Dessler 12

© 2008 Prentice Hall, Inc. © 2008 Prentice Hall, Inc. All rights reserved.All rights reserved.

PowerPoint Presentation by Charlie CookPowerPoint Presentation by Charlie CookThe University of West AlabamaThe University of West Alabama

1

Human Resource Human Resource ManagementManagement

ELEVENTH EDITIONELEVENTH EDITION

G A R Y D E S S L E RG A R Y D E S S L E R

Pay for Performance andPay for Performance andFinancial IncentivesFinancial Incentives

Chapter Chapter 1212

Part 4 | CompensationPart 4 | Compensation

© 2008 Prentice Hall, Inc. All rights reserved. 12–2

After studying this chapter, you should be able to:After studying this chapter, you should be able to:

1.1. Discuss the main incentives for individual employees.Discuss the main incentives for individual employees.

2.2. Discuss the pros and cons of incentives for Discuss the pros and cons of incentives for salespeople.salespeople.

3.3. Name and define the most popular organizationwide Name and define the most popular organizationwide variable pay plans.variable pay plans.

4.4. Describe the main incentives for managers and Describe the main incentives for managers and executives.executives.

5.5. Outline the steps in developing effective incentive Outline the steps in developing effective incentive plans.plans.


Motivation, Performance, and PayMotivation, Performance, and Pay

• IncentivesIncentives

Financial rewards paid to workers whose production Financial rewards paid to workers whose production exceeds a predetermined standard.exceeds a predetermined standard.

• Frederick TaylorFrederick Taylor

Popularized scientific management and the use of Popularized scientific management and the use of financial incentives in the late 1800s.financial incentives in the late 1800s.

Systematic soldieringSystematic soldiering

Fair day’s workFair day’s work


Employee Incentive PlansEmployee Incentive Plans

Individual Employee Incentive and Recognition Programs

Sales Compensation Programs

Organizationwide Incentive Programs

Executive Incentive Compensation Programs

Team/Group-based Variable Pay Programs

Pay-for-PerformancePlans


Incentives for SalespeopleIncentives for Salespeople

• Salary PlanSalary Plan Straight salariesStraight salaries

Best for: prospecting (finding new clients), account Best for: prospecting (finding new clients), account servicing, training customer’s salesforce, or participating in servicing, training customer’s salesforce, or participating in national and local trade shows.national and local trade shows.

• Commission PlanCommission Plan Pay is a percentage of sales results.Pay is a percentage of sales results.

Keeps sales costs proportionate to sales revenues.Keeps sales costs proportionate to sales revenues. May cause a neglect of nonselling duties.May cause a neglect of nonselling duties. Can create wide variation in salesperson’s income.Can create wide variation in salesperson’s income. Likelihood of sales success may be linked to external factors Likelihood of sales success may be linked to external factors

rather than to salesperson’s performance.rather than to salesperson’s performance. Can increase turnover of salespeople.Can increase turnover of salespeople.


Incentives for Salespeople (cont’d)Incentives for Salespeople (cont’d)

• Combination PlanCombination Plan Pay is a combination of salary and commissions, Pay is a combination of salary and commissions,

usually with a sizable salary component.usually with a sizable salary component.

Plan gives salespeople a floor (safety net) to their Plan gives salespeople a floor (safety net) to their earnings.earnings.

Salary component covers company-specified service Salary component covers company-specified service activities.activities.

Plans tend to become complicated, and Plans tend to become complicated, and misunderstandings can result.misunderstandings can result.


Specialized Combination PlansSpecialized Combination Plans

• Commission-plus-Drawing-Account PlanCommission-plus-Drawing-Account Plan Commissions are paid but a draw on future earnings Commissions are paid but a draw on future earnings

helps the salesperson to get through low sales helps the salesperson to get through low sales periods. periods.

• Commission-plus-Bonus PlanCommission-plus-Bonus Plan Pay is mostly based on commissions.Pay is mostly based on commissions. Small bonuses are paid for directed activities like Small bonuses are paid for directed activities like

selling slow-moving items.selling slow-moving items.


Team/Group Incentive PlansTeam/Group Incentive Plans

• Team (or Group) Incentive PlansTeam (or Group) Incentive Plans Incentives are based on team’s performance.Incentives are based on team’s performance.

• How to Design Team IncentivesHow to Design Team Incentives Set individual work standards.Set individual work standards. Set work standards for each team member and then Set work standards for each team member and then

calculate each member’s output.calculate each member’s output. Members are paid based on one of three formulas: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 highest producer. All receive the same pay earned by the lowest producer.All receive the same pay earned by the lowest producer. All receive the same pay equal to the average pay earned All receive the same pay equal to the average pay earned

by the group.by the group.


Team/Group Incentive Plans (cont’d)Team/Group Incentive Plans (cont’d)

• ProsPros Reinforces team planning and problem solvingReinforces team planning and problem solving Helps ensure collaborationHelps ensure collaboration Encourages a sense of cooperationEncourages a sense of cooperation Encourages rapid training of new membersEncourages rapid training of new members

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


Organizationwide Incentive PlansOrganizationwide Incentive Plans

• Employee Stock Ownership Plan (ESOP)Employee Stock Ownership Plan (ESOP) A firm annually contributes its own stock—or cash A firm annually contributes its own stock—or cash

(with a limit of 15% of compensation) to be used to (with a limit of 15% of compensation) to be used to purchase the stock—to a trust established for the purchase the stock—to a trust established for the employees. employees.

The trust holds the stock in individual employee The trust holds the stock in individual employee accounts and distributes it to employees upon accounts and distributes it to employees upon separation from the firm if the employee has worked separation from the firm if the employee has worked long enough to earn ownership of the stock.long enough to earn ownership of the stock.


Gainsharing PlansGainsharing Plans

Philosophy of

Cooperation

Involvement System

Identity

Scanlon Plan

CompetenceSharing of Benefits Formula


At-Risk Variable Pay PlansAt-Risk Variable Pay Plans

• Put some portion of the employee’s Put some portion of the employee’s weekly pay at risk. weekly pay at risk.

If employees meet or exceed their goals, If employees meet or exceed their goals, they earn incentives. they earn incentives.

If they fail to meet their goals, they forgo If they fail to meet their goals, they forgo some of the pay they would normally have some of the pay they would normally have earned.earned.


Incentives for Managers and ExecutivesIncentives for Managers and Executives

• Short-Term Incentives: The Annual BonusShort-Term Incentives: The Annual Bonus

Plans that are designed to motivate short-term Plans that are designed to motivate short-term performance of managers and are tied to company performance of managers and are tied to company profitability.profitability.

• Issues in Awarding Bonuses Issues in Awarding Bonuses

Eligibility basisEligibility basis

Fund size basisFund size basis

Individual awardsIndividual awards


K E Y T E R M SK E Y T E R M S

financial incentivesfinancial incentives

fair day’s workfair day’s work

scientific managementscientific management

expectancyexpectancy

instrumentalityinstrumentality

valencevalence

behavior modificationbehavior modification

variable payvariable pay

pieceworkpiecework

straight pieceworkstraight piecework

standard hour planstandard hour plan

merit pay (merit raise)merit pay (merit raise)

team or group incentive planteam or group incentive plan

organization wide incentive plansorganization wide incentive plans

profit-sharing planprofit-sharing plan

employee stock ownership plan (ESOP)employee stock ownership plan (ESOP)

Scanlon planScanlon plan

gainsharing plangainsharing plan

at-risk variable pay plansat-risk variable pay plans

annual bonusannual bonus

stock optionstock option

golden parachutesgolden parachutes

Business

Dessler 12