Pay for Performance and Financial Incentives

Money’s Role In Motivation

Frederick Taylor contributions:

Financial Incentives-financial rewards paid to workers whose production exceeds some

Fair Day’s Work- output standards devised based on careful, scientific analysis

Scientific Management Movement- management approach based on improving work methods

Incentive Pay Terminology

Pay-for-performance Plans- tie employees’ pay to the employees’ performance

Variable Pay- an incentive plan that ties a group or team’s pay to productivity or firm’s profitability.

Motivation and Incentives

Motivators and Frederick Herzberg- 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.

Intrinsic Motivation- motivation that derives from the pleasure someone gets from doing the job or
task.

Demotivators and Edward Deci- highlights potential downside to relying too heavily on extrinsic
rewards. They may backfire. Extrinsic rewards could sometimes actually detract from the person’s
intrinsic motivation.

Expectancy Theory and Victor Vroom- a person’s motivation to exert some level of effort depends on
three things:

the person’s Expectancy- a person’s expectation that his or her effort will lead to performance

Instrumentality- the perceived relationship between successful performance and obtaining the
reward

Valence- the perceived value a person attaches to the reward

Vroom’s Theory: Motivation= (E x I x V)

Behavior Modification/ Reinforcement and B.F. Skinner

Behavior modification means changing behavior through rewards and punishments that are
contingent on performance

Main Incentives for Individual Employees

Straight Piecework Plan- an incentive plan in which a person is paid a sum for each item he or she
makes or sells, with a strict proportionality between results and rewards

Standard Hour Plan- a worker is paid a basic hourly rate but is paid an extra percentage of his or her
rate for production exceeding the standard per hour or peer day. Similar to piecework payment but
based on a percent premium.

Advantages of Piecework- Simple to calculate and easily understood by employees. And incentive
value can be powerful since they tie pay directly to performance

Disadvantages- unsavory reputation, in worker’s mind the production standard become tied
inseparably to the amount of money they earned

Merit Pay as an Incentive

Merit Pay (merit raise)- any salary increase awarded to an employee based on his or her individual
performance

Merit Pay Options

1. One awards merit raises in a lump sum once a year and does not make the raise part of the
employer’s salary.

2. Ties merit awards to both individual and organizational performance

Incentives for Professional Employees

Dual-career Ladders- another way to manage professionals’ pay. A bigger salary and bonus requires
position rerouting

Non-financial and Recognition-Based Awards

Recognition Program- refers to formal programs, such as employee-of-the-month programs

Social Recognition Program- refers to informal manager-employee exchanges such as praise,

Performance Feedback- means providing quantitative or qualitative information on task performance

Most used rewards to motivate employees:

Employee recognition

Gift certificates

Special events

Cash rewards
Merchandise incentives

E-mail/print communications

Training programs

Work/life benefits

Variable pay

Group travel

Individual travel

Sweepstakes

How to motivate employee

Make sure the employee has a doable goal

Recognizing an employee’s contribution

Use social recognition

Social Recognition and Related Positive Reinforcement Managers can Use

Challenging work assignments

Freedom to choose own work activity

Having fun built into work

More of preferred task

Role as boss’s stand-in when he/she is away

Role in presentations to top management

Job rotation

Encouragement

Job Design- although not considered an incentive, it can have a significant impact on employee
motivation and retention

Financial Incentives- consisted of lump-sum bonuses in the workers’ paychecks.

Non-financial Incentives- feedback and recognition

Results- both financial and nonfinancial incentives improves employee and store performance

Salary Plan- some firms pay salespeople fixed salaries (straight salary) to make it easier to reassign
salespeople and can foster sales staff loyalty. The disadvantage is that it may not motivate
high-performing salespeople
Commission Plan- straight commission plans pay salespeople for results and only for results. It
attracts high-performing salespeople who see that effort produces rewards.

Combination Plan- paying salespeople a combination of salary and commissions.

With the aid of VUE Compensation Management the sales manager can analyze compensation and
performance data, conduct “what-if” analyses and reports, and do trend analyses

SARBANES-OXLEY ACT OF 2002- affects how employers formulate their executive incentive programs

Annual Bonus- plans that are designed to motivate short-term performance of managers and which
are tied to company profitability

3 Factors Influence One’s Bonus:

Eligibility- base annual bonus eligibility on job level/title, base salary, officer status

Fund Size- estimate the likely bonus for each eligible employee and total these to arrive at the bonus
pool’s size

Individual Performance- employer sets target bonus for each eligible position

Split-award Plan- an employee is eligible for two bonuses, one based on his/her individual effort
and one based on the organization’s overall performance

Strategic Long-term Incentives

Stock Options- the right to purchase a stated number of shares of a company stock at today’s price at
some time in the future

Stock Options Problem- often reward even managers who have lackluster performance. Executives
allegedly lied about the dates they received their options to boost their returns

Other Stock Plans:

Performance-contingent restricted stock- the executive receives his/her shares only if he/she meets
the preset performance targets

Time-based restricted stock plans- usually awards rights to the shares without cost to the executive
but the employee is restricted from acquiring and selling the shares

Indexed Options- option’s exercise price fluctuates with the performance of a market index.

Premium priced options- exercise price is higher than the stock’s closing price on the date of the
grant.

Stock appreciation rights (SARs)- permit the recipient to exercise the stock option or to take any
appreciation in the stock price.

Phantom stock plans- executive receive not shares but units that are similar to shares of company
stock.

Performance achievement plan- awards shares of stock for the achievement of predetermined
financial targets.
Some other Executive Incentives

Golden parachutes- extraordinary payment companies make in connection with a change in

Team and Organization-Wide Incentive Plans

Team (or group) incentive plan- a plan in which a production standard is set for a specific work group,
and its members are paid incentives if the group exceeds the production standard

Team incentives can foster a sense of cooperation and unanimity.

Engineered Standards- while most employers just use experience to estimate what the team goal or
standard should be others carefully engineer their production standards.

Pros of Team Incentives- reinforce team planning and problem solving and can help ensure
cooperation

Cons of Team Incentives- demotivating effects of workers who share in the team-based pay but who
don’t put their hearts into it.

Organization-wide incentive plan- incentive plan in which all employees can participate

Profit-sharing plan- a plan whereby employees share in the company’s profit

Deferred profit-sharing plan- employer puts cash awards into trust accounts for the employees’
retirement.

Scanlon Plans- an incentive plan developed in 1937 by Joseph Scanlon and designed to encourage
cooperation, involvement, and sharing of benefits.

Scanlon Plan 5 Basic Features:

Philosophy of cooperation

Identity

Competence

Involvement system

Sharing of benefits formula

Other Gainsharing Plans

Gainsharing plan- an incentive plan that engages employees in a common effort to achieve
productivity objectives and share the gains.

Lincoln incentive system- employees work on a guaranteed piecework basis

Employee stock ownership plan (ESOP)- a corporation contributes shares of its own stock to a trust in
which additional contributions are made annually. The trust distributes the stock to employees on
retirement or separation from service.

Broad-based stock options- all or most employees can participate

Incentive Plans:

Production incentive plan- operating and maintenance employees and supervisors get weekly
bonuses based on their work groups’ productivity

Department manager incentive plan- pays department managers annual incentive bonuses based
mostly on the ratio of net income to dollars of assets employed for their division.

Professional and clerical bonus plan- employees who are not in one of the two previous plans get
bonuses based on their divisions’ net income return on assets.

Senior officer incentive plan- senior managers get bonuses based on firm’s annual overall percentage
of net income to stockholders equity.