Incentives

Chapter 2 Incentives and Rewards

Resource Person: Ms Mahwish Talib
Incentives
• The Ultimate Purpose of Incentives TO MOTIVATE PEOPLE TO WORK
HARDER WORK SMARTER REACH PERSONAL AND PROFESSIONAL
GOALS MORE QUICKLY GENERATE COMPETITIVE ADVANTAGES
THROUGH ITS PEOPLE.
Motivation
Two Types of Human Motivation
• Intrinsic Motivation refers to motivation that comes from inside an
individual rather than from any external or outside rewards, such as
money or grades. The motivation comes from the pleasure one gets
from the task itself or from the sense of satisfaction in completing or
even working on a task.
• Extrinsic motivation refers to motivation that comes from outside an
individual. The motivating factors are external, or outside, rewards such
as money or grades. These rewards provide satisfaction and pleasure
that the task itself may not provide. An extrinsically motivated person
will work on a task even when they have little interest in it because of
the anticipated satisfaction they will get from some reward.
Which motivation concept works best for employees?

Intrinsic or Extrinsic.
• If people experience positive consequences, they are likely to repeat
the actions
• Goal Setting – Focusing the efforts of employees when the goals are
specific, challenging, and attainable
• Expectancy – Employees make decisions regarding how to act at work
based on which behaviors they believe will lead to their most valued
work-related rewards and outcomes
• Agency – Managers motivate their employees by aligning their
interests with the interest of other stakeholders
 Incentive Pay or Variable Pay
• Compensation fluctuates according to
• A pre-established formula
• Individual or group goals
• Company earnings
• other than fixed pay
• Controls costs
• Motivates employees
 Incentive Pay Categories

 Individual

 Group

 Company-wide
 Performance Measures
• Individual incentive plans
• Quantity of work output
• Quality of work output
• Monthly sales
• Work safety record
• Work attendance
Types of Incentive Plans Individual
(1) Merit Pay Programs
• employees receive a compensation adjustment based on results of
their performance evaluation
• Permanently raises base salary and company’s costs
• Rewards employees for past performance
(2) Lump-Sum Merit Bonuses
• one-time payment for performance not rolled into employees’
salaries
Types of Incentive Plans Individual
(3). Piecework Incentive Plans
• reward employees for future performance Straight piecework plan
• receive a certain rate of pay for each unit produced
(4) Differential piecework plan
• the pay received per unit produced changes at certain levels of output Employees
may focus only on aspects of job that get rewarded Some tasks are difficult to
measure
(5) Standard Hour Plan
• pay rate set based on expected amount of time an employee needs to complete
task If employees exceed minimum, they will receive a premium for higher level of
work
More Types of Incentive Plans Individual
Awards 
used to encourage employees to work toward specific outcomes
SPOT AWARDS
• Manager gives awards “on the spot” when they see certain behaviors
exhibited by employees
• Can be cash or non-cash (e.g., merchandise, gift certificates, paid time
off)
Recognition programs like employee-of-the-month can also be used
Can become an expectation of employee.
More Types of Incentive Plans Individual
Sales Incentive Plans
Straight commission plan
• pays an employee a percentage of the total sales they generate
• employees receive a set compensation, regardless of their level of
sales (employees may not be as motivated to sell as much as they
can)
Mixed salary/commission plan
• employees receive a lower base salary (50%) and the remaining is
commission based
• Assumes that money motivates!
Individual Incentive Plan Advantages & Disadvantages
Advantages:
• Helps relate pay to performance
• Promotes equitable distribution of compensation

• Helps retain best performers

• Compatible with the individualistic culture
Disadvantages:
• May promote inflexibility
• Unrealistic standards may hamper employee motivation
• Factors beyond employee’s control may affect outcomes
• Factors not rewarded may be overlooked
 Group Incentive Plans
• Rewards employees for their collective performance
• Use has increased in industry
• 2 types
• Team - based or small group
• Gain sharing
 Allocation Methods
• Equal incentive payments

• Differential payments based on contribution to goals

• Differential payments according to base pay

 Gain Sharing
• Gainsharing is a system of management used by a
business to increase profitability by motivating
employees to improve their performance through
involvement and participation. As their performance
improves, employees share financially in the gain
(improvement).
• In gain sharing, gain means savings. An employee or
team shares in the amount saved by a business as a
result of a suggestion he made or task performed. 
 Company - Wide Incentive Plans
• Rewards employees when company meets performance standards.

• 2 Types
• Profit sharing plans
• Employee stock option plans
Designing Sales Incentive Compensation
Plans
• Sales volume, which indicates the amount of sales that should be
achieved for a specified period.
New business, which refers to making sales from customers who have
not made previous purchases.
Retaining sales, which simply targets a level of sales from existing
customers.
Product mix, which rewards sales professionals for selling a pre-
established mix of a company’s product goods or services.
Win-back sales, which is designed to motivate sales professionals to
regain business from former.
Designing Sales Incentive Compensation
Plans
Alternative Sales Compensation
Choosing the appropriate plan depends on the company’s
competitive strategy
Five main alternatives
a. Salary-only
b. Salary-plus-bonus
c. Salary-plus-commission
d. Commission-plus-draw
e. Commission-only
Designing Sales Incentive Compensation
Plans
• Multiple-tiered commissions
 Award sales professionals with higher percentages
of the sales made in a given period,
 If the sales level exceeds a pre-determined level
• Example: Multiple-Tiered Commissions
* 8% commissions per unit for sales up to 1000 units
* 12% commissions per unit for sales exceeding 1000
units
 Executive Compensation
• Executive Compensation is a broad term for the financial compensation
awarded to a firm's executives. Executive Compensation packages are
designed by a company's Board of Directors, typically by the
Compensation Committee consisting of independent directors, with the
purpose of incentivizing the executive team, who have a significant
impact on company strategy, decision-making, and value creation (Pay
for Performance) as well as enhancing Executive Retention.
 Executive Compensation
• There are following basic features of executive compensation or
remuneration:
 Salary
 Short-term incentives (STIs), sometimes known as bonuses
 Long-term incentive plans (LTIPs)
 Employee benefits and paid expenses (perquisites)
 Insurance and Golden parachute Plans
 Stocks
 One-dollar Salary
• A number of top executives in large businesses and
governments work for an annual salary of one dollar.
Many executives who take a one-dollar salary also choose not
to take any other forms of compensation. In some cases, in lieu
of a salary, the executives receive stock options and bonuses.
The assumption is that stock prices will reflect the actual value
of a company, which reflect the management performance of
the company.

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