1. Incentive Plans

2. Pay influences employees through u Reinforcement theory u Expectancy theory

3. Reinforcement Theory u Behavior that is rewarded will be repeated.

4. Expectancy Theory Expectancy If I attempt this level of performance, am I likely to succeed? Instrumentality If I achieve this level of performance, am I likely to be rewarded? Valence What value do I place on the rewards available to me? Motivational Force = E * I * V

5. Incentive Programs u Differ by – payment method – frequency of payout – ways of measuring performance – choice of which employees are covered u Fitting program to situation depends on – organizational structure – management style – type of work

6. Types of Plans u Merit Pay u Individual Incentives u Profit Sharing u Ownership u Gainsharing u Group Incentives u Alternative Reward Systems

7. Merit Pay Programs u link performance appraisal ratings to annual pay increases u focus: identifying individual differences in performance u better performance results in higher reward, contingent on position in the range (compra-ratio)

8. Criticisms of Merit Pay u merit pay systems focusing on individual performance discourage teamwork u if performance is not measured fairly and accurately, the whole process will be contaminated u apparent differences between people arise almost entirely from the system that they work in, not the people themselves – coworkers, job materials, customers, management, supervision

9. Individual Incentives u reward individual performance u payments are NOT rolled into base pay u performance is usually measured as a physical output rather than subjective ratings

10. Individual Incentives are rare because u most jobs have no physical output measure u administrative problems of setting and maintaining acceptable standards u plans may be inconsistent with other goals (e.g. acquiring multiple skills, proactive problem solving) u people may focus on what they get paid for and nothing else u plans may reward output at the expense of quality

11. Profit Sharing u payments are based on a measure of organizational performance (profits) u payments do NOT become a part of base pay u Advantage: may encourage workers to think more like owners u Drawbacks: – workers may perceive their performance has little to do with profit – deferred nature of payouts

12. Ownership u encourages employees to focus on the success of the organization as a whole but may not result in motivation for high individual performance u gains not realized until stock sold (employees leaving company?) u Methods: – stock options – ESOPs (employee stock ownership plans)

13. Gainsharing u sharing productivity gains with employees u differs from profit sharing in that instead of using an organization-level performance measure (profits) plans measure group or plant performance u better for motivation u Examples: – Scanlon plan, Rucker plan, Improshare u goes beyond money -- participation in problem solving = key

14. Conditions for effective Gainsharing u management commitment u need to change or a process of continuous improvement u management acceptance & encouragement of employee input u high levels of cooperation and interaction u employment security u information sharing on all productivity and costs u goal setting u commitment of all involved parties to change and improvement u agreement on a performance standard u calculation that is understandable, perceived as fair, closely related to managerial objectives

15. Group Incentives u Focus = smaller work groups u While gainsharing typically measures physical output, group incentives tend to measure performance in terms of a broader array such as – cost savings – successful completion of product design – meeting deadlines u Drawback: competition among teams

16. Alternative Reward Systems u alternatives to cash -- u travel u merchandise u earned time off u symbolic awards – plaques, coffee cups, bananas

17. Incentive Plans

18. Conditions for Effective Incentive Plans u Plan is clearly communicated. u Plan is understood by employees and management. u Bonuses are easy to calculate. u Employees participate in administrating the plan. u Employees believe they are being treated fairly. u Employees believe they can trust the company and that they have security. u Bonuses are awarded as soon as possible after the desired performance.

19. Pay for Performance Plans

20. Conditions for Effective Performance-Based Pay Systems u Pay-performance linkage must be perceived by employees u Pay is valued by employees u Employees must perceive that effort and ability lead to rewarded behavior u Performance measurement must be fair u Employees must trust the organization u Pay program must be understood u Employees must be able to control their performance u Performance appraisal system cannot be biased u There must be enough money to fund incentives u A valid job evaluation must have been conducted