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Human Resource Management: Functions, Applications, Skill

Development by Robert N. Lussier and John R. HendonChapter 12

Incentive Pay

Incentives (Variable Pay)

Compensation that depends on some

measure of individual performance or

results in order to be awarded.

Incentive Pay

Why Give Incentives?

1. To reward employees for their past performance in the hope they will want similar rewards in the future and will therefore will repeat the desired behaviors.

2. To move some of the risk associated with paying employees from the firm to the individual.

3. To guide employees towards goals that ties into the organizational goals.

Incentive Pay

Individual or Group-based Incentives?

Individual incentives reinforce performance of a single person with a reward that is significant to that person.

Group incentives provide reinforcement for actions of more than one individual within the organization.

Incentive Pay

Individual Incentives Work Best When…

� There are distinct, measurable outcomes for

individual efforts.

� Individual jobs require autonomy.

Group Incentives Work Best When…

� We need people to cooperate.

� Individual contributions are difficult to identify.

� Members possess similar or complimentary skills.

Incentive Pay

Incentive Options for Individuals

Bonus – a lump sum payment, typically given to an employee at the end of a period; is most effective when given after employee reaches a specified goal.

Commission – payment for selling an item, usually calculated as a percentage of the item’s price; is most effective when it provides a significant return but also provides a disincentive to make a “quick sale.”

Merit Pay – rewards top performers with increases in annual wage that carry over from year to year; is most effective when employees understand the benefits of this incentive and when only top performers are rewarded.

Incentive Pay

Incentive Options for Individuals (continued)

Piecework Plans – the more workers get done, the more they get paid; are more effective when managers set clear performance standards and offer continuous feedback.

Standard Hour Plans – each task is assigned a “standard” amount of work time for completion; are more effective if worker must redo substandard work for no additional pay.

Recognition and other non-monetary incentives – are the most effective motivational tools, and include: extra time off; ability to choose tasks or jobs; flexible hours and working conditions; extra training in areas of interest to employees; and giving praise.

Incentive Pay

Incentive Options for Groups

Profit Sharing Plans – a portion of company proceeds

paid over a specific period of time (usually quarterly or

annually) through a bonus payment; are more effective

when management doesn’t manipulate factors to

minimize profits and posts weekly records of firm

revenues and profits; and when employees are trained

to increase revenues/decrease costs.

Incentive Pay

Incentive Options for Groups (continued)

Gainsharing Plans – can be accomplished through any organization factor that costs the company money, and that can be analyzed and modified for performance improvement; are more effective than profit sharing because options are more difficult for management to manipulate, so workers feel they have more control over their results.

Incentive Pay

Employee Stock Ownership Plan (ESOP) – company stock is given to employees over a period of time; offers tax advantages to firm and employees, and motivates employees to feel/act more like owners of the firm.

Stock Options– employees may buy X shares of stock in the company at a specified point in the future, at a preset price; motivates employees to improve the value of the firm.

Stock Purchasing Plans – ability to purchase company stock anytime, usually at a discount

Incentive Pay

Evenly Distributed or Fairly Distributed Group

Incentives?

1. Even. Each member receives the same reward;

best to use when group cohesion is needed.

2. Fairly. Each member receives his/her fair share

of the incentive based on peer evaluations and

a formula for their pay level; best to use when it

is important to motive top-performing

employees.

Incentive Pay

Failure, Challenges, and Guidelines in Creating Incentive Pay Systems

Many incentive systems are poorly designed and implemented due to:

� Poor system management.

� Complicated programs.

� The plan doesn’t really increase rewards, or it provides insignificant rewards.

� Employee can’t affect the desired outcomes.

� Employees don’t know how they are doing.

Incentive Pay

Challenges to Incentive Pay SystemsGroup v. individual incentives – group incentives work better than individual ones when people have to cooperate with one another to complete tasks.

Employee entitlement mentality – overcome it by basing rewards on achieving a particular specific and measurable goal, and providing reinforcement soon after the goal is achieved.

Do only what gets paid for syndrome – overcome it by making the incentive specific, but making overall job performance a part of any variable pay program.

Extrinsic rewards may decrease intrinsic motivation – look for ways to show that the external motivators are good for both the employee and others who depend on the employee.

Incentive Pay

Executive Compensation – Too Much or Just Enough?

Excesses in executive pay, e.g., when CEO’s pay increased while employees took pay cuts and were laid off, resulted in questions about companies acting ethically and being socially responsible.

� The practice harmed a large number of stakeholders (including employees and shareholders) in order to reward relatively few executives.

Some of these actions affected the market value of firms and resulted in the Dodd-Frank Wall Street Reform and Consumer Protection Act.

Incentive Pay

The Dodd-Frank Wall Street Reform and

Consumer Protection Act of 2010

Limits executive pay in public corporations and

adds requirements for reporting of compensation

and shareholder involvement with executive

compensation.

Incentive Pay

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010

Significant provisions:

� Shareholders can vote on executives’ compensation packages (“say on pay”) and “golden parachutes”.

� Every public company must disclose the CEO’s total compensation and the total median compensation of all employees, and the ratio.

� All public firms must provide annual information on the relationship between executive compensation and the total shareholder return.

Incentive Pay

Executive Incentives

Should be designed to motivate the executive to make decisions that will benefit the organization over both the short and the long term.

� Stock incentives.

� Perquisites.

� Short-term bonuses.

� Long-term stock awards or options.

Incentive Pay

The Goal of Executive Compensation

To create a system that aligns the behavior of the

executive with the interests of the owners of the

firm by combining short and long-term

incentives.