CHAPTER 12

Recognizing Employee Contributions with Pay

Incentive Pay
Incentive pay forms of pay linked to an employees performance as an individual, group member, or
organization member.
Incentive pay is influential because the amount paid is linked to certain predefined behaviors or outcomes.
For incentive pay to motivate employees to contribute to the organizations success, the pay plans must be well
designed.
Effective incentive pay plans meet the following requirements:

1. Performance measures are linked to the organizations goals.
2. Employees believe they can meet performance standards.
3. The organization gives employees the resources they need to meet their goals.
4. Employees value the rewards given.
5. Employees believe the reward system is fair.
6. The pay plan takes into account that employees may ignore any goals that are not rewarded.

Investing in Human Resources

Pay for Individual Performance
Pay for Individual Performance:
Piecework Rates
Figure 12.1:
How Incentives Sometimes Work
Pay for Individual Performance:
Standard Hour Plans and Merit Pay

Standard Hour Plan
An incentive plan that pays workers extra for work done in less than a preset standard time.
These plans are much like piecework plans.
They encourage employees to work as fast as they can, but not necessarily to care about quality or service.

Merit Pay
A system of linking pay increases to ratings on a performance scale.
They make use of a merit increase grid.
The system gives the lowest paid best performers the biggest pay increases.
Table 12.1: Sample Merit Increase Grid
Figure 12.2: Ratings and Raises
Underrewarding the Best
Pay for Individual Performance:
Performance Bonuses
Performance bonuses are not rolled into base pay.
The employee must re-earn them during each performance period.
Sometimes the bonus is a one-time reward.
Bonuses may also be linked to objective performance measures, rather than subjective ratings.
Pay for Individual Performance:
Sales Commissions
Commissions incentive pay calculated as a percentage of sales.
Some salespeople earn a commission in addition to a base salary.
Straight commission plan some salespeople earn only commissions.
Some salespeople earn no commissions at all, but a straight salary.

Many car salespeople earn a straight commission, meaning that 100% of their pay comes from commission
instead of salary.
Pay for Group Performance
Pay for Group Performance:
Gainsharing
Gainsharing group incentive program that measures improvements in productivity and effectiveness and
distributes a portion of each to employees.
Gainsharing addresses the challenge of identifying appropriate performance measures for complex jobs.
Gainsharing frees employees to determine how to improve their own and their groups performance.
Organization Conditions Necessary for Gainsharing to Succeed

1. Management commitment.
2. Need for change or strong commitment to continuous improvement.
3. Management acceptance and encouragement of employee input.
4. High levels of cooperation and interaction.
5. Employment security.
6. Information sharing on productivity and costs.
7. Goal setting.

Organization Conditions Necessary for Gainsharing to Succeed
8. Commitment of all involved parties to the process of change and improvement.
9. Performance standard and calculation that employees understand and consider fair and that is closely related to
managerial objectives.
10. Employees who value working in groups.
Figure 12.3: Finding the Gain in a Scanlon Plan

Scanlon Plan a gainsharing program in which employees receive a bonus if the ratio of labor costs to the sales value of
production is below a set standard.
Pay for Group Performance:
Group Bonuses and Team Awards
Group Bonuses
Bonuses for group performance tend to be for smaller work groups.
These bonuses reward the members of a group for attaining a specific goal, usually measured in terms of
physical output.
Team Awards
Similar to group bonuses, but are more likely to use a broad range of performance measures:
Cost savings
Successful completion of a project
Meeting deadlines

Group members that meet a sales goal or a product development team that meets a deadline or successfully
launches a product may be rewarded with a bonus for group performance.
Figure 12.4: Types of Pay for Organizational Performance
Pay for Organizational Performance:
Profit Sharing
Profit sharing incentive pay in which payments are a percentage of the organizations profits and do not
become part of the employees base salary.
Profit sharing may encourage employees to think like owners.
Evidence is not clear whether profit sharing helps organizations perform better.
Balanced Scorecard
Balanced scorecard a combination of performance measures directed toward the companys long- and short-
term goals and used as the basis for awarding incentive pay.
The four categories of a balanced scorecard include:
financial
customer
internal
learning and growth
Processes That Make Incentives Work

Participation in Decisions
Employee participation in pay-related decisions can be part of a general move toward employee empowerment.
Employee participation can contribute to the success of an incentive plan.

Communication
Communication demonstrates to employees that the pay plan is fair.
When employees understand the requirements of the incentive pay plan, the plan is more likely to influence
their behavior as desired.
Important when the pay plan is being changed.
Incentive Pay for Executives
Short-Term Incentives
Bonuses based on the years profits, return on investment, or other measures related to the organizations
goals.
Actual payment of the bonus may be delayed to gain tax advantages.



Long-Term Incentives
Include stock options and stock purchase plans.
Rationale for these long-term incentives is that executives will want to do what is best for the organization
because that will cause the value of their stock to grow.
Incentive Pay for Executives:

Ethical Issues
Incentive pay for executives lays the groundwork for significant ethical issues.
When an organization links pay to its stock performance, executives need the courage to be honest about their
companys performance even when dishonesty or clever shading of the truth offers the tempting potential for
large earnings.


Summary

Incentive pay is pay tied to individual performance, profits, or other measures of success. Organizations select
forms of incentive pay to energize, direct, or control employees behavior.
To be effective, incentive pay should encourage the kinds of behaviors most needed, and employees must
believe they have the ability to meet the performance standards.
Employees must value the rewards, have the resources they need to meet the standards, and believe the pay
plan is fair.
Organizations may recognize individual performance through such incentives as piecework rates, standard hour
plans, merit pay, sales commissions, and bonuses for meeting individual performance objectives.
Common group incentives include gainsharing, bonuses, and team awards.
Incentives for meeting organizational objectives include profit sharing and stock ownership.
A balanced scorecard can be used as the basis for awarding incentive pay. It also helps employees to understand
and care about the organizations goals.
The mix of pay programs is intended to balance the disadvantages of one type of incentive with the advantages
of another type.
Communication and participation in decisions can contribute to employees feelings that the organizations
incentive pay plans are fair.
Communication is especially important when the organization is changing its pay plan.
Because executives have such a strong influence over the organizations performance, incentive pay for them
receives special attention. Performance measures should encourage behavior that is in the organizations best
interests, including ethical behavior.