

May promote inflexibility

Unrealistic standards may hamper
employee motivation
Setting performance standards is time
consuming
Factors beyond employee’s control may
affect outcomes
May promote undesirable behaviors
4-3
 Advantages of Group Incentives

Companies can more easily develop

performance measures for group plans
than individual plans

Greater group cohesion

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LO 4-4
Disadvantages of Group Incentives

May lead to higher employee turnover

because of the free-rider effect

Members may feel uncomfortable with the

fact that other members’ performance
influences their compensation level

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 Advantages and Disadvantages of
Profit-Sharing Plans
Advantages
Enable employees to share in companies’ profits
Allow companies greater financial flexibility
Disadvantages
Can undermine the economic security of
employees
May fail to motivate employees if they do not see
a direct link between their efforts and profits

4-6
 Incentive Pay Considerations

Based on individual or group performance

Acceptable level of risk
Replace traditional pay
Performance criteria evaluated
Appropriate time horizon

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 Advantages of Incentive Pay
 Incentive plans motivate workers for higher efficiency and
productivity.

 It can improve the work-flow and work methods.

 Incentive plans make employees hardworking and innovative.

 When employees are dedicated, supervision costs can be reduced.

 Wage incentives are the cheapest, quickest, and sure means of

increasing productivity.

 Incentive plans help establish positive response within an

organization.

4-8
 Disadvantages of Incentive Pay
Incentive plans can lead to disputes among workers
Hunger for money among the workers forces them to
overwork, which may affect their health.
Some workers may involve in malpractices in order to
earn more money.
For enhanced incentives, they may sacrifice quality.
It also leads to corruption by falsifying the production
records.
Incentive plans can create tensions among different
personnel.

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