Pay For Performance PDF

Human Resource Management
Fifteenth Edition
Chapter 12
Pay for
Performance and
Financial
Incentives
Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved
Money and Motivation
• He defined a fair’s day work

using standards of output
• he is known as the father of
the scientific management
approach
• This approach emphasized
improvement of work
methods
• He recognized the use of
financial incentives for those
whose output exceeded
standards.
Linking Strategy, Performance, and
Incentive Pay
Linking pay to performance is easier said
than done:
• “Employees don’t see a strong connection

between pay and performance, and their
performance is not particularly influenced
by the company’s incentive plan”
• Equally problematical is the fact that some

incentives reward the wrong behavior
• Incentives that may motivate some people

won’t motivate others.
Motivation and Incentives
Theories that have relevance to designing incentive plans
• Motivators and Fredrick Herzberg
– Frederick Herzberg said the best way to motivate someone is to
organize the job so that doing it provides the challenge and
recognition we all need to help satisfy “higher-level” needs for things
like accomplishment and recognition.
– Herzberg says the factors (“hygiene's”) that satisfy lower-level
needs are different from those (“motivators”) that satisfy or partially
satisfy higher-level needs.
Theories that have relevance to
designing incentive plans
• Demotivators and Edward Deci
– Psychologist Edward Deci’s work
highlights another potential
downside to relying too heavily
on extrinsic rewards:
 They may backfire. Deci
found that extrinsic rewards
could at times actually detract
from the person’s intrinsic
motivation.
Theories that have relevance to designing
incentive plans
• Expectancy Theory and Victory
Vroom
– In general, people won’t pursue
rewards they find unattractive, or
where the odds of success are very
low
– The person’s expectancy (in terms
of probability) that his or her effort
will lead to performance;
• Expectancy Theory and Victory
Vroom
– Instrumentality, or the
perceived connection (if any)
between successful
performance and actually
obtaining the rewards;
– Valence, which represents the
perceived value the person
attaches to the reward
• Behavior Modification /
Reinforcement and B.F. Skinner
– Behavior modification means
changing behavior through
rewards or punishments that
are contingent on performance
incentive plans
• Behavior Modification / Reinforcement
and B.F. Skinner
– For managers, behavior modification
boils down to two main principles
 First, that 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;
incentive plans
• Behavior Modification / Reinforcement
and B.F. Skinner
– For managers, behavior modification
boils down to two main principles
 Second, that managers can
therefore get someone to change
his or her behavior by providing the
properly scheduled rewards (or
punishment).
Copyright © 2011 Pearson Education
Incentive Pay Terminology

• Pay-for-Performance Plan
– Ties employee’s pay to the
employee’s performance
• Variable Pay Plan
– Is an incentive plan that ties a
group or team’s pay to some
measure of the firm’s (or the
facility’s) overall profitability
 Example: profit-sharing plans
– May include incentive plans for
individual employees
12–11
Individual Incentive Plans

• Piecework Plans
– The worker is paid a sum (“piece rate”) for each unit he or
she produces.
 Straight piecework – there is a proportionality between
results and rewards regardless of output
 Standard hour plan for – paid an extra percentage of the
basic rate for production exceeding the standard per hour
or per day.
12–12
Individual Incentive Plans (cont’d)

• Merit Pay
– Is a permanent cumulative salary increase the firm awards to an
individual employee based on his or her individual performance
– Becomes permanent ongoing reward for past performance
• Merit Pay Options
– Give annual lump-sum merit raises that do not make the raise
part of an employee’s base salary.
– Tie merit awards to both individual and organizational
performance.
12–13
Incentives for Professional Employees

• Professional Employees
– Are those whose work involves the application
of learned knowledge to the solution of the
employer’s problems.
 Lawyers, doctors, economists, and engineers
• Possible Incentives
– Bonuses, stock options and grants, profit sharing
– Better vacations, more flexible work hours
– Improved pension plans
– Equipment for home offices
12–14
Non-financial and Recognition-Base
Awards
• Social Recognition
– refers to informal manager–employee exchanges such as
praise, approval, or expressions of appreciation for a job
well done.
• Performance Feedback
– means providing quantitative or qualitative information on
task performance so as to change or maintain performance;
showing workers a graph of how their performance is
trending is an example.
• Job Design
Incentives for Salespeople

• Salary Plan
– Straight salaries
 Best for: prospecting (finding new clients),
account servicing, training customer’s sales force,
or participating in national and local trade shows
12–16
Incentives for Salespeople (Con’t.)

• Commission Plan
– Pay is a percentage of sales results.
 Keeps sales costs proportionate to sales revenues
 Can create wide variation in salesperson’s income
 Likelihood of sales success may be linked to external
factors rather than to salesperson’s performance
 Can increase turnover of salespeople
12–17
Incentives for Salespeople (cont’d)

• Combination Plan
– Pay is a combination of salary and
commissions, usually with a sizable
salary component.
– Salary component covers company-
specified service activities.
12–18
Incentives for Managers and
Executives
• Short-term Incentives
• Long-term incentives
Short- and Long-Term Incentives

• Short-Term Incentives: The Annual Bonus
– Plans intended to motivate short-term
performance of managers and tied to company
profitability.
– Issues in awarding bonuses
 Eligibility basis
 Fund size basis
 Individual performance award
12–20
Short- and Long-Term Incentives

• Long-term incentives
– Stock options
– Other Stock Options:
 Performance shares
 Indexed options
 Premium price options
 Stock appreciation rights
12–21
Team and Organization-Wide
Incentive Plans
• Designing Team Incentives
– Firms increasingly rely on teams to manage
their work
– They therefore need incentive plans that
encourage teamwork and focus teams on
performance
– Team (or group) incentive plans pay
incentives to the team based on the team’s
performance.
 They reinforce team planning and
problem solving, and can help ensure
cooperation
Team and Organization-Wide
Incentive Plans
• How Designing Team Incentives
– Team (or group) incentive plans pay
incentives to the team based on the team’s
performance (CON’T.)
 Team incentives also facilitate training,
since each member has an interest in
getting new members up to speed fast.
 The main disadvantage is the
demotivating effects of free rider
workers who share in the team-based
pay but who don’t put their hearts into it.
Organizational – Wide Plans
• Profit-sharing plans
– Plans in which all or most employees receive a share
of the firm’s annual profits
– current profit-sharing or cash plans
– current profit-sharing or cash plans
• Scanlon plans
– Designed to encourage cooperation, involvement, and
sharing of benefits
• Other Gainsharing Plans
– Gainsharing is an incentive plan that engages many or all
employees in a common effort to achieve a company’s
productivity objectives, with any resulting cost-savings
gains shared among employees and the company
• At-Risk Pay Plans
– Plan that puts some portion of
employees’ normal pay at risk if they
don’t meet their goals, in return for
possibly obtaining a much larger bonus
if they exceed their goals.
• Employee Stock Ownership Plans
– Company-wide plans in which the
employer contributes shares of its own
stock (or cash to be used to purchase
such stock) to a trust established to
purchase shares of the firm’s stock for
employees.

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Human Resource Management

• He defined a fair’s day work

• “Employees don’t see a strong connection

• Equally problematical is the fact that some

• Incentives that may motivate some people

Incentive Pay Terminology

Individual Incentive Plans

Individual Incentive Plans (cont’d)

Incentives for Professional Employees

Incentives for Salespeople

Incentives for Salespeople (Con’t.)

Incentives for Salespeople (cont’d)

Short- and Long-Term Incentives

Short- and Long-Term Incentives

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