CHAPTER 12 *

Recognizing Employee Contributions with Pay

What Do I Need to Know? *

1. Discuss the connection between incentive pay

and employee performance.
2. Describe how organizations recognize
individual performance.
3. Identify ways to recognize group performance.
4. Explain how organizations link pay to their
overall performance.
What Do I Need to Know?*
(continued)

5. Describe how organizations combine incentive

plans in a “balanced scorecard.”
6. Summarize processes that can contribute to the
success of incentive programs.
7. Discuss issues related to performance-based
pay for executives.
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, the pay
plans must be well designed.
Most Companies Use Incentive
Pay *
 Effective incentive pay plans
meet the following
requirements*:
1. Performance measures are linked to the
organization’s goals.
2. Employees believe they can meet performance
standards.
3. The organization gives employees the resources
they need to meet their goals.
4. Employees value the rewards given.
5. Employees believe the reward system is fair.
6. The pay plan takes into account that employees
may ignore any goals that are not rewarded.
Pay for Individual
Performance *
Pay for Individual Performance:
Piecework Rates *
Figure 12.1:
How Incentives Sometimes “Work” *

SOURCE: DILBERT reprinted by permission of United Feature Syndicate, Inc.

Pay for Individual Performance:
Standard Hour Plans and Merit Pay
Standard Hour Plan Merit Pay
 An incentive plan that pays  A system of linking pay
workers extra for work increases to ratings on a
done in less than a preset performance scale.
“standard time.”
 They make use of a merit
 These plans are much like
piecework plans. increase grid.
 They encourage  The system gives the
employees to work as fast lowest paid best
as they can, but not performers the biggest pay
necessarily to care about increases.
quality or service.
Table 12.1: Sample Merit
Increase Grid *
Figure 12.2: Ratings and Raises –
Underrewarding the Best *
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.
Pay for Individual Performance:
Sales Commissions
 Commissions – incentive pay calculated as a
percentage of sales.
 Some salespeople earn a commission in addition
to a base salary.
 Straight commission plan – some salespeople
earn only commissions.
 Some salespeople earn no commissions at all,
but a straight salary.
Many car salespeople earn a straight
commission, meaning that 100% of their
pay comes from commission instead of
salary.
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) Merit pay, individual bonus
b) Sales commissions; merit pay
c) Piecework, Merit pay
d) Individual bonus, sales commissions
Pay for Group
Performance
Pay for Group Performance:
Gainsharing
 Gainsharing – group  Gainsharing addresses
incentive program that the challenge of
identifying appropriate
measures performance measures
improvements in for complex jobs.
productivity and  Gainsharing frees
effectiveness and employees to
distributes a portion of determine how to
each to employees. improve their own and
their group’s
performance.
Organization Conditions Necessary
for Gainsharing to Succeed
1. Management commitment.
2. Need for change or strong commitment to
continuous improvement.
3. Management acceptance and encouragement of
employee input.
4. High levels of cooperation and interaction.
5. Employment security.
6. Information sharing on productivity and costs.
7. Goal setting.
Organization Conditions Necessary
for Gainsharing to Succeed (continued)
8. Commitment of all involved parties to the process
of change and improvement.
9. Performance standard and calculation that
employees understand and consider fair and that is
closely related to managerial objectives.
10. Employees who value working in groups.
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.
Pay for Group Performance:
Group Bonuses and Team Awards
Group Bonuses Team Awards
 Bonuses for group  Similar to group bonuses,
performance tend to be for but are more likely to use a
smaller work groups. broad range of
 These bonuses reward the performance measures:
members of a group for  Cost savings

attaining a specific goal,  Successful completion of a

project
usually measured in terms
 Meeting deadlines
of physical output.
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.
 Figure 12.4: Types of Pay for
Organizational Performance
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.
Considerations for Setting Up a
Profit-Sharing Plan
1. Get supervisors on board with the plan.
2. Make sure employees understand how the plan
works.
3. Identify the behaviors and results that contribute to
greater profits.
4. Make sure managers understand that they
contribute to the profit-sharing goals by
encouraging their employees and keeping them
focused on their goals.
Considerations for Setting Up a
Profit-Sharing Plan (continued)
5. Consider linking rewards to the department’s or
division’s performance, if profits can be assigned to
the group.
6. Make the rewards big enough to matter.
7. Time the profit-sharing payments for maximum
effect.
Pay for Organizational Performance:
Stock Ownership
Stock Options ESOPs
 Rights to buy a certain  Employee Stock Ownership
number of shares of stock Plan (ESOP) – an
at a specified price. arrangement in which the
 Traditionally, stock options organization distributes
have been granted to shares of stock to all its
executives. employees by placing it in
a trust.
 Some companies are trying
to push eligibility for  This is the most common
options further down the form of employee
organization’s structure. ownership.
Figure 12.5: Number of ESOPs
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. Director of Marketing, Pepsi
2. Recruiter, Verizon
3. Cashier, CVS (drugstore)
4. Salesperson, Macy’s
a) Individual
b) Group
c) Organizational
Balanced Scorecard

 Balanced scorecard –  The four categories of a

a combination of balanced scorecard
performance measures include:
directed toward the  financial
company’s long- and  customer
short-term goals and  internal
used as the basis for  learning and growth
awarding incentive
pay.
 Tellabs is one company
that uses a balanced
scorecard.
 The company conducts
quarterly meetings at
which employees learn
how their performance will
be evaluated according to
the scorecard.
 The company also makes
this information available
on the their intranet.
 Table 12.2: Sample Balanced
Scorecard for a Production
Manager
Balanced Scorecard (continued)

 It combines the advantages of different

incentive pay plans.
 It helps employees understand the
organization’s goals.
 By communicating the balanced scorecard to
employees, the organization shows employees
information about what its goals are and what it
expects employees to accomplish.
Processes That Make
Incentives Work
Participation in Communication
Decisions
 Communication
 Employee participation in
demonstrates to
pay-related decisions can employees that the pay
be part of a general move plan is fair.
toward employee  When employees
empowerment. understand the
 Employee participation can requirements of the
incentive pay plan, the plan
contribute to the success is more likely to influence
of an incentive plan. their behavior as desired.
 Important when the pay
plan is being changed.
Incentive Pay for Executives

Short-Term Incentives Long-Term Incentives

 Bonuses based on the  Include stock options and
year’s profits, return on stock purchase plans.
investment, or other  Rationale for these long-
measures related to the term incentives is that
organization’s goals. executives will want to do
 Actual payment of the what is best for the
bonus may be delayed to organization because that
gain tax advantages. will cause the value of their
stock to grow.
 Table 12.3: Balanced Scorecard
for Whirlpool Executives
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.
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.
Summary (continued)

 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.
Summary (continued)

 A balanced scorecard can be used as the basis for

awarding incentive pay. It also helps employees to
understand and care about the organization’s goals.
 The mix of pay programs is intended to balance the
disadvantages of one type of incentive with the
advantages of another type.
 Communication and participation in decisions can
contribute to employees’ feelings that the
organization’s incentive pay plans are fair.
Summary (continued)

 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.