BUS 381 - CH12 PAY-FOR-PERFORMANCE & FINANCIAL INCENTIVES

Fixed Pay

•compensation independent of performance level

•includes base pay, allowances

Variable Pay

•any plan that ties pay to productivity or profitability

•almost always in addition to base pay

**Hygiene factors for dissatisfaction vs**

**Motivating factors for satisfaction**

**Hygiene factors for dissatisfaction:**

Company policies; work conditions; security; salary

**Motivating factors for satisfaction**

Achievement; recognition; the work itself; responsibility; advancement; growth

**Intrinsic** motivation vs Extrinsic

**Intrinsic** motivation is motivation derived from the non-monetary pleasure someone gets from doing the job or task.

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**Extrinsic** motivation is motivation derived from earning a tangible reward, such as base salary or incentive pay.

6 of Types of Incentive Plans

* Organization-wide (all employees)
* Teams (team performance
* Operations employees (production employees)
* Senior managers and executives (strategy and management)
* Salespeople (sales based)
* Other managers and professional employees

**Merit Pay vs Merit Raise**

Merit Pay:

* Pay increase based on individual performance
* Encourages employees to work harder and improve skills
* Can be tied to specific goals or metrics
* May lead to competition and resentment among coworkers

Merit Raise:

* Across-the-board pay increase for all employees
* Based on company or department performance
* Rewards all employees equally, regardless of individual performance
* May not motivate high-performing employees to continue improving

**Employee Share Purchase/Stock Ownership Plan**

•a trust holds shares of company stock purchased for or issued to employees

•the trust distributes the stock to employees as prescribed by the plan

**Profit-Sharing Plans vs Gainsharing Plans**

Profit-Sharing Plans:

* Employers share a portion of profits with employees
* Encourages employees to work towards company profitability
* Contributions are made at employer's discretion
* Can be structured in various ways (cash, stocks, etc.)
* Can be subject to vesting schedules

Gainsharing Plans:

* Rewards employees for achieving specific goals
* Focuses on improving productivity and reducing costs
* Contributions are based on predetermined formula
* Can be structured in various ways (cash, bonuses, etc.)
* Can be more effective in certain industries (manufacturing, production)

3 Team or Group Incentives

1. Set standards __for each member__ of the group

* members paid based on highest performer
* members paid based on lowest performer
* members paid on average performer

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2\.Set standards __for the group__ as whole 

* all members are paid equally 



3\.Use a group defined measure of performance (team goals, MBO and group defined key results)

Piecework Plan

based on the number of items processed by each individual worker in a unit of time

* Oldest and most common incentive plan
* Job evaluation determines production standards
* Simple to calculate, easy to understand, appears equitable
* Disliked by employees due to employers raising production standards to suppress wages

Incentives for Senior Managers & Executives: Short term vs long term

Short term

* Annual bonus
* Who is eligible? (position; grade; salary cut-off
* Tied to organizational and/or individual performance

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Long-term

* Intended to motivate and reward; encourage executive to stay with company
* Capital accumulation plans:
* Stock options

Incentives for Professional Employees

Financial incentives can be challenging to implement.

* Profit sharing is becoming common

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Non-financial and recognition-based award programs

* Dual career ladder
* Professional development opportunities
* Tuition reimbursement
* Flexible work arrangements
* Additional time-off; sabbaticals

Incentives for Salespeople

Salary plan

* Fixed salary with occasional incentives; does not depend on results

Commission plan

* Pay only for results; focuses on making a sale rather than cultivating customers

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Combination plan Base

* salary and commissions.

How to Implement Incentive Plans

* Pay for performance
* Link incentives to activities that engage employees - not only direct task performance, consider contextual performance (Ch. 10)
* Link incentives to measurable, valuable competencies (must be able to measure)
* Match incentives to organizational culture (what makes sense), be strategic
* Keep group incentives clear and simple
* Overcommunicate
* The greatest incentive is the work itself (intrinsic rewards) – try to make the work interesting and enjoyable

Employee Recognition

* Emerging as a critical component of incentive plans (praise!
* Traditionally, recognition has been for long service
* Movement toward recognition throughout the career