Chapter 10 Pay for performance: incentive rewards

Learning objectives
 Discuss the basic requirements for successful implementation of incentive
programs.
 Identify the types of and reasons for implementing individual incentive plans.
 Explain why merit raises may fail to motivate employees adequately and
discuss ways to increase their motivational value.
 Indicate the advantage of each of the principal methods used to compensate
salespeople.
 Identify the key aspects of team and group-level pay-for-performance plans.
 Differentiate between profit-sharing plans and explain the advantages and
disadvantages of these programs.
 Describe the main types of employee stock ownership plans and discuss their
advantages to employers and employees.

Variable pay: Tying pay to some measure of individual, group, or organizational

performance

Setting Performance Measures: The Keys

 Performance measures—at all organizational levels— must be consistent
with the strategic goals of the organization.
 Define the intent of performance measures and champion the cause
relentlessly.
 Involve employees. Acceptance of a performance measurement program is
heightened when employees “buy into” the process.
 Consider the organization’s culture and workforce demographics when
designing performance measures.
 Set challenging but attainable goals.
 Widely communicate the importance of performance measures.
Administering incentive plans
 Incentive systems are effective only when managers are willing to grant
incentives based on differences in individual, team, or organizational
performance.
 Annual salary budgets must be large enough to reward and reinforce
exceptional performance.
 The overhead costs associated with plan implementation and administration
must be determined.

Individual incentive plans

Straight piecework: An incentive plan under which employees receive a certain
rate for each unit produced

Differential piece rate: A compensation rate under which employees whose

production exceeds the standard amount of output receive a higher rate for all of
their work than the rate paid to those who do not exceed the standard amount
 Disadvantages of piecework: When quality is more important than quantity,
when technology changes are frequent, when productivity standards on which
piecework must be based are difficult to develop

Standard hour plan: An incentive plan that sets rates based on the completion of a
job in a predetermined standard time

Bonus: An incentive payment that is supplemental to the base wage

Spot bonus: An unplanned bonus given for employee effort unrelated to an

established performance measure

Merit pay: links an increase in base pay to how successfully an employee performs
his or her job. The merit increase is normally given on the basis of an employee
having achieved some objective performance standard

Merit guidelines: Guidelines for awarding merit raises that are tied to performance
objectives

Lump-sum merit program: Program under which employees receive a year-end

merit payment, which is not added to their base pay

Sales Incentives
Straight salary plan: A compensation plan that permits salespeople to be paid for
performing various duties that are not reflected immediately in their sales volume
Straight commission plan: A compensation plan based on a percentage of sales
 However, the straight commission plan is limited by the following
disadvantages:
1. Salespeople will stress high-priced products.
2. Customer service after the sale is likely to be neglected.
3. Earnings tend to fluctuate widely between good and poor periods of business, and
turnover of trained sales employees tend to increase in poor periods.
4. Salespeople are tempted to grant price concessions.

Combined salary and commission plan: A compensation plan that includes a

straight salary and a commission

Salary plus bonus plan: A compensation plan that pays a salary plus a bonus
achieved by reaching targeted sales goals

Executive compensation plans consist of five basic components:

(1) Base salary: Executive base salaries represent between 30 and 40 percent of
total annual compensation
(2) Short-term incentives or bonuses: Annual bonuses represent the main
element of executive short-term incentives.
(3) Long-term incentives or stock plans

(4) Benefits: Various programs for extended health insurance, life insurance,
retirement plans, and vacations. The benefits offered executives are likely to be
broader in coverage and free of charge.
(5) Perquisites: Special nonmonetary benefits given to executives; often referred to
as perks
Team compensation
Team incentive plan: A compensation plan in which all team members receive an
incentive bonus payment when production or service standards are met or
exceeded

Designing Effective Team Incentives

 The organization at all levels must embrace a team- based structure
 To facilitate this paradigm shift, communication and post-completion
evaluation are fundamental.
 Enlist managerial support at all levels.
 Select representatives from management, labour, and employees to
champion the team-based project.
 Establish the legitimacy of the group incentives; use written contracts as they
put the onus on individuals as teams to be accountable for the end results.
 Ensure that the incentive payout is perceived as fair and equitable.
 Celebrate the team’s accomplishments collectively rather than singling out
individuals who have made outstanding contributions.

Problems associated with team compensation:

 Individual team members may perceive that “their” efforts contribute little to
team success or to the attainment of the incentive reward.

 Team members may be afraid that one individual may make the others look
bad, or that one individual may put in less effort than others but share
equally in team rewards—the “free rider” effect.

 The payout formulas may be complex, or there may be insufficient payout

rewards.

Gain-sharing plans: Programs under which both employees and the organization
share financial gains according to a predetermined formula that reflects improved
productivity and profitability

Profit sharing: Any procedure by which an employer pays, or makes available to all
regular employees, in addition to base pay, special current or deferred sums based
on the profits of the enterprise

Employee stock ownership plans (ESOPs): Stock plans in which an organization

contributes shares of its stock to an established trust for the purpose of stock
purchases by employees