Pay for Performance

& Financial Incentives

Chapter 12

Presented by: FSZ

 Learning Objectives
 Explain how to apply motivation theories in formulating an incentive plan

 Discuss the main incentives for individual employees

 Discuss the pros and cons of commissions versus straight pay incentives for
salespeople

 Describe the main incentives for managers and executives

 Name and define the most popular organization-wide variable pay plans

 Outline the steps in designing effective incentive plans

2
 Money’s Role in Motivation
Frederick Taylor
 was concerned with Systematic Soldiering- the tendency of the employees to work
at the slowest pace possible and to produce at the minimum acceptable level

 made three contributions

 popularized Financial Incentives- financial rewards paid to workers whose

production exceeds some predetermined standard in the late 1880s

 formulated Fair Day’s Work- output standards devised based on careful, scientific
analysis
3
 Money’s Role in Motivation
Frederick Taylor

 spearheaded Scientific Management Movement- a management

approach based on improving work methods through observation
and analysis

 focused on Productivity- the ratio of outputs (goods and services)

divided by the inputs (resources such as labor and capital)

 Taylor’s aim:

 Financial Incentives > Boost Employee Performance >

Productivity Gains
4
 Motivation & Incentives
Motivators & Frederick Herzberg
 Best way to motivate someone is to organize the job so that doing so it provides the
feedback and challenge that helps satisfy the person’s higher-level needs
(accomplishment & recognition)

 Satisfying “lower-level” needs (better pay and working conditions) keeps the person
from becoming dissatisfied

 Factors (hygienes) that satisfy lower-level needs are different from those
(motivators) that satisfy or partially satisfy higher-level needs

5
 Motivation & Incentives
Motivators & Frederick Herzberg
 If hygiene factors (working condition, salary, incentive pay) are inadequate,
employees become dissatisfied

 Adding more of the above (extrinsic motivation) is an inferior way of motivating

 Managers interested in creating a self-motivated workforce should focus on

motivating factors or intrinsic motivation- motivation that derives from the pleasure
someone gets from doing the job

 Comes from within


6
 Motivation & Incentives
Expectancy Theory & Victor Vroom
 People won’t pursue rewards they find unattractive

 A person’s motivation to exert some level of effort depends on three things

 Expectancy- (in terms of probability) that his/her effort will lead to performance

 Instrumentality- the perceived connection between successful performance and

actually obtaining the rewards

 Valence- the perceived value the person attaches to the reward

 Motivation = E x I x V
7
 Motivation & Incentives

Behavior Modification/Reinforcement & B. F. Skinner

 Behavior Modification means changing behavior through rewards or punishments that
are contingent on performance

 It boils down to two main principles

 First, the behavior that appears to lead to a positive consequence (reward) tends to
be repeated

 Whereas, behavior that appears to lead to a negative consequence (punishment)

tends not to be repeated
8
 Individual Employee Incentives
• Piecework Plans: type of incentive program whereby the employee is paid based on each unit of
output; employees are paid a certain rate per unit times the number of units produced

- Straight piecework: an incentive plan in which a person is paid a sum for each item he or she
makes or sells, with a strict proportionality between results and rewards

- Guaranteed piecework: the straight piecework calculation plus an incentive for each piece
produced above a set number of pieces

• Standard Hours Plan: a plan by which a worker is paid a basic hourly rate but might be paid an
extra percentage (percent premium) of his or her rate for production exceeding the standard per
hour or per day
9
 Straight Piecework
Step-1: Computing the piece rate:
For example, a job has hourly rate of $6.50
per hour. Standard production 40 units per
Step 2: Computing earnings:
day. Standard hour is 8 hour per day.

So, if the employee produce 40 units

40 units
then his/her earnings will be $1.30 x
8 hour =5 units per hour 40 = $52.

$6.50 (hourly rate)

5 (units per hour) = $1.30 per unit

10
 Standard Hour Plan
For example, a job has hourly rate of $6.50 per hour. Standard production 40 units
per day. Standard hour is 8 hours per day. An employee produced 60 units in a
specific day. So his earning for the day will be:

8 X $6.50 = $52 per day as per standard hour

However, production exceeded by (60-40)=20 units or 20/40= 50%

Compute Earning:

so total earning will be = $52 + (50% x $52) = $78

11
 Guaranteed Piecework
Step-1: Computing the piece rate:
For example, Standard production is 40 units per
day. Standard hour is 8 hours/day. A job has
Step 2: Computing earnings:
hourly rate of $8.00/hour. 20 percent premium
So, if the employee produces 60 units then
for producing each piece above standard number
his/her earnings will be
of units is provided.
Wages from producing Standard units: $1.60 x
Calculation: 40 = $64.
Standard Unit: 40 units/8 hour Wages from producing premium units: $1.92 x
=5 units/hour (60-40=20) = $38.4
Total: $102.4
Std. rate per Unit is; $8.00 (hourly rate)/ 5 (units
per hour) = $1.60 per unit
Premium rate per unit is 1.60 X 1.2= $1.92

12
 Individual Employee Incentives
Pros and Cons of Piecework incentives
 Easily understandable, equitable, and powerful incentives
 Employee resistance to changes in standards or work processes affecting output
 Quality problems caused by an overriding output focus, absence of equipment
maintenance
 Possibility of violating minimum wage standards
 Employee dissatisfaction when incentives either cannot be earned or are
withdrawn

13
 Individual Employee Incentives &
Recognition Programs
Merit Pay/Merit Raise
 A salary increase the firm awards to an individual employee based on his or her
individual performance

 Advocates argue that awarding pay raises across the board (without regard to
individual merit) may actually detract from performance, by showing employees they
will be rewarded regardless of how they perform

14
 Individual Employee Incentives &
Recognition Programs
Incentives for Professional Employees
 Dual-career ladder is a way to manage professionals’ pay. At many employers, a
bigger salary and bonus requires rerouting from, say, engineering into management.
However, not all professionals want such paths. Therefore, many employers institute
dual-career paths, in other words, one path for managers, and another for technical
experts.

 The latter offer professionals (engineers) the prospect of using advanced technical
skills and earning higher pay without switching to management

15
 Individual Employee Incentives &
Recognition Programs
Nonfinancial & Recognition-Based Awards
 Social Recognition Program: refers to informal manager-employee exchanges such
as praise, approval, or expressions of appreciation for a job well done

 Performance Feedback: providing quantitative or qualitative information on task

performance to change or maintain performance; showing workers a graph of how
their performance is trending

 Has a positive impact on performance, either alone or in conjunction with financial

rewards
16
 Incentives for Salespeople
Salary Plan
- fixed/straight salaries

- best for : prospecting (finding new clients), account servicing

(participating in national and local trade shows)

- foster sales staff loyalty

- but, it can demotivate potentially high-performing salespeople

17
 Incentives for Salespeople
Commission Plan
- straight commission plans pay salespeople for results

- sales costs proportionate to sales rather than fixed

- easy to understand and compute

- poorly designed plans may cause a negligence of non-selling duties (servicing small accounts,
cultivating customers) or pushing hard-to-sell items, where focus is only on making sales

- can create wide variation in salesperson’s income

- misjudging sales potential can lead to excessive commissions and having to cut commission
rates

- likelihood of sales success may be linked to external factors (economic boom or recession)
18
 Incentives for Salespeople
Combination Plan
- pay is a combination of salary and commissions, usually with a sizable salary
component

- ex: 70% base salary and 30% commission (varies from industry to industry)

- plan gives salespeople a floor (safety net) to their earnings

- salary component covers company-specified service activities

19
 Incentives for Managers & Executives
Short-Term Incentives
 Annual bonus are plans that are designed to motivate short-term performance of
managers and are tied to company profitability

 Factors influencing the bonus

 Eligibility

 Fund Size

 Individual Performance
20
 Incentives for Managers & Executives
Strategic Long-Term Incentives
 Stock Options: the right to purchase a specific number of shares of a company stock at
today’s price at some time in the future
 Restricted Stock Plans: the company usually awards rights to the shares without cost
to the executive but the employees are restricted from acquiring (and selling) the
shares for a specified time period (forfeited in case of dismissal)
 Golden Parachutes: extraordinary payments companies make to executives in
connection with a change in ownership/control
 Loans

21
 Team Incentives

 A plan in which a standard is set for a specific work group, and its members
are paid incentives if the group exceeds the standard

 Companies incentivize teams in one of the three following ways

- Pay the same incentives to each team member based on some overall
standard

- Pay different rates to each member based on performance

- Pay different rates to each in some proportion to each member’s base pay
22
 Team Incentives
 reinforce team problem-solving

 help ensure cooperation

 facilitate training, since each team member has an interest in getting new
members up to speed fast

 reward free-riders

23
 Organization-wide Incentive Plans
Profit-Sharing Plans
A plan whereby employees receive a share of the company’s annual profits
 Current-profit sharing plans/Cash plans: employees receive cash shares of the firm’s
profits quarterly or annually
 The Lincoln Incentive System: profits are distributed to employees based on their
individual merit rating
 Deferred profit-sharing plans: a predetermined portion of profits is placed in each
employee’s account under a trustee’s supervision

24
 Thanks!
Any questions?
You can find me at
faseeha.zabir@northsouth.edu

25
 Reference
Dessler, G. (2012). Human Resource Management (13th Edition).
New York: Pearson.

26