Human Resource

Management
ELEVENTH EDITION
1
GARY DESSLER

Chapter
12

Pay For Performance & Financial Incentives

Motivation, Performance, and Pay
• Incentives
 Financial rewards paid to workers whose production
exceeds a predetermined standard.

• Frederick Taylor
 Popularized scientific management and the use of
financial incentives in the late 1800s.
 Fair day’s work

12–2
Motivation & incentives
• Fredrick Herzberg:
 Motivator: internal factors
 Hygiene: External factors
 Higher level needs & lower level needs
• Edward Deci
 Extrinsic rewards can detract employee
• Reinforcement theory
• Victor Vroom
 Expectancy: expectations- performance
 Instrumentality: performance- reward
 Valance: value of reward
 Motivation= E+I+V

12–3
Incentive pay
• Variable pay
• Piecework plans: pay based on numbers of
items processed
 Straight piecework
 Standard hour plans
 Pros & cons
• Merit pay:
 Salary increased based on individual performance.

12–4
 Merit Pay Options

• Lump sum can be a bigger motivator

Lump sum award

matrix based on
individual and
organization
performance

12–5
 Employee Incentive Plans

Individual Employee Incentive

and Recognition Programs

Sales Compensation
Programs

Pay-for-Performance Team/Group-based Variable

Pay Programs
Plans
Organizationwide Incentive
Programs

Executive Incentive
Compensation Programs

12–6
Incentives for Salespeople
• Salary Plan
 Straight salaries
 Best for: prospecting (finding new clients), account
servicing, training customer’s salesforce.
• Commission Plan
 Pay is a percentage of sales results.
 Keeps sales costs proportionate to sales revenues.
 Can create wide variation in salesperson’s income.
 Likelihood of sales success may be linked to external factors
rather than to salesperson’s performance.
 Can increase turnover of salespeople.

12–7
Incentives for Salespeople (cont’d)
• Combination Plan
 Pay is a combination of salary and commissions,
usually with a sizable salary component.
 Plan gives salespeople a floor (safety net) to their
earnings.
 Salary component covers company-specified service
activities.
 Plans tend to become complicated, and
misunderstandings can result.

12–8
Setting Sales Quotas

• Setting effective quotas is an art

• Make sure commissions match expenses
• Ask these questions:

12–9
Team/Group Incentive Plans
• Team (or Group) Incentive Plans
 Incentives are based on team’s performance.

• How to Design Team Incentives

 Set individual work standards.
 Set work standards for each team member and then
calculate each member’s output.
 Members are paid based on one of three formulas:
 All receive the same pay earned by the highest producer.
 All receive the same pay earned by the lowest producer.
 All receive the same pay equal to the average pay earned
by the group.

12–10
Team/Group Incentive Plans (cont’d)
• Pros
 Reinforces team planning and problem solving
 Helps ensure collaboration
 Encourages a sense of cooperation
 Encourages rapid training of new members

• Cons
 Pay is not proportionate to an individual’s effort
 Rewards “free riders”

12–11
Organizationwide Incentive Plans
• All or most employees can participate.
• Employee Stock Ownership Plan (ESOP)
 A firm annually contributes its own stock—or cash
(with a limit of 15% of compensation) to be used to
purchase the stock—to a trust established for the
employees.
 The trust holds the stock in individual employee
accounts and distributes it to employees upon
separation from the firm if the employee has worked
long enough to earn ownership of the stock.

12–12
Organization Wide Variable Pay Plans
• Variable pay plans include:
 Profit sharing
 Employee Stock Ownership Program (ESOP)
 Scanlon or gain-sharing plans
 At risk plans

12–13
 Profit Sharing

• Employees share in some

part of profits
• In cash plans
• Lincoln incentive plan
• Deferred plans

12–14
 ESOP

• Builds a sense of commitment and ownership

in company
• Help build team work
• Positive tax advantages for company and
employee

12–15
Scanlon Plan

• An incentive plan developed in 1937 by Joseph Scanlon

and designed to encourage cooperation, involvement,
and sharing of benefits
• Scanlon ratio= labor cost/ SVOP
(Sale value of production )
Philosophy of
Identity Competence
cooperation
Involvement Benefits sharing
system formula
12–16
Gainsharing

• A modern Scanlon type plan where cost

savings are shared
• Eight basic steps:
Payout must be
Establish plan
Choose performance large enough
Choose formto of
objectives
UseMethod
a funding
measures motivate
Decide
payout bonus
for Develop
formula share
distributing frequency
an involvement
of gains system

12–17
Making Gainsharing Work

• Use multiple measures

 Productivity cost performance, product damage,
customer complaints, shipping errors, safety, and
attendance
• Committed managers
• Straightforward formula
• Employee involvement

12–18
At-Risk Variable Pay Plans
• Put some portion of the employee’s
weekly pay at risk.
 If employees meet or exceed their goals,
they earn incentives.
 If they fail to meet their goals, they forgo
some of the pay they would normally have
earned.

12–19
Incentives for Managers and Executives
• Short-Term Incentives: The Annual Bonus
 Plans that are designed to motivate short-term
performance of managers and are tied to company
profitability.

• Issues in Awarding Bonuses

 Eligibility basis

 Fund size basis

 Individual awards

12–20
Long Term Incentives

• Stock options
• Different stock option plans
• Performance plans
• Cash plans
• Other plans

12–21
Long Term Incentives (Cont.)

• Other Plans
 Stock appreciation
 Performance achievement
 Stock options
 Phantom stock
• Performance Plans
• Cash Versus Stock Options

12–22
 Stock Options

• A stock option is the right to purchase a stated number

of shares of a company stock at a preset price at some
time in the future

• Some stock plans are different for each employee

• A restricted stock option is an option grant which has
constraints on its use

12–23
 Performance Plans

• Executives do not prosper unless the company

does
• Executives have some “skin in the game”
• Value is contingent on financial performance

12–24
Cash Versus Stock Options

Which do you think is a better

motivator?

12–25
Strategy and Executive Compensation

• Long-term incentives have a profound impact on

strategic success
• When designing a compensation plan, 1st define
strategic context
• Create package

• Ignore firm’s strategy at your own peril

12–26
Steps to a Compensation
Package

• Include external and internal issues

 What are our long term goals?
 How can compensation support them?
• What defines the work culture and how can
the package be molded to it?
 What are our competitive challenges?
 What are our specific business objectives?

12–27
Steps to a Compensation
Package (Cont.)

• Shape components into balanced plan

• Meet unique company and strategic needs
• Legal and tax effective
• Install a review and evaluation process

12–28
Why Incentive
Plans Can Fail

• Performance pay can’t replace good

management
• You get what you pay for
• Pay is not a motivator
• Rewards punish
• Rewards rupture relationships

12–29
Why Incentive
Plans Can Fail

• Rewards can unduly restrict performance

• Rewards may undermine responsiveness
• Rewards undermine intrinsic motivation
• People work for more than money

12–30
 Implementing Incentive Plans

• Use common sense • Get support

• Incentive linked to strategy • Use accurate
• Effort linked to reward measurement
• Easily understood • Long and short view
• Set effective standards • Consider corporate
• Standard is a contract culture
• Comprehensive
commitment oriented
approach

12–31