1. 1– 1 MGT-351 Human Resource Management Chapter-12 Pay for Performance and Financial Incentives

2. 12–2 Motivation, Performance, and Pay IncentivesIncentives  Financial rewards paid to workers whose production exceeds a predetermined standard.

3. 12–3 Motivation and Incentives Herzberg’s Hygiene–Motivator theoryHerzberg’s Hygiene–Motivator theory  Hygienes (extrinsic job factors)  Inadequate working conditions, salary, and incentive pay can cause dissatisfaction and prevent satisfaction.  Motivators (intrinsic job factors)  Job enrichment (challenging job, feedback, and recognition) addresses higher-level (achievement, self-actualization) needs.  The best way to motivate someone is to organize the job so that doing it helps satisfy the person’s higher- level needs.

4. 12–4 Motivation and Incentives (cont’d) Edward DeciEdward Deci  Intrinsically motivated behaviors are motivated by the 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.

5. 12–5 Motivation and Incentives (cont’d) Victor Vroom’s Expectancy TheoryVictor Vroom’s Expectancy Theory  Motivation is a function of:  Expectancy: 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  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.

6. 12–6 Motivation and Incentives (cont’d) Behavior Modification/Reinforcement TheoryBehavior Modification/Reinforcement Theory  B. 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 the properly scheduled rewards (or punishments).

7. 12–7 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

8. 12–8 Individual Incentive Plans Piecework PlansPiecework Plans  The worker is paid a sum (called a piece rate) for each unit he or she produces.  Straight piecework  Standard hour plan

9. 12–9 Individual Incentive Plans (cont’d) Pros and Cons of PieceworkPros 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

10. 12–10 Individual Incentive Plans (cont’d) Merit PayMerit Pay  A permanent cumulative salary increase the firm awards to an individual employee based on his or her individual performance. Merit Pay OptionsMerit Pay Options  Annual lump-sum merit raises that do not make the raise part of an employee’s base salary.  Merit awards tied to both individual and organizational performance.

11. 12–11 Individual Incentive Plans (cont’d) Incentives for Professional EmployeesIncentives 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 IncentivesPossible Incentives  Bonuses, stock options and grants, profit sharing  Better vacations, more flexible work hours  Improved pension plans  Equipment for home offices

12. 12–12 Individual Incentive Plans (cont’d) Recognition-Based AwardsRecognition-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

13. 12–13 Individual Incentive Plans (cont’d) Online Award ProgramsOnline Award Programs  Programs offered by online incentives firms that improve and expedite the awards process.  Broader range of awards  More immediate rewards Information Technology and IncentivesInformation Technology and Incentives  Enterprise incentive management (EIM)  Software that automates planning, calculation, modeling, and management of incentive compensation plans, enabling companies to align their employees with corporate strategy and goals.

14. 12–14 Incentives for Salespeople Salary PlanSalary Plan  Straight salaries  Best for: prospecting (finding new clients), account servicing, training customer’s salesforce, 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.

15. 12–15 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.

16. 12–16 Specialized Combination 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 are paid for directed activities like selling slow-moving items.

17. 12–17 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.

18. 12–18 Team/Group Incentive Plans (cont’d) 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”

19. 12–19 Organizationwide Incentive Plans 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.

20. 12–20 Advantages of ESOPs The CompanyThe Company  Can take a tax deduction equal to the fair market value of the shares transferred to the ESOP trustee.  Gets an income tax deduction for dividends paid on ESOP-owned stock.  Can borrow against ESOP in trust and then repay the loan in pretax rather than after-tax dollars.

21. 12–21 Advantages of ESOPs (cont’d) EmployeesEmployees  Develop a sense of ownership in and commitment to the firm.  Do not pay taxes on ESOP earnings until they receive a distribution. Shareholders of Closely-Held CorporationsShareholders of Closely-Held Corporations  Can place assets into an ESOP trust which will allow them to purchase other marketable securities to diversify their holdings.

22. 12–22 At-Risk Variable Pay Plans Put some portion of the employee’s weekly pay at risk.Put some portion of the employee’s weekly pay at risk.  If employees meet or exceed their goals, they earn incentives.  If they fail to meet their goals, they forgo some of the pay they would normally have earned.

23. 12–23 Incentives for Managers and Executives Short-Term Incentives: The Annual BonusShort-Term Incentives: The Annual Bonus  Plans that are designed to motivate short-term performance of managers and are tied to company profitability. Issues in Awarding BonusesIssues in Awarding Bonuses  Eligibility basis  Fund size basis  Individual awards

24. 12–24 Incentives for Managers and Executives (cont’d) Long-Term IncentivesLong-Term Incentives  Cash  Stock options  Stock appreciation rights  Performance achievement plans  Restricted stock plans  Phantom stock  Golden parachutes  Guaranteed loans