HRM Chapter 13

Incentive Pay

• Forms of pay linked to an employee’s performance as an individual, group member, or organization member

• Influential because the amount paid is linked to certain predefined behaviors or outcomes

• May be in the form of a commision or a bonus

Effective Incentive Pay Requirements

1. Performance measures are linked to the organization’s goals.

2. Employees believe they can meet performance standards.

3. 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. Pay plan takes into account that employees may ignore any goals that are not rewarded.

Motivating employees with incentives

• Employees must feel the incentive plan is fair.

• Give employees a say in allocating incentives.

• Employees also want interesting work, appreciation for their efforts, flexibility, and a sense of belonging to the work group, and the inner satisfaction of work well done.

Pay for Individual Performance

• Advantages:

  • Encourages high individual productivity

  • Provides clear link between performance and reward

• Challenges:

  • May reduce teamwork and collaboration

  • Depends on accurate and fair performance evaluation

Piecework rate

• a wage based on the amount an employee produces

• Manufacturing and assembly workers, garment workers, agricultural harvesters, construction workers, call center agents, freelance writers, delivery drivers, data entry operators

Straight piecework plan

• the employer pays the same rate per piece no matter how much the worker produces

Differential piece rates

• the piece rate depends on the amount produced

Standard Hour Plan

• An incentive plan that pays workers extra for work done in less than a preset “standard time”

• Similar to piecework plans

• Encourage employees to work as fast as possible

• Employees often neglect quality or customer service

• Works well when the time required to complete a task is predictable and workers can potentially increase their earnings by completing tasks faster than the standard time.

  • Manufacturing and production workers

  • Field technicians or repair workers

  • Sales representatives

  • Freelancers or contractors

Merit Pay

• A system of linking pay increases to ratings on performance appraisals.

• Merit pay systems gives lowest paid best performers the biggest pay increases.

• Use a merit increase grid.

• Individual’s performance rating

• Compa-ratio. - the employee’s salary divided by the midpoint of their salary range.

Performance Bonuses

• Not rolled into base pay

• The employee must re-earn them during each performance period.

• May be a one-time reward

• May be linked to objective performance measures, rather than subjective ratings.

Sales Commissions

• Commissions - incentive pay calculated as a percentage of sales.

  • some earn a commission in addition to a base salary

• Straigh commission plan - some earn only commisions.

  • some earn no commissions at all, but a straight salary.

Pay for Group Performance

• Advantages:

  • Promotes collaboration and shared responsibility

• Challenges:

  • Risk of free-riding

  • Unequal contributions can cause dissatisfaction

Gainsharing

Group incentive program that measures improvements in productivity and effectiveness and distributes a portion of each to employees.

• Frees employees to determine how to improve their own and their group’s performance.

  • Reduced production costs

  • Increased output or efficiency

  • Fewer accidents or defects

  • Improved quality or customer satisfaction

EX) A factory team reduces material waste by 10%, saving $100,000. Then, the company shares $30,000 of that savings with employees as a bonus.

Group Bonuses

• Tend to be for smaller work groups.

• Reward the members of a group for attaining a specific goals, usually measured in terms of physical output. (e.g., number of units produced)

• Focused on repetitive tasks and productivity

Team Awards

Similar to group bonuses, but more likely to use a broad range of performance measures:

• Cost savings

• Successful completion of a project

• Meeting deadlines

Can include qualitative or composite goals

More flexible - used for complex, collaborative tasks

EX) creative industries (graphic design, advertising, film production, etc.), project-based work, R&D field (pharma, engineering, or technology), health care (doctors, nurses), emergency services

Pay for Organizational Performance

• Builds ownership mentality, but may lack short-term motivational power.

Advantages

• Aligns employee interests with organizational goals

Challenges

• Weak connectiomn between individual effort and company-wide results

Profit sharing

• Incentive pay in which payments are a percentage of the organization’s profits and do not become part of the employees’ base salary.

• May encourage employees to think like owners.

• May be used as a component of a pay system that includes other kinds of pay more directly linked to individual behavior.

  (increasing employees’ commitment to organizational goals while addressing concerns about fairness)

• Generous profit sharing: Costco, Southwest Airlines, Lincoln Electric, Google, etc

Stock Ownership

• Makes employees part owners of the organization

• May not have a strong effect on employees’ motivation

Stock Options

• Rights to buy a certain number of shares of stock at a specified price.

• Traditionally, stock options have been granted to executives.

ESOPs

• Employee Stock Ownership Plan - an arrangement in which the organization distributes shares of stock to all its employees by placing it in a trust.

• Most common form of employee ownership.

• Carry significant risk.

Processes That Make Incentives Work

Participation in Decisions:

• Employee participation can be part of general move to employee empowerment.

• Employees have hands-on knowledge of behaviors that are effective.

Communication:

• Demonstrates that the pay plan is fair.

• When employees understand the plan, it is more likely to influence their behavior as desired.

• Especially important when changing the pay plan.

Why Combine Incentives?

• Incentives should be based on multiple performance dimensions, not just one.

• Single metrics can lead to unintended consequences.

  • E.g., Focusing only on sales may harm customer service or quality.

• Each incentive type has strengths and weaknesses.

  • Merit pay: boosts individual focus, but may hinder teamwork.

  • Profit sharing / stock ownership: encourages cooperation, but may not motivate daily effort or top talent.

  • —> Solution: Combine types to balance out disadvantages.

Combining incentives Plans in a Balanced Scorecard:

• Combination of performance measures.

• Directed toward company’s long- and short-term goals.

• Used as the basis for awarding incentive pay.

• Balanced scorecard ensures alignment with the organization’s overall strategy.

What is a Balanced Scorecard?

• A mix of performance measures aligned with:

  • Long-term and short-term company goals.

  • Basis for group or organizational incentive pay decisions

A balanced scorecard aligns employee behavior with strategic goals by evaluating diverse, meaningful performance areas.

Perspective - Financial

Example Metrics

• Cost, ROI, cash flow

Purpose

• Satisfy investors, ensure stability

Perspective - Customer

Example Metrics

• Satisfaction, service speed

Purpose

• Drive loyalty and market share

Perspective - Internal Process

Example Metrics

• Safety, quality, operational efficiency

Purpose

• Improve productivity and consistency

Perspective - Learning & Growth

Example Metrics

• Skills, innovation, employee development

Purpose

• Build future capabilities