Chapter 12 Pay-for-Performance and Financial Incentives Money and motivation

The use of financial incentives is popularized Today’s efforts to achieve the organization’s strategy through motivated

employees include fixed and variable compensation plans Fixed pay: represents compensation that is independent of the performance

level of the individual, group, or organization. It includes bas pay and other forms of relatively consistent compensation: allowances

Variable pay: any plan that ties pay to productivity or profitabilityOrganizations spend roughly 11 percent of total pay-related spending on variable pay-related expenses.

Types of incentive plans Individual incentive programs: give income over and above base salary

to individual employees who meet a specific individual performance standard

Informal incentives :be awarded, to individual employees, for accomplishments that are not readily measured by a standard

Group incentive programs: to all team members Organization-wide incentives plans: to all employees with a share of the

organization’s profit-sharing plans Non-monetary recognition programs: motivate employees through

praise and expressions of appreciation for their work Incentives for operations employees

Piecework plans: earnings are tied directly to what the worker produces – the person is paid a piece rate for each unit that he/she produce; a strict proportionality between results and rewards regardless of the level of output

Eg: Tom gets $0.4 per piece for stamping out door jambs, so e would make $40 for stamping out 100 a day

Eg: Tom job is worth $10 per hour, the industrial engineer determined that 20 jambs per hour was the standard production rate, therefore the piece rate is 10/20=$0.5 per door jamb

Requires both job evaluation (enables firms to assign an hourly wage rate to the job in question) and industrial engineering (developing production standard)

Straight piecework plan: a set payment for each piece produced or processed in a factory or shop

Guaranteed piecework plan: the minimum hourly wage plus an incentive for each piece produced above a set number of pieces per hour

Differential piece-rate plan: worker is rewarded by a premium that equals the percentage by which his/her performance exceeds the standard (guaranteed base)

Advantage and disadvantagesAdvantage: simple to calculate and easily understood by employees; appear equitable in principal, and their incentive value can be powerful since rewards are directly tied to performanceDisadvantage: piecework its somewhat unsavoury reputation among many employees; piece rates must be revised when a new job evaluation comes out; a per-piece basis will lead to workers think about production standards become tied inseparably to the amount of money earned. The differential piece-rate plans has most of the advantages: less tendency on the part of workers to link their production standard with their pay

Team or group incentive plans: set work standards for each member of the group and maintain a count of the output of each memberPaid based on: 1 all members receive the pay earned by the highest producers 2 all members receive the pay earned by the lowest producer 3 all members receive payment equal to the average pay earned by the group.

Advantage and disadvantageAdvantage: some jobs are interrelated; help ensure collaboration take placeDisadvantage: each worker’s rewards are no longer based solely on his/her effort.

Incentives for senior managers and executives Short-term incentives: the annual bonus

Eligibility: decided in three waysa. Key position: which have a measurable impact on profitabilityb. Salary-level cut-off pointsc. Salary grade: above a certain grade

Fund-size determination (how much to pay out)Method: non-deductible formula—straight percentage

Deductible: accumulate only after the firm has met a specified level of earnings

Individual awardsProfit-sharing plan: each person gets a bonus based on the company’s results, regardless of the person’s actual effortTrue individual incentive: the manager’s individual effort and performance that are rewarded with a bonus

Long-term incentives: encourage executives to stay with the company by giving them the opportunity to accumulate capital (capital accumulation programs)Stock option: the right to purchase a stated number of shares of a company stock at today’s price at some time in the future

Plans providing share “units”: executives are granted a specified number of units whose value is equal to a company’s share price

Performance share unit: get earnings when performance goals are met Restricted share unit plan: will be forfeited if an executive leaves the

company before a typical period Deferred share unit plan: payable when executive leaves

Relating strategy to executive compensationa) Define the internal and external issues that face the company and its

business objectivesb) Based on the strategic aims, shape each component of the executive

compensation package and then group the components into a balanced whole

c) Check the executive compensation plan for compliance with all legal and regulatory requirements and for tax effectiveness

d) Install a process for reviewing and evaluating the executive compensation plan whenever a major business change occurs

Incentives for salespeople: tradition, the unsupervised nature of most sales work, and the assumption that incentives are needed to motivate salespeople

Salary plan: salespeople are paid a fixed salary, a straight salary basisAd: develop a high degree of loyalty Dd: do not depend on results, are tied to seniority rather than performance

Commission plan: proportion of the salesAd: greatest possible incentive, a tendency to attract high-performing sales peopleDd: focus on making a sale and on high-volume items; variances in income may lead to feel inequitable

Combination plan: salary + commissionDd: complicated and misunderstandings

Incentives for other managers and professionalsMerit pay/merit raise: any salary increase awarded to employee based on his/her individual performanceAd: only pay or other rewards tied directly to performance can motivate improved performanceDD: usefulness of the merit pay plan depends on the validity of the performance appraisal system; supervisors often tend to minimize differences in employee performance when computing merit rises; almost every employee thinks that he/she is an above-average performer.

Organization-wide incentive plan Profit-sharing plans: a plan whereby most or all employees share in the

company’s profits

Employee share purchase/stock ownership plan: hold shares of the firm’s stock for employees by using cash from employee contributions; encourage employees to develop a sense of ownership in and commitment to the fir

Gainsharing plans: an incentive plan that engages many or all employees in a common effort to achieve a company’s productivity objectives

Developing effective incentive plans When to use incentives

a) Performance pay cannot replace good managementb) Firms get what they pay forc) Pay is not a motivatord) Rewards rupture relationshipse) Rewards may undermine responsiveness

How to implement incentive plansa) Pay for performanceb) Link incentives to other activities that engage employees in the businessc) Link incentives to measurable competencies that are valued by the

organization d) Match incentives to the culture of the organizatione) Keep group incentives clear and simplef) Overcommunicateg) Remember that the greatest incentive is the work itself

Employee recognition programs Recognition programs are more effective than cash in achieving improved

employee attitudes, increased workloads and hours of work, and improved productivity.