Pay-for-Performance and Financial Incentives Dessler, Cole, and Sutherland Human Resources Management in Canada Canadian Ninth Edition 12 Chapter Twelve Pay-for-Performance and Financial Incentives © 2005 Pearson Education Canada Inc., Toronto, Ontario 12-1

Money and Motivation: Background and Trends Variable Pay -plan that links pay to productivity or profitability © 2005 Pearson Education Canada Inc., Toronto, Ontario

Money and Motivation: Background and Trends Types of Incentive Plans -individual incentive programs -group incentive programs -profit sharing plans -gainsharing plans © 2005 Pearson Education Canada Inc., Toronto, Ontario

Incentives for Operations Employees Piecework plans – straight; guaranteed Standard hour plan Team or group incentive plan © 2005 Pearson Education Canada Inc., Toronto, Ontario

Incentives for Managers and Executives Short-term Incentives annual bonus Long-term Incentives capital accumulation plans © 2005 Pearson Education Canada Inc., Toronto, Ontario

Incentives for Managers and Executives Annual Bonus - Decisions Eligibility Fund size Determining individual awards © 2005 Pearson Education Canada Inc., Toronto, Ontario

Incentives for Managers and Executives Long-Term Incentives Stock options Book value plan Stock appreciation rights Performance achievement plan Restricted stock plans Phantom stock plans Performance plans © 2005 Pearson Education Canada Inc., Toronto, Ontario

Incentives for Salespeople Salary Plan (fixed salary) Commission Plan (pay in direct proportion to sales) Combination Plan (salary plus commission) © 2005 Pearson Education Canada Inc., Toronto, Ontario

Incentives for Other Professionals Merit Pay -salary increase awarded to an employee -based on individual performance -effectiveness based on validity of performance appraisal system -sometimes paid as a lump sum without changing base salary © 2005 Pearson Education Canada Inc., Toronto, Ontario

Incentives for Other Professionals Incentives for Professional Employees -bonus represents small portion of total pay -incentives based on results longer than one year -up-to-date equipment and facilities -supportive management style -support for research publications © 2005 Pearson Education Canada Inc., Toronto, Ontario

Organization-Wide Incentive Plans -profit sharing plans -employee share purchase/stock ownership plans -Scanlon plans -gainsharing plans -at-risk variable pay plans © 2005 Pearson Education Canada Inc., Toronto, Ontario

Organization-Wide Incentive Plans Scanlon Plan -engages many or all employees in a common effort to achieve a company’s productivity objectives -any resulting incremental cost-savings shared among employees and the company © 2005 Pearson Education Canada Inc., Toronto, Ontario

Organization-Wide Incentive Plans Gainsharing Plans – Success Factors Cooperation between management and labour Joint development of the plan Effective communication Clear guidelines regarding plan changes Setting achievable goals © 2005 Pearson Education Canada Inc., Toronto, Ontario

Developing Effective Incentive Plans When to Use Incentives -units of output can be measured -clear relationship between employee effort and quantity of output -standardized job, regular workflow with few/consistent delays -quality less important than quantity © 2005 Pearson Education Canada Inc., Toronto, Ontario

Developing Effective Incentive Plans Principles for Effective Implementation (1 of 2) -pay for performance -link incentives to career development and challenging opportunities -link incentives to measurable competencies © 2005 Pearson Education Canada Inc., Toronto, Ontario

Developing Effective Incentive Plans Principles for Effective Implementation (2 of 2) -match incentives to the culture of the organization -keep group incentives clear and simple -overcommunicate -remember greatest incentive is the work itself © 2005 Pearson Education Canada Inc., Toronto, Ontario

Developing Effective Incentive Plans Why Incentive Plans Don’t Work Performance pay cannot replace good managers Firms get what they pay for Pay is not a motivator Rewards can rupture relationships Rewards may undermine responsiveness © 2005 Pearson Education Canada Inc., Toronto, Ontario

Developing Effective Incentive Plans Employee Recognition Programs Lack of recognition and praise is the #1 cause of employee turnover © 2005 Pearson Education Canada Inc., Toronto, Ontario

Developing Effective Incentive Plans Employee Recognition Programs Objectives -show support for employees -enhance employees’ attitudes to the company -increase productivity © 2005 Pearson Education Canada Inc., Toronto, Ontario

Developing Effective Incentive Plans Employee Recognition Programs Cost-effective -> praise and modest gifts Important communication tool © 2005 Pearson Education Canada Inc., Toronto, Ontario