2. Incentive Pay and Benefits MGTO 231 Human Resources Management Dr. Jeroen KUILMAN

3. Total Compensation Base Compensation Incentive Pay Benefits Elements of Compensation

4. At the End of this Session, You will be Able to Answer the Following Questions:  Why don’t we design a compensation system that totally follows the incentive pay notion, i.e. “paying for performance”? Any potential drawbacks of the idea of “pay of performance”?  What are the considerations in designing a benefit package?

5. Incentive Pay: Paying for Performance Incentive Pay Some basic concepts Types of pay- for-performance plans Potential drawbacks

6. Incentive Pay and System  Incentive pay is specifically designed to energize, direct, or control employees' behavior  An incentive system specifies the regulations to execute the rewards  A component of a compensation system

7. Basic Assumptions  Individual employees and work teams differ in how much they contribute to the firm  A large degree of the firm’s overall performance depends on the performance of individuals and groups within the firm  To attract, retain, and motivate high performers and to be fair to all employees, the firm needs to reward employees on the basis of their relative performance

8. Incentive Pay: Paying for Performance Incentive Pay Some basic concepts Types of pay- for-performance plans Potential drawbacks

9. Three Basic Types  Individual-based plans  Group-based plans  Organization wide plans

10. Three Basic Types  Individual-based plans  Group-based plans  Organization wide plans

11. Individual-Based Plans  Identify and reward the contributions of individual employees  Most widely used in industry  Three basic components Merit pay Piece-rate system or standard hour plan Bonuses and sales commissions

12.  Merit pay An increase in base pay, normally given once a year (remember what we have discussed in Performance Appraisals) Could take into account compa-ratio  Piece-rate system A compensation system in which employees are paid per unit produced Individual-Based Plans

13.  Standard hour plan Employees are paid extra if work is done in less than standard time  Bonuses and sales commissions Often a one-time reward, not rolled into the base compensation. Individual-Based Plans

14. Test Your Knowledge  Julian works making baskets in a basket factory. Yvonne 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 bonus b. Sales commissions; merit pay c. Piecework, merit pay d. Individual bonus, sales commissions

15. Advantages  Performance that is rewarded is likely to be repeated (reinforced) Expectancy theory: people tend to do those things that are rewarded  Can shape an individual’s goals over time  Helps the firm achieve individual equity

16. Disadvantages  The quantity-quality tradeoff  The power of supervisors becomes very influential For survival, employees will follow the orders of the supervisors Doing what they think the top-management want them to do in order to impress top-management

17. Individual-Based Plans are Most Likely to Succeed when  The contributions of individual employees can be accurately isolated  The job demands autonomy  Cooperation is less critical to successful performance OR competition is to be encouraged

18. Three Basic Types  Individual-based plans  Group-based plans  Organization wide plans

19. Group-based plans  Normally reward all team members equally based on group outcomes Very common in team ballgame: soccer, basketball (Man. United, LA Lakers, South China, etc.) Some may be allowed to decide how the bonus will be distributed within group  Can be in the form of: Gain sharing Bonuses and awards

20.  Gain sharing Group incentive program that measures improvements in productivity and effectiveness and distributes a portion of each gain to employees.  Group bonuses and team awards Group-based plans

21. Advantages  Foster group cohesiveness Imagine how Man. United will be if only those who make the goal will be financially awarded  May increase the level of cooperation across workers by giving everyone a common goal  The performance measure on groups has shown to be more accurate and reliable than that on individuals

22. Disadvantages  Problems of social loafing The sum of individuals’ output is higher than the whole group output Free-riding effect  Inter-group competition leading to a decline in overall performance We have important information and you are not allowed to access it.

23. Disadvantages  What potential disadvantages will there be for the idea of gain sharing? Protection of low performers because they are hardly detected Not fair for those units which have long been cost effective

24. Team-based plans are most likely to succeed when  It is difficult to single out who did what or identify the relative contribution  In flat organizations where team works are common and highly emphasized  Employees are committed to their work and are intrinsically motivated Social-loafing is less likely

25. Three basic types  Individual-based plans  Group-based plans  Organization wide plans

26. Organization Wide Plans  The most macro type of incentive programs  Reward employees based on the entire corporation’s performance  In the forms of Profit sharing Employee stock ownership plan (ESOP)

27. Profit Sharing  Uses a formula to allocate a portion of declared profits to employees  It is not to directly reward workers for productivity improvements  Some may be given in terms of retirement benefits, other may be given in terms of bonuses

28. ESOP  Employee stock ownership plan (ESOP) Rewards employees with company stocks An outright grant or a favorable price that may be below market value  Next media, PCCW, etc.

29. Advantages  Financially flexible for the firms – they can automatically adjust the labor downward during economic downturns  Increase employee commitment The employees become part of the owners under the concept of profit sharing and ESOP

30. Disadvantages  Employees may have little sense of control on their compensation  Limited effect on productivity The connection between individual goal and firm performance is not so tight

31. Test Your Knowledge  For each of the following jobs, identify the best type of incentive (i.e., individual, group, or organizational). Be prepared to explain your answer. 1. Director of Marketing, Pepsi 2. Recruiter, HSBC 3. Cashier, Park n Shop 4. Salesperson, G2000

32. 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.

33. Balanced Scorecard Table 12.2

34. At the End of this Session, You will be Able to Answer the Following Questions:  Why don’t we design a compensation system that totally follows the incentive pay notion, i.e. “paying for performance”? Any potential drawbacks of the idea of “pay of performance”?  What are the considerations in designing a benefit package?

35. Incentive Pay: Paying for Performance Incentive Pay Some basic concepts Types of pay- for-performance plans Potential drawbacks

36. Potential Drawbacks  Do only what you get paid for  Decrease intrinsic motivation  Decrease job satisfaction  Increase stress  Negative effects due to competitions between individuals or groups

37.  Problems of measurement Judgment bias, and not all performance can be easily measured  Sometimes difficult to disentangle individual and group performance.  Credibility gap Some workers do not believe in the performance- reward contingency Potential Drawbacks

38. Total Compensation Base Compensation Incentive Pay Benefits Elements of Compensation

39. At the End of this Session, You will be Able to Answer the Following Questions:  Why don’t we design a compensation system that totally follows the incentive pay notion, i.e. “paying for performance”? Any potential drawbacks of the idea of “pay of performance”?  What are the considerations in designing a benefit package?

40. Which Benefits to Provide?  Firms have three considerations The organization’s goals Employee expectations (relates to min.) Cost of employee benefits (relates to max.)

41. Benefits in Hong Kong  Usually around 15-20 % of total labor costs  Common benefits Subsidized meals/food allowances Health and dental plans Transportation allowance Mandatory Provident Fund (MPF)  5% of wage to a maximum of HKD 1,000 a month.  **Note: Ocean Park spends 6% on pension costs

42. Communicating Benefits  As was shown in the video, the value of the benefit package is often not well communicated to employees.  Communication can be done through a variety of means (see also Figure 13.7)