BANGOR TRANSFER ABROAD PROGRAMME PAY & PERFORMANCE

Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall12–2 Motivation, Performance, and Pay IncentivesIncentives  Financial rewards paid to workers whose production exceeds a predetermined standard. Frederick TaylorFrederick Taylor  Popularized scientific management and the use of financial incentives in the late 1800s.  Systematic soldiering  Fair day’s work Linking Pay and PerformanceLinking Pay and Performance  Understanding the motivational bases of incentive plans

Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall12–3 The Hierarchy of Needs Maslow’s Hierarchy of Needs:Maslow’s Hierarchy of Needs:  Physiological (food, water, warmth)  Security (a secure income, knowing one has a job)  Social (friendships and camaraderie)  Self-esteem (respect)  Self-actualization (becoming a whole person) Maslow’s prepotency process principle:Maslow’s prepotency process principle:  People are motivated first to satisfy each lower-order need and then, in sequence, each of the higher-level needs.

Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall12–4 Herzberg’s Hygiene–Motivator Theory Hygienes (extrinsic job factors)Hygienes (extrinsic job factors)  Satisfy lower-level needs  Inadequate working conditions, salary, and incentive pay can cause dissatisfaction and prevent satisfaction. Motivators (intrinsic job factors)Motivators (intrinsic job factors)  Satisfy higher-level needs  Job enrichment (challenging job, feedback, and recognition) addresses higher-level (achievement, self-actualization) needs. Premise:Premise:  The best way to motivate someone is to organize the job so that doing it provides feedback and challenge that helps satisfy the person’s higher-level needs.

Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall12–5 Demotivators and Edward Deci Intrinsically motivated behaviors are motivated by the individual’s underlying need for competence and self- determination.Intrinsically motivated behaviors are motivated by the individual’s underlying need for competence and self- determination.  Offering an extrinsic reward for an intrinsically-motivated act can conflict with the acting individual’s internal sense of responsibility.  Some behaviors are best motivated by job challenge and recognition, others by financial rewards.

Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall12–6 Victor Vroom’s Expectancy Theory Motivation is a function of:Motivation is a function of:  Expectancy: the belief that effort will lead to performance.  Instrumentality: the connection between performance and the appropriate reward.  Valence: the value the person places on the reward. Motivation = (E x I x V)Motivation = (E x I x V)  If any factor (E, I, or V) is zero, then there is no motivation to work toward the reward.  Employee confidence building and training, accurate appraisals, and knowledge of workers’ desired rewards can increase employee motivation.

Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall12–7 Behavior Modification / Reinforcement Theory B. F. Skinner’s PrinciplesB. F. Skinner’s Principles  To understand behavior one must understand the consequences of that behavior.  Behavior that leads to a positive consequence (reward) tends to be repeated, while behavior that leads to a negative consequence (punishment) tends not to be repeated.  Behavior can be changed by providing properly scheduled rewards (or punishments).

Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall12–8 Incentive Pay Terminology Pay-for-Performance PlanPay-for-Performance Plan  Ties employee’s pay to the employee’s performance Variable Pay PlanVariable Pay Plan  Is an incentive plan that ties a group or team’s pay to some measure of the firm’s (or the facility’s) overall profitability  Example: profit-sharing plans  May include incentive plans for individual employees

Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall12–9 Employee Incentives and the Law FLSA Wage Calculations and Incentive PaymentsFLSA Wage Calculations and Incentive Payments  Bonuses included in overtime calculations:  Those promised to newly hired employees  Those provided for in union contracts or other agreements  Those announced to induce employees to work more productively, steadily, rapidly, or efficiently or to induce them to remain with the firm  Bonuses excluded from overtime calculations:  Christmas and gift bonuses not based on hours worked.  Bonuses so substantial that employees don’t consider them a part of their wages  Purely discretionary bonuses in which the employer retains discretion over how much, if anything, to pay

Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall12–10 Types of Employee Incentive Plans Individual Employee Incentive and Recognition Programs Sales Compensation Programs Organizationwide Incentive Programs Executive Incentive Compensation Programs Team/Group-based Variable Pay Programs Pay-for-Performance Plans

Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall12–11 Individual Incentive Plans Piecework PlansPiecework Plans  The worker is paid a sum (“piece rate”) for each unit he or she produces.  Straight piecework  Standard hour plan

Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall12–12 Pros and Cons of Piecework Easily understandable, equitable, and powerful incentivesEasily understandable, equitable, and powerful incentives Employee resistance to changes in standards or work processes affecting outputEmployee resistance to changes in standards or work processes affecting output Quality problems caused by an overriding output focusQuality problems caused by an overriding output focus Possibility of violating minimum wage standardsPossibility of violating minimum wage standards Employee dissatisfaction when incentives either cannot be earned or are withdrawnEmployee dissatisfaction when incentives either cannot be earned or are withdrawn

Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall12–13 Individual Incentive Plans (cont’d) Merit PayMerit Pay  Is a permanent cumulative salary increase the firm awards to an individual employee based on his or her individual performance  Can detract from performance if awarded across the board  Becomes permanent ongoing reward for past performance Merit Pay OptionsMerit Pay Options  Give annual lump-sum merit raises that do not make the raise part of an employee’s base salary.  Tie merit awards to both individual and organizational performance.

Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall12–14 Incentives for Professional Employees Professional EmployeesProfessional Employees  Are those whose work involves the application of learned knowledge to the solution of the employer’s problems.  Lawyers, doctors, economists, and engineers Possible IncentivesPossible Incentives  Bonuses, stock options and grants, profit sharing  Better vacations, more flexible work hours  Improved pension plans  Equipment for home offices

Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall12–15 Nonfinancial and Recognition Awards Effects of Recognition-Based AwardsEffects of Recognition-Based Awards  Recognition has a positive impact on performance, either alone or in conjunction with financial rewards.  Day-to-day recognition from supervisors, peers, and team members is important. Ways to Use RecognitionWays to Use Recognition  Social recognition  Performance-based recognition  Performance feedback

Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall12–16 FIGURE 12–1Social 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 or she is away Role in presentations to top management Job rotation Encouragement of learning and continuous improvement Being provided with ample encouragement Being allowed to set own goals Compliments Expression of appreciation in front of others Note of thanks Employee-of-the-month award Special commendation Bigger desk Bigger office or cubicle

Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall12–17 Incentives for Salespeople Salary PlanSalary Plan  Straight salaries  Best for: prospecting (finding new clients), account servicing, training customer’s sales force, or participating in national and local trade shows Commission PlanCommission Plan  Pay is a percentage of sales results.  Keeps sales costs proportionate to sales revenues  May cause a neglect of nonselling duties  Can create wide variation in salesperson’s income  Likelihood of sales success may be linked to external factors rather than to salesperson’s performance  Can increase turnover of salespeople

Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall12–18 Incentives for Salespeople (cont’d) Combination PlanCombination Plan  Pay is a combination of salary and commissions, usually with a sizable salary component.  Plan gives salespeople a floor (safety net) to their earnings.  Salary component covers company- specified service activities.  Plans tend to become complicated, and misunderstandings can result.

Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall12–19 Specialized Commission Plans Commission-plus-Drawing-Account PlanCommission-plus-Drawing-Account Plan  Commissions are paid but a draw on future earnings helps the salesperson to get through low sales periods. Commission-plus-Bonus PlanCommission-plus-Bonus Plan  Pay is mostly based on commissions.  Small bonuses (“spiffs”) are paid for directed activities like selling add-ons or slow-moving items.

Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall12–20 Incentives for Managers and Executives Executive Total Reward PackageExecutive Total Reward Package  Base salary (cash)  Short-term incentives (bonuses)  Long-term incentives (e.g., stock options) Sarbanes-Oxley Act of 2002Sarbanes-Oxley Act of 2002  Makes executives and the board of directors personally liable for violating their fiduciary responsibilities to their shareholders.  Requires the CEO and CFO to repay bonuses, incentives, or equity-based compensation received following issuance of a financial statement that the firm must restate.

Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall12–21 Short- and Long-Term Incentives Short-Term Incentives: The Annual BonusShort-Term Incentives: The Annual Bonus  Plans intended to motivate short-term performance of managers and tied to company profitability.  Issues in awarding bonuses  Eligibility basis  Fund size basis  Individual performance award  Long-term incentives  Stock options  Performance shares  Indexed options  Premium price options  Stock appreciation rights  Perks

Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall12–22 Creating an Executive Compensation Plan 1.Define the strategic context for the executive compensation program. 2.Shape each component of the package to focus the manager on achieving the firm’s strategic goals. 3.Check the executive compensation plan for compliance with all legal and regulatory requirements and for tax effectiveness. 4.Install a process for reviewing and evaluating the executive compensation plan whenever a major business change occurs.

Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall12–23 Team/Group Incentive Plans Team (or Group) Incentive PlansTeam (or Group) Incentive Plans  Incentives are based on team’s performance. How to Design Team IncentivesHow to Design Team Incentives  Set individual work standards.  Set work standards for each team member and then calculate each member’s output.  Members are paid based on one of three formulas:  All receive the same pay earned by the highest producer.  All receive the same pay earned by the lowest producer.  All receive the same pay equal to the average pay earned by the group.

Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall12–24 Pros and Cons of Team Incentives ProsPros  Reinforces team planning and problem solving  Helps ensure collaboration  Encourages a sense of cooperation  Encourages rapid training of new members ConsCons  Pay is not proportionate to an individual’s effort  Rewards “free riders”

Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall12–25 Organizationwide Incentive Plans Profit-Sharing PlansProfit-Sharing Plans  Current profit-sharing (cash) plans  Employees receive cash shares of the firm’s profits at regular intervals.  Deferred profit-sharing plans  A predetermined portion of profits based on the employee’s contribution to the firm’s profits is placed in each employee’s retirement account under a trustee’s supervision.  Employees’ income taxes on the distributions are deferred, often until the employee retires.

Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall12–26 Organizationwide Incentive Plans (cont’d) Employee Stock Ownership Plan (ESOP)Employee Stock Ownership Plan (ESOP)  A firm annually contributes its own stock—or cash (with a limit of 15% of compensation) to be used to purchase the stock—to a trust established for the employees.  The trust holds the stock in individual employee accounts and distributes it to employees upon separation from the firm if the employee has worked long enough to earn ownership of the stock.

Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall12–27 Why Incentive Plans Fail Performance pay can’t replace good management.Performance pay can’t replace good management. You get what you pay for.You get what you pay for. “Pay is not a motivator.”“Pay is not a motivator.” Rewards punish.Rewards punish. Rewards rupture relationships.Rewards rupture relationships. Rewards can have unintended consequences.Rewards can have unintended consequences. Rewards may undermine responsiveness.Rewards may undermine responsiveness. Rewards undermine intrinsic motivation.Rewards undermine intrinsic motivation.