12-1McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved.

fundamentals ofHuman Resource Management 3rd editionby R.A. Noe, J.R. Hollenbeck, B. Gerhart, and P.M. Wright

CHAPTER 12Recognizing Employee Contributions

with Pay

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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.

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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.

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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.

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Most Companies Use Incentive Pay

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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.

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Pay for Individual Performance

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Pay for Individual Performance:Piecework Rates

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Figure 12.1:How Incentives Sometimes “Work”

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

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Pay for Individual Performance:Standard Hour Plans and Merit Pay

Standard Hour Plan• An incentive plan that pays

workers extra for work done in less than a preset “standard time.”

• These plans are much like piecework plans.

• They encourage employees to work as fast as they can, but not necessarily to care about quality or service.

Merit Pay• A system of linking pay

increases to ratings on a performance scale.

• They make use of a merit increase grid.

• The system gives the lowest paid best performers the biggest pay increases.

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Table 12.1: Sample Merit Increase Grid

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Figure 12.2: Ratings and Raises – Underrewarding the Best

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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.

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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.

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Many car salespeople earn a straight commission, meaning that 100% of their pay comes from commission instead of salary.

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

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Pay for Group Performance

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Pay for Group Performance:Gainsharing• Gainsharing – group

incentive program that measures improvements in productivity and effectiveness and distributes a portion of each to employees.

• Gainsharing addresses the challenge of identifying appropriate performance measures for complex jobs.

• Gainsharing frees employees to determine how to improve their own and their group’s performance.

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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.

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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.

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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.

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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 are 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 12.4: Types of Pay for Organizational Performance

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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.

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Considerations for Setting Up aProfit-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.

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Considerations for Setting Up aProfit-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.

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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.

• Some companies are trying to push eligibility for options further down the organization’s structure.

ESOPs• Employee Stock Ownership

Plan (ESOP) – an arrangement in which the organization distributes shares of stock to all its employees by placing it in a trust.

• This is the most common form of employee ownership.

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Figure 12.5: Number of ESOPs

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

a) Individualb) Groupc) Organizational

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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.

• The four categories of a balanced scorecard include:– financial– customer– internal– learning and growth

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• 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.

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Table 12.2: Sample Balanced Scorecard for a Production Manager

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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.

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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 success of an incentive plan.

Communication• Communication

demonstrates to employees that the pay plan is fair.

• When employees understand the requirements of the incentive pay plan, the plan is more likely to influence their behavior as desired.

• Important when the pay plan is being changed.

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Incentive Pay for Executives

Short-Term Incentives• Bonuses based on the year’s

profits, return on investment, or other measures related to the organization’s goals.

• Actual payment of the bonus may be delayed to gain tax advantages.

Long-Term Incentives• Include stock options and

stock purchase plans.• Rationale for these long-

term incentives 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 12.3: Balanced Scorecard for Whirlpool Executives

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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.

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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.

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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.

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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.

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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.