chapt13 lecture

CHAPTER 13 RECOGNIZING

EMPLOYEE CONTR

IBUTIONS

WITH PA

Y

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1. Connection between incentive pay and employee performance.

2. How organizations recognize individual performance.

3. Ways to recognize group performance.4. How organizations link pay to overall performance.5. How organizations combine incentive plans in a

“balanced scorecard.”6. Processes that contribute to successful incentive

programs.7. Issues related to performance-based pay for

executives.

Need to Know

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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.

Incentive Pay

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1. Performance measures are linked to the organization’s goals.

2. Employees believe they can meet performance standards.

3. 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. Pay plan takes into account that employees

may ignore any goals that are not rewarded.

Effective Incentive Pay Requirements:

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Employers Stress Merit Pay to Retain Workers

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Pay for Individual Performance

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Pay for Individual Performance:Piecework Rates

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Figure 13.1How 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 PlanAn incentive plan that pays workers extra for work done in less than a preset “standard time”

Merit Pay• A system of linking

pay increases to ratings on a performance scale.

• They make use of a merit increase grid.

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Table 13.1Sample Merit Increase Grid

Recommended Salary Increase

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Figure 13.2Ratings and Raises –

Under-rewarding the Best

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• 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:Performance Bonuses

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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.

Pay for Individual Performance:Sales Commissions

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Real estate agents typically earn a straight commission, meaning that 100% of their pay comes from commission instead of salary. What type of individual might enjoy a job like this?

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• 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 bonusb) Sales commissions; merit payc) Piecework, Merit payd) Individual bonus, sales commissions

Test Your Knowledge

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Pay for Group Performance

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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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1. Management commitment2. Need for change or commitment to

continuous improvement3. Management acceptance and

encouragement of employee input4. High levels of cooperation and interaction5. Employment security

10 Conditions for Effective Gainsharing

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7. Information sharing on productivity and costs.

Goal setting.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.

Conditions for Effective Gainsharing, cont.

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Figure 13.3 Finding the Gain in

a Scanlon Plan

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Pay for Group Performance:Group Bonuses and Team Awards

Group Bonuses• 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.

Team Awards• 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 13.4 Types of Pay for Organizational

Performance

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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.

Pay for Organizational Performance:Profit Sharing

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1. Get supervisors on board with the plan.2. Make sure employees understand how

the plan works.3. Identify behaviors and results that

contribute to greater profits.4. Make sure managers understand that

they contribute to profit-sharing goals by encouraging their employees and keeping them focused on their goals.

Considerations for Setting Up aProfit-Sharing Plan

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5. Consider linking rewards to the department’s or division’s performance, if profits can be assigned to the group.

6. Make rewards big enough to matter.7. Time the profit-sharing payments for

maximum effect.

Considerations for Setting Up aProfit-Sharing Plan

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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 13.5Number of ESOPs

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SOURCE: National Center for Employee Ownership, “A Statistical Profile of Employee Ownership,” NCEO website,updated February 2012, www.nceo.org .

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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, Pepsi2. Recruiter, Verizon3. Cashier, CVS (drugstore)4. Salesperson, Macy’s

a) Individualb) Groupc) Organizational

Test Your Knowledge

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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. financial2. customer3. internal4. 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 13.2 Sample Balanced Scorecard for

an Electric Cooperative

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Processes That Make Incentives Work

Participation in Decisions• 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• 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• 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 13.3

Balanced Scorecard for Merck Executives

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• 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.

• Group incentives include gainsharing, bonuses, and team awards.

• Incentives for meeting organizational objectives include profit sharing and stock ownership.

Summary

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• 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.

Summary

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• 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.

• It includes financial goals to satisfy stockholders, quality- and price-related goals for customer satisfaction, efficiency goals for improved operations, and goals related to acquiring skills and knowledge for the future.

Summary

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•Incentives for meeting organizational objectives include profit sharing and stock ownership.•Profit-sharing plans pay workers a percentage of the organization’s profits; these payments do not become part of the employees’ base salary.•Stock ownership incentives may take the form of stock options or employee stock ownership

plans.

Summary

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