1. Pay for Performance and Financial Incentives12
Pay for Performance and Financial Incentives
There is tension between the concept of providing employees with a secure, stable income, and the idea of linking pay directly to performance. Some feel pay for performance allows employeesthe ability to be entrepreneurial and take appropriate risks for the company. Improved employee performance must be linked to improved organizational performance if incentive pay is to be more than just another labor cost.
For this chapter we will take an overview of money and motivation, then outline different incentive programs used for different types of employees. We also will discuss organization-wide incentive plans.
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2. Learning Objectives
Explain how you would apply five motivation theories in formulating an incentive plan.
Discuss the main incentives for individual employees.
Discuss the pros and cons of commissions versus straight pay incentives for salespeople.
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3. Learning Objectives
Describe the main incentives for managers and executives.
Name and define the most popular organization-wide variable pay plans.
Outline the steps in designing effective incentive plans.
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4. Money and Motivation Strategy Performance Incentive Pay
Frederick Taylor was an American mechanical engineer who sought to improve industrial efficiencies. He made three major contributions in the late 1800s. First he defined a fair’s day work using standards of output. Second, he is known as the father of the scientific management approach. This approach emphasized improvement of work methods. Finally, he recognized the use of financial incentives for those whose output exceeded standards.
Today, business is characterized by consideration of compensation, shareholder value, and turbulence. The three factors have produced a renaissance for financial incentive/pay-for-performance plans.
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5. Explain how you would apply five motivation theories in formulating an incentive plan.
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6. Motivation and Incentives
Maslow’s Hierarchy of Needs - people are motivated to satisfy lower-order needs first and then work their way up the hierarchy in sequence,
The law of individual differences means that people differ in personality, abilities, values, and needs. Individuals, therefore, react to different incentives in different ways. Several theorists have contributed information relevant to designing incentive plans. Let’s discuss each of them.
The Hierarchy of Needs and Abraham Maslow – This hierarchy includes five types of needs: physiological, security, social (love and belongingness), self-esteem, and self-actualization. According to Maslow, people are motivated to satisfy lower-order needs first and then work their way up the hierarchy in sequence,
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7. Motivation and Incentives
Hygiene
Working Conditions
Salary
Incentives
Motivators
Challenge
Feedback
Recognition
Herzberg’s Two-Factory Theory – divide needs into 2 factors:
Motivators and Frederick Herzberg – Hygiene-motivator theory divides needs into two factors. Hygiene factors include such things as working conditions, salary, and incentives. Motivators include those factors that make the job more intrinsically motivating, like challenge, feedback, and recognition. He further claimed that the absence of hygiene factors would not foster a motivated individual. However, once hygiene factors had been attended to, the presence of motivator factors would create a motivated employee.
Edward Deci found that extrinsic rewards could, at times, actually detract from an employee who already possesses a great deal of intrinsic motivation.
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8. Herzberg’s Two-Factory Theory
The absence of hygiene factors would not foster a motivated individual. However, once hygiene factors had been attended to, the presence of motivator factors would create a motivated employee.
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9. Motivation and Incentives
Expectancy Theory, Victor Vroom
Expectancy theory suggests that a person’s motivation to exert some level of effort is a function of three things. First is the person’s expectancy (in terms of probability) that his or her effort will lead to performance. Second is theinstrumentality, or the individual's perceived connection (if any) between successful performance and actually obtaining the rewards. Third,valence, represents the perceived value the person attaches to the reward.
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10. Expectancy Theory, Victor Vroom
Expectancy theory suggests that a person’s motivation to exert some level of effort is a function of three things.
First is the person’s expectancy (in terms of probability) that his or her effort will lead to performance.
Second is the instrumentality, or the individual's perceived connection (if any) between successful performance and actually obtaining the rewards.
Third, valence, represents the perceived value the person attaches to the reward.
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11. Motivation and Incentives
Behavior modification
Incentive pay terminology
Employee incentives and the law
Behavior Modification/Reinforcement and B. F. Skinner – Psychologist B.F. Skinner proposed that to understand behavior, one must understand the consequences of that behavior. Behavior modification means changing behavior through rewards or punishments that are contingent upon performance.
Traditionally, allincentive plans are pay-for-performance plans. Variable pay is usually an incentive plan that ties pay to some measure of the firm’s overall profitability. However, confusing as it may be, some experts have usedthe term “variable pay” to include incentive plans for individual employees.
The employer must comply with the overtime provisions of the Fair Labor Standards Act (FLSA) when designing and administering its incentive plans. Certain bonuses are excludable from overtime pay calculations. However,many other types of incentive pay must be included.
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12. Review Money and motivation Motivation theories Incentives Terminology
The law
For this learning objective, we have discussed the relationship between money and motivation. In addition, we covered various theories of motivation including:
Maslow’s Hierarchy of Needs
Herzberg’s Two-Factor Theory
Demotivators
Expectancy Theory
Behavior modification
Finally, we touched on the terminology used for incentive pay and the relationship of employee incentives to the law.
Let’s now turn our attention to the main incentives for individual employees.
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13. Discuss the main incentives for individual employees.
Several incentive plans are particularly suited for use with individual employees.
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14. Types of Employee Incentive Plans
Human Resources Management 12e Gary Dessler
Types of Employee Incentive Plans
Individual Employee Incentive and Recognition Programs
Incentives for Salespeople
Team Incentive Plans
Incentives for Managers and Executives
Pay-for-Performance Plans
Managers should seek to choose the incentive plan that best suits the work that an employee does. Various incentive plans focus on either individuals, groups or teams, or organizations.
Organization-wide
Incentive Programs
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Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

15. Individual Employee Incentive and Recognition Programs
Piecework plans
Straight piecework
Standard hour plans
Pros and cons
Merit pay as an incentive
Differential pay increases
Merit pay options
Piecework is the oldest and still most popular individual incentive plan. Piecework involves paying the worker aspecified amount for each piece or unit he/she produces. Straight piecework entails a strict proportionality between results and rewards regardless of output. With a standard hour plan, the worker gets a premium equal to the percent by which his/her performance exceeds the standard.
The pluses for piecework are that piecework plans are understandable, appear equitable, and can be powerful incentives, since rewards are proportionate to performance. On the other hand, workers may resist even justified attempts to raise production standards. This may occur in part because a cultural norm has been established between the employees performing the same work. Occasionally, employees may well downplay quality, or resist switching from job to job (since doing so could reduce productivity). Attempts to introduce new technology or processes may trigger resistance, for much the same reason.
Merit pay or a merit raise is any salary increase the firm awards to an employee based on his/her individual performance. Merit plan effectiveness depends on trulydifferentiating among employees.
Two adaptations of merit pay plans are popular. One awards merit raises in a lump sum once a year and does not make the raise part of the employee’s salary. The other adaptation ties merit awards to both individual and organizational performance.
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16. Individual Incentive Plans
Human Resources Management 12e Gary Dessler
Piecework Plans
The worker is paid a sum (“piece rate”) for each unit he or she produces.
Straight piecework – an incentive plan in which a person is paid a sum for each item he/she makes or sells
Standard hour plan – a worker is paid basic hourly rate but is paid an extra percentage of his or her rate for production exceeding the standard per hour or per day.
Piecework is the oldest and still most popular individual incentive plan. Here the worker is paid a sum (called a piece rate) for each unit he or she produces.
The standard hour plan is like the piece rate plan, except that, instead of getting a rate per piece, the worker gets a premium equal to the percent by which his or her performance exceeds the standard.
Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall
Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

17. Pros and Cons of Piecework
Human Resources Management 12e Gary Dessler
Pros and Cons of Piecework
Easily understandable, equitable, and powerful incentives
Employee resistance to changes in standards or work processes affecting output
Quality problems caused by an overriding output focus
Possibility of violating minimum wage standards
Employee dissatisfaction when incentives either cannot be earned or are withdrawn
Piecework plans are understandable, appear equitable in principle, and can be powerful incentives, since rewards are proportionate to performance. However, employees may not respond positively to changes in output or their ability to earn incentives.
Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall
Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

18. Individual Incentive Plans (cont’d)
Human Resources Management 12e Gary Dessler
Individual Incentive Plans (cont’d)
Merit Pay
any salary increase awarded to an employee based on his/her individual performance
It is different from bonus in that it usually becomes part of the employee’s base salary whereas bonuses are generally one-time payments.
Merit pay or a merit raise is a permanent salary increase the firm awards to an individual employee based on his or her individual performance.
Merit pay advocates argue that awarding pay raises across the board (without regard to individual merit) may actually detract from performance, by showing employees they’ll be rewarded regardless of how they perform. The solution is not to throw out merit raises, but to design them to be more effective. Among other things, this means establishing effective appraisal procedures and ensuring that managers in fact tie merit pay awards to performance.
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Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

19. Individual Incentive Plans (cont’d)
Merit 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.
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20. Human Resources Management 12e Gary Dessler
TABLE 12–1 Merit Award Determination Matrix (an Example)
Company Performance (Weight = 0.50)
Employee Performance
Rating (Weight = .50)
Outstanding
Excellent
Good
Marginal
Unacceptable
1.00
0.90
0.80
0.70
0.00
0.60
0.50 —
To determine the dollar value of each employee’s incentive award: (1) multiply the employee’s annual, straight-time wage or salary as of June 30 times his or her maximum incentive award and (2) multiply the resultant product by the appropriate percentage figure from this table. Example: if an employee had an annual salary of $20,000 on June 30 and a maximum incentive award of 7% and if her performance and the organization’s performance were both “excellent,” the employee’s award would be $1,120 ($20,000 × 0.07 × 0.80 = $1,120).
Table 12-1 presents a sample matrix for merit award determination. In this example, the company’s performance is measured by, say, rate of return, or sales divided by payroll costs. Company performance and the employee’s performance (using his or her performance appraisal) receive equal weight in computing the merit pay.
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Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

21. Incentives for Professional Employees
Human Resources Management 12e Gary Dessler
Incentives for Professional Employees
Professional 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 Incentives
Bonuses, stock options and grants, profit sharing
Better vacations, more flexible work hours
Improved pension plans
Equipment for home offices
Professional employees are those whose work involves the application of learned knowledge to the solution of the employer’s problems. They include lawyers, doctors, economists, and engineers.
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Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

22. Nonfinancial and Recognition Awards
Human Resources Management 12e Gary Dessler
Nonfinancial and Recognition Awards
Effects 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: praise, approval, or expressions of appreciation for a job well done.
Ways to Use Recognition
Social recognition
Performance-based recognition
Performance feedback
Recognition programs are one of several types of nonfinancial incentives. The term recognition program usually refers to formal programs, such as employee-of-the-month programs. Social recognition program generally refers to informal manager-employee exchanges such as praise, approval, or expressions of appreciation for a job well done. Performance feedback means providing quantitative or qualitative information on task performance for the purpose of changing or maintaining performance; showing workers a graph of how their performance is trending is an example.
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Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

23. Human Resources Management 12e Gary Dessler
FIGURE 12–1 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 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
Figure 12-1 presents a short list of social recognition (such as compliments) actions that can be used as positive reinforcements on a day-to-day basis.
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Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

24. Review Piecework Merit pay Incentives for professionals
Nonfinancial rewards
For this learning objective, we have discussed the two types of piecework plans and their pros and cons. In addition, we noted that merit pay requires truly differentiating between employees, which is difficult for some managers due either to a lack of effective recordkeeping or reluctance to distinguish between employees.
Professionals require different non-financial incentives such as time off for participation in professional organizations. Computer-based management of incentive and recognition programs offer several advantages compared to traditional approaches, including more timely distribution of rewards and tracking.
Finally, job design, responsibility and feedback are important to many employees at all levels.
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25. Incentives for Salespeople
Salary plan
Commission plan
Combination plan
Maximizing sales force results
How effective are your incentives?
Fixed salaries are offered by some firms. Straight salary makes it simple to switch territories or to reassign salespeople, and it can foster loyalty. A disadvantage is that it can constrict sales and de-motivate potentially high-performing salespeople.
Salespeople are paid for results, and only for results. Thus, commission plans tend to attract high-performing salespeople who see that effort clearly leads to rewards. But it may cause them to neglect non-selling duties like servicing small accounts, cultivating dedicated customers, and pushing hard-to-sell items.
Most companies pay salespeople a combination of salary and commissions, usually with a sizable salary component. Combination plans give salespeople a floor to their earnings and still provide an incentive for superior performance.
Setting effective quotas is an art. In today’s fast-changing business scene, sales quotas must become more flexible than they have been in the past. There is a tendency to set commission rates informally, without considering how much each sale must contribute to coveringexpenses.
To maximize performance, the sales manager typically needs evidence. Answering the following questions will provide such information.
Do the sales team members understand the compensation plans?
Do they know how we measure and reward performance?
Are quotas set fairly?
Is there a positive correlation between performance and commission earnings?
Are commissions more than covering total salespersons expenses?
Does our commission plan maximize sales of our most profitable products?
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26. Incentives for Managers and Executives
Long term and total rewards package
Short term incentives and annual bonus
Strategic long-term incentives
Some other executive incentives
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27. Team Incentives Plans
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.
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28. Organization-wide Incentive Plans
Profit-Sharing Plans
Scanlon Plans
Gain-sharing Plans
At-risk Pay Plans
Employee Stock Ownership Plans
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29. Review Types of employee incentives plans Maximizing results
Effectiveness
For this learning objective, we have discussed some of the pros and cons between straight salary plans and commission plans. We also noted that most companies offer a combined program, with a substantial emphasis on salary.
To maximize results, we recommended you use formal and systematic methods of setting sales quotas. Finally, to determine how effective your incentive program is, a number of questions must be answered. Some have to do with the level of understanding of your program by your salesforce. Others have to do with measuring the correlations between your program and the results produced
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30. The Practice of Malaysia on Incentives
Pay and benefits are determined by negotiation between employers and their employees.
For individual employees, the results of negotiation will be stated in the employment contract.
For unionized companies, the results will be stated in the collective agreement.
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31. The Practice of Malaysia on Incentives – Private Sector
Negotiations on pay, benefits and incentives are influenced by the Employment Act.
This Act stipulates several terms and conditions such as hours of works, various kinds of leaves, lay-off and maternity benefits.
These provisions are complemented by the decisions of the Industrial Court that enforces collective agreement negotiated by employers and trade unions.
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32. The Practice of Malaysia on Incentives – Public Sector
Pay, benefits and incentives are determined by salary commissions appointed periodically by the Federal Government.
Their recommendations are then implemented through “service circulars” issued by the Public Service Department.
This Department is a federal agency that functions as the HR department of the government.
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33. End
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