Chapter 10

Learning Outcomes

  • Understand key requirements for strategic incentive programs.

  • Identify aspects of individual incentive plans and their appropriateness.

  • Discuss principal methods to compensate salespeople.

  • Identify key aspects of team and group-level pay-for-performance plans.

  • Compare incentives for professional employees and executives versus other employees.

  • Discuss profit-sharing plans and their advantages/disadvantages.

  • Describe main types of employee stock ownership plans (ESOPs) and their pros/cons.

Strategic Reasons for Incentive Plans

  • Motivate desirable behaviors.

  • Variable pay ties compensation to individual, group, or organizational performance.

  • Establish a performance threshold for incentive payments.

Types of Incentive Plans

  • Individual: Piecework, standard hour plan, bonuses, merit pay, lump-sum merit pay, sales incentives.

  • Group: Team compensation, Scanlon Plan, Improshare, profit sharing, stock options.

  • Enterprise: Employee stock ownership plans (ESOPs).

Advantages of Incentive Pay Programs

  • Focus employee efforts on specific performance targets.

  • Convert compensation into variable costs linked to results.

  • Foster teamwork when based on team results.

  • Attract top performers within budget constraints.

Requirements for a Successful Incentive Plan

  • Employee involvement in plan design.

  • Clear link between performance and payout.

  • Establish measurable performance indicators.

  • Incentives should be sufficient to reward exceptional performance.

Individual Incentive Plans

  • Piecework: Pay per unit produced.

  • Bonuses: Supplemental payments for performance.

  • Merit Pay: Links salary increases to performance, often with issues like external variables and pay inequity.

Sales Incentives

  • Salary vs. Commission:

    • Straight salary encourages customer relationships but may lack motivation.

    • Straight commission promotes aggressive selling but may neglect service.

    • Combined approach offers a balance of both.

Executive Pay Packages

  • Consists of base salary, short/long-term incentives, benefits, and perks (e.g., company cars, first-class travel).

  • Long-Term Incentive Plans (stock options, performance units, etc.) encourage sustained performance.

Group Incentive Plans

  • Share benefits of improved efficiency across teams or organizational units.

  • Types:

    • Team Incentive Plans (Goal Sharing).

    • Gainsharing Programs.

Enterprise Incentive Plans

  • Reward employees based on organizational success over time (e.g., profit sharing, stock options, ESOPs).

Profit-Sharing Plans

  • Distribution of profits to employees; effectiveness may wane if payments are infrequent or nonexistent.

Employee Stock Ownership Plans (ESOPs)

  • Contributions of shares to a trust for employees; benefits include retirement, pride of ownership, but risks include liquidity issues and lack of insurance.