Transcript Chapter 012 Recognizing Employee Contributions with Pay

McGraw-Hill/Irwin
Copyright © 2014 by the McGraw-Hill Companies, Inc. All rights reserved.
Need to Know
1.
2.
3.
4.
5.
6.
7.
Connection between incentive pay and employee
performance.
How organizations recognize individual performance.
Ways to recognize group performance.
How organizations link pay to overall performance.
How organizations combine incentive plans in a “balanced
scorecard.”
Processes that can contribute to the success of incentive
programs.
issues related to performance-based pay for executives.
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Incentive Pay

•
•
Incentive pay – forms of pay linked to an
employee’s performance as an individual, group
member, or organization member.
Incentive pay is influential because the amount
paid is linked to certain predefined behaviors or
outcomes.
For incentive pay to motivate employees to
contribute to the organization’s success, pay plans
must be well designed.
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Effective incentive pay plans meet the
following requirements:
1.
2.
3.
4.
5.
6.
Performance measures are linked to the
organization’s goals.
Employees believe they can meet performance
standards.
Organization gives employees the resources they
need to meet their goals.
Employees value the rewards given.
Employees believe the reward system is fair.
Pay plan takes into account that employees may
ignore any goals that are not rewarded.
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Pay for Individual Performance
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Pay for Individual Performance:
Piecework Rates
Piecework Rate
• A wage based
on the
amount
workers
produce.
Straight
Piecework Plan
Differential
Piece Rates
• Incentive pay
in which the
employer pays
the same rate
per piece, no
matter how
much the
worker
produces.
• Incentive pay
in which the
piece rate is
higher when a
greater
amount is
produced.
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Figure 12.1: How Incentives
Sometimes “Work”
SOURCE: DILBERT (c) 1995 Scott Adams. Used by permission of UNIVERSAL UCLICK. All rights reserved.
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Pay for Individual Performance:
Standard Hour Plans and Merit Pay
Standard Hour Plan
•
•
•
An incentive plan that
pays workers extra for
work done in less than a
preset “standard time.”
These plans are much like
piecework plans.
They encourage
employees to work as fast
as they can, but not
necessarily to care about
quality or service.
Merit Pay
•
•
•
A system of linking pay
increases to ratings on a
performance scale.
They make use of a merit
increase grid.
The system gives lowest
paid best performers the
biggest pay increases.
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Table 12.1: Sample Merit Increase Grid
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Figure 12.2: Ratings and Raises –
Underrewarding the Best
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Pay for Individual Performance:
Performance Bonuses
•
•
•
•
Performance bonuses are not rolled into base pay.
The employee must re-earn them during each
performance period.
Sometimes the bonus is a one-time reward.
Bonuses may also be linked to objective
performance measures, rather than subjective
ratings.
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Pay for Individual Performance:
Sales Commissions

Commissions – incentive pay calculated as a
percentage of sales.
 Some

earn a commission in addition to a base salary.
Straight commission plan – some earn only
commissions.
 Some
earn no commissions at all, but a straight salary.
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Many car salespeople earn a straight
commission, meaning that 100% of their
pay comes from commission instead of
salary.
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Test Your Knowledge
•
John works twisting pretzels in a pretzel factory.
Pablo works on IT systems integration at a credit
card company. The best pay plans for these
individuals would be ________ and _______,
respectively.
a)
b)
c)
d)
Merit pay, individual bonus
Sales commissions; merit pay
Piecework, Merit pay
Individual bonus, sales commissions
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Pay for Group Performance
Gainsharing
Bonuses
Team Awards
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Pay for Group Performance:
Gainsharing
Gainsharing – group
incentive program that
measures improvements
in productivity and
effectiveness and
distributes a portion of
each to employees.

•
•
Addresses challenge
of identifying
appropriate
performance
measures for complex
jobs.
Frees employees to
determine how to
improve their own
and their group’s
performance.
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10 Conditions Necessary for
Gainsharing to Succeed
1.
2.
3.
4.
5.
6.
7.
Management commitment.
Need for change or strong commitment to
continuous improvement.
Management acceptance and encouragement of
employee input.
High levels of cooperation and interaction.
Employment security.
Information sharing on productivity and costs.
Goal setting.
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Conditions Necessary for Gainsharing
to Succeed
8.
9.
10.
Commitment of all involved parties to the process
of change and improvement.
Performance standard and calculation that
employees understand and consider fair and that is
closely related to managerial objectives.
Employees who value working in groups.
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Figure 12.3: Finding the Gain in
a Scanlon Plan
Scanlon Plan – a
gainsharing
program in which
employees receive
a bonus if the ratio
of labor costs to
the sales value of
production is
below a set
standard.
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Pay for Group Performance:
Group Bonuses and Team Awards
Group Bonuses
Team Awards
Bonuses for group
performance tend to
be for smaller work
groups.
• These bonuses reward
the members of a
group for attaining a
specific goal, usually
measured in terms of
physical output.
•
•
Similar to group
bonuses, but more likely
to use a broad range of
performance measures:
–
–
–
Cost savings
Successful completion of
a project
Meeting deadlines
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Group members that meet a sales goal or a
product development team that meets a
deadline or successfully launches a product
may be rewarded with a bonus for group
performance.
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Figure 12.4: Types of Pay for
Organizational Performance
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Pay for Organizational Performance:
Profit Sharing

•
•
Profit sharing – incentive pay in which payments
are a percentage of the organization’s profits and
do not become part of the employees’ base salary.
Profit sharing may encourage employees to think
like owners.
Evidence is not clear whether profit sharing helps
organizations perform better.
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Considerations for Setting Up a
Profit-Sharing Plan
1.
2.
3.
4.
Get supervisors on board with the plan.
Make sure employees understand how the plan
works.
Identify behaviors and results that contribute to
greater profits.
Make sure managers understand that they
contribute to profit-sharing goals by encouraging
their employees and keeping them focused on their
goals.
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Considerations for Setting Up a
Profit-Sharing Plan
5.
6.
7.
Consider linking rewards to the department’s or
division’s performance, if profits can be
assigned to the group.
Make rewards big enough to matter.
Time the profit-sharing payments for maximum
effect.
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Pay for Organizational Performance:
Stock Ownership
Stock Options
•
•
Rights to buy a certain
number of shares of
stock at a specified
price.
Traditionally, stock
options have been
granted to executives.
ESOPs
•
•
(ESOP) – an
arrangement in which
the organization
distributes shares of
stock to all its
employees by placing
it in a trust.
Most common form of
employee ownership.
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Figure 12.5: Number of ESOPs
SOURCE: National Center for Employee Ownership, “A Statistical Profile of Employee Ownership,” NCEO website,
updated February 2012, www.nceo.org.
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Test Your Knowledge

For each of the following jobs, identify the best
type of incentive (e.g., individual, group,
organizational). Be prepared to explain your
answer.
1.
2.
3.
4.
Director of Marketing, Pepsi
Recruiter, Verizon
Cashier, CVS (drugstore)
Salesperson, Macy’s
a)
b)
c)
Individual
Group
Organizational
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Balanced Scorecard

Balanced scorecard – a
combination of
performance measures
directed toward the
company’s long- and
short-term goals and
used as the basis for
awarding incentive pay.
Four categories of a
balanced scorecard
include:
1.
2.
3.
4.
financial
customer
internal
learning and growth
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Tellabs uses a
balanced scorecard.
- Conducts quarterly
meetings at which
employees learn how
their performance
will be evaluated
according to the
scorecard.
- Makes this
information available
on the their intranet.
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Table 12.2: Sample Balanced
Scorecard for an Electric Cooperative
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Processes That Make Incentives Work
Participation in Decisions
Communication
Employee participation
in pay-related decisions
can be part of a general
move toward employee
empowerment.
• Employee participation
can contribute to the
incentive plan’s success.
•
•
Communication
demonstrates that the
pay plan is fair.
• When employees
understand the incentive
pay plan’s requirements,
the plan is more likely to
influence their behavior
as desired.
•
Important when
changing the pay plan.
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Incentive Pay for Executives
Short-Term Incentives
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•
Bonuses based on ROI,
year’s profits, or other
measures related to the
organization’s goals.
Actual payment of
bonus may be delayed
to gain tax advantages.
Long-Term Incentives
Include stock options and
stock purchase plans.
• Rationale is that
executives will want to
do what is best for the
organization because
that will cause the value
of their stock to grow.
•
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Table 12.3: Balanced Scorecard for Whirlpool
Executives
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Incentive Pay for Executives:
Ethical Issues
•
•
Incentive pay for executives lays the groundwork
for significant ethical issues.
When an organization links pay to its stock
performance, executives need the courage to be
honest about their company’s performance even
when dishonesty or clever shading of the truth
offers the tempting potential for large earnings.
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Summary
•
•
•
Incentive pay is pay tied to individual
performance, profits, or other measures of
success. Organizations select forms of incentive
pay to energize, direct, or control employees’
behavior.
To be effective, incentive pay should encourage
the kinds of behaviors most needed, and
employees must believe they have the ability to
meet the performance standards.
Employees must value the rewards, have the
resources they need to meet the standards, and
believe the pay plan is fair.
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Summary
•
•
•
Organizations may recognize individual
performance through such incentives as piecework
rates, standard hour plans, merit pay, sales
commissions, and bonuses for meeting individual
performance objectives.
Common group incentives include gainsharing,
bonuses, and team awards.
Incentives for meeting organizational objectives
include profit sharing and stock ownership.
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Summary
•
•
•
Communication is especially important when the
organization is changing its pay plan.
Because executives have such a strong influence
over the organization’s performance, incentive
pay for them receives special attention.
Performance measures should encourage behavior
that is in the organization’s best interests,
including ethical behavior.
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Summary
•
•
A balanced scorecard can be used as the basis for
awarding incentive pay. It helps employees to
understand and care about the organization’s
goals.
Mix of pay programs is intended to balance
disadvantages of one type of incentive with
advantages of another type.
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