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WELCOME TO THE CLASS OF HRM. PAY FOR PERFORMANCE & FINANCIAL INCENTIVES PROF. HITESHWARI JADEJA.

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Presentation on theme: "WELCOME TO THE CLASS OF HRM. PAY FOR PERFORMANCE & FINANCIAL INCENTIVES PROF. HITESHWARI JADEJA."— Presentation transcript:

1 WELCOME TO THE CLASS OF HRM

2 PAY FOR PERFORMANCE & FINANCIAL INCENTIVES PROF. HITESHWARI JADEJA

3 Incentive Pay Terminology Pay-for-Performance PlanPay-for-Performance Plan  Ties employee’s pay to the employee’s performance Variable Pay PlanVariable Pay Plan  Is an incentive plan that ties a group or team’s pay to some measure of the firm’s (or the facility’s) overall profitability  Example: profit-sharing plans  May include incentive plans for individual employees

4 Remuneration & Rewards Financial Non-Financial DIRECT (cash) Salaries Incentives Bonuses INDIRECT (benefits) Insurance Holidays Medical and health Child care Employee assistance JOB Interesting work Challenge Responsibility Recognition Advancement ENVIRONMENT Good policies and practices Competent supervision Congenial co-workers Safe and healthy work environment Fair treatment Components of Employee Remuneration

5 Motivation, Performance, and Pay IncentivesIncentives  Financial rewards paid to workers whose production exceeds a predetermined standard. Frederick TaylorFrederick Taylor  Popularized scientific management and the use of financial incentives in the late 1800s.

6 How you would apply five motivation theories in formulating an incentive plan?

7 Needs and Motivation Abraham Maslow’s Hierarchy of Needs Abraham Maslow’s Hierarchy of Needs – Five increasingly higher-level needs: physiological (food, water, sex) physiological (food, water, sex) security (a safe environment) security (a safe environment) social (relationships with others) social (relationships with others) self-esteem (a sense of personal worth) self-esteem (a sense of personal worth) self-actualization (becoming the desired self) self-actualization (becoming the desired self) – Lower level needs must be satisfied before higher level needs can be addressed or become of interest to the individual.

8 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.

9 Motivation and Incentives (continued) Demotivators and Edward Deci Demotivators and Edward 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.

10 Motivation and Incentives (continued) Victor Vroom’s Expectancy Theory Victor Vroom’s Expectancy Theory – Motivation is a function of: Expectancy: that effort will lead to performance. Expectancy: that effort will lead to performance. Instrumentality: the connection between performance and the appropriate reward. Instrumentality: the connection between performance and the appropriate reward. Valence: the value the person places on the 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. 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. Employee confidence building and training, accurate appraisals, and knowledge of workers’ desired rewards can increase employee motivation.

11 Motivation and Incentives (continued) Behavior Modification/Reinforcement Theory Behavior Modification/Reinforcement Theory – B. F. Skinner’s Principles To understand behavior one must understand the consequences of that behavior. 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 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). Behavior can be changed by providing the properly scheduled rewards (or punishments).

12 How Incentives Sometimes “Work”

13 P AY FOR P ERFORMANCE Business history is littered with firms that got what they paid for. Sears had a very clear pay for performance system in which mechanics were paid bonuses as a percentage of repair receipts. Receivables went up, the company was happy because of higher sales, mechanics got higher pay, and 41 states indicted Sears for fraud.

14 Do Incentive Plans Work? Successful PlansSuccessful Plans  Use important organizational metrics by which to measure employee performance  Find the right incentive payout. Payout formulas should be simple and understandable.  Are continuously communicated to employees to establish a clear link between performance and payout.  Effectively measure employee output and reward exceptional employee performance

15 Do Incentive Plans Work? Why Incentive Plans Fail:Why Incentive Plans Fail:  They fail to meet employee expectations for pay gains.  There is confusion about incentive payment calculations due to poor design and implementation of the plan.  Employees do not have the capability to change their performance levels.  The organization environment does not support plan.

16 Employee Opposition to Incentive Plans Production standards/goals are set unfairly.Production standards/goals are set unfairly. Incentive plans are really “work speedup.”Incentive plans are really “work speedup.” Incentive plans create competition among workers.Incentive plans create competition among workers. Increased earnings result in tougher standards.Increased earnings result in tougher standards. Payout formulas are complex and difficult to understand.Payout formulas are complex and difficult to understand. Incentive plans cause friction between employees and management.Incentive plans cause friction between employees and management.

17 Advantages of Incentives Motivation to perform better Enhanced employee earnings Reduced cost of production Increased production capacity Reduced supervision, reduced accidents, reduced absenteeism Case of Rail Factory, Bangalore

18 Disadvantages Quality is dentedQuality is dented Introduction of new machines and methods opposedIntroduction of new machines and methods opposed Jealousies creep inJealousies creep in Difficulty in setting ratesDifficulty in setting rates Difficulty in setting standardsDifficulty in setting standards Case of Premier Automobiles, MumbaiCase of Premier Automobiles, Mumbai Ethically incorrect to pay more when normal wages are already paidEthically incorrect to pay more when normal wages are already paid Standards are perceived to be ceilingsStandards are perceived to be ceilings Incentives only remove dissatisfaction but may not offer satisfactionIncentives only remove dissatisfaction but may not offer satisfaction

19 Types of Incentive Plans IndividualGroup/TeamEnterprise/Organization Piecework Team Profit sharing Bonuses Gainsharing Scanlon plan Improshare Rucker plan Earnings-at-risk Employee stock ownership plans (ESOPs) Merit pay Stock options Lump sum merit pay Incentive awards Sales incentives Executive compensation

20 Individual Incentive Plans Piecework PlansPiecework Plans  The worker is paid a sum (“piece rate”) for each unit he or she produces.  Straight piecework pays a fixed sum of money for each unit of production completed. For example: Ballpark workers selling peanuts and soda get $1 for each bag of peanuts and soda sold.  Standard hour plan pays the worker a premium equal to the percent by which his or her performance exceeds a standard.

21 Computing the Piece Rate—Another Example hourper units 5 unit)per time(standard minutes 12 hour)(per minutes 60 = unitper $2.55 hour)(per units 5 rate)(hourly $12.75 =

22 Pros and Cons of Piecework Easily understandable, equitable, and powerful incentivesEasily understandable, equitable, and powerful incentives Employee resistance to changes in standards or work processes affecting outputEmployee resistance to changes in standards or work processes affecting output Quality/safety problems caused by an overriding output focusQuality/safety problems caused by an overriding output focus Possibility of violating minimum wage standardsPossibility of violating minimum wage standards Employee dissatisfaction when incentives either cannot be earned or are withdrawnEmployee dissatisfaction when incentives either cannot be earned or are withdrawn

23 Individual Incentive Plans (cont’d) Merit PayMerit Pay  Is a permanent cumulative salary increase the firm awards to an individual employee based on his or her individual performance  Can detract from performance if awarded across the board  Becomes permanent ongoing reward for past performance  Generally based on performance appraisal of worker

24 11-24 Merit Pay Options Give annual lump-sum merit raises that do not make the raise part of an employee’s base salary. Tie merit awards to both individual and organizational performance.

25 11-25 Merit Incentives A reward based on how well a job was done The most widely used plan for managing individual performance Merit increases usually spread evenly throughout the subsequent year Traditionally results in a higher base salary after an annual performance evaluation 80 to 90% of firms offer merit raises, but little research has examined merit pay or its effects

26 11-26

27 Percentage of Employees Who Agreed that Better Performers Get Better Increases

28 Incentives for Professional Employees Professional EmployeesProfessional 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

29 Nonfinancial and Recognition Awards Effects of Recognition-Based AwardsEffects of Recognition-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

30 Social Recognition (non financial) by Gujarat Gas Company Limited FIGURE 12–1 The Gujarat Gas Company Uses Special Congratulatory Cards to Recognize High-performing Employees

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32 FIGURE 12–1Social Recognition and Related Positive Reinforcement Managers Can Use Challenging work assignments Freedom to choose own work activity Having fun built into work More of preferred task Role as boss’s stand-in when he or she is away Role in presentations to top management Job rotation Encouragement of learning and continuous improvement Being provided with ample encouragement Being allowed to set own goals Compliments Expression of appreciation in front of others Note of thanks Employee-of-the-month award Special commendation Bigger desk Bigger office or cubicle

33 Combining Financial and Nonfinancial Awards Employee recognitionEmployee recognition Gift CertificatesGift Certificates Special EventsSpecial Events Cash RewardsCash Rewards /Print Communication /Print Communication Training ProgramsTraining Programs Work life BenefitsWork life Benefits Variable payVariable pay Group travelGroup travel Individual travelIndividual travel

34 Non Financial Techniques Awards & Recognition:  Employee of the Month/Quarter/Year  Certificate  Circulars  Public/Staff Recognition  Personalized Gifts

35 Working Environment: Working Environment: Non Political EnvironmentNon Political Environment Good CultureGood Culture Transparency in work placeTransparency in work place Hygiene & SafetyHygiene & Safety Effective Grievance HandlingEffective Grievance Handling Clear Code of ConductClear Code of Conduct Efficient working hoursEfficient working hours Freedom of working styleFreedom of working style

36 Family Welfare Family Welfare Child/Elder CareChild/Elder Care Fitness FacilitiesFitness Facilities Family InsuranceFamily Insurance Creche FacilityCreche Facility Employee Assistance ProgramsEmployee Assistance Programs

37 Social Gatherings PartiesParties PicnicsPicnics GamesGames ContestsContests Festival CelebrationsFestival Celebrations

38 Paid Leave & Vacations

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40 Incentives for Salespeople Salary PlanSalary Plan  Straight salaries  Best for: prospecting (finding new clients), account servicing, training customer’s sales force, 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 salesperson’s performance  Can increase turnover of salespeople

41 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.

42 Specialized Commission 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 (“spiffs”) are paid for directed activities like selling add-ons or slow-moving items.

43 Incentives for Managers and Executives Executive Total Reward PackageExecutive Total Reward Package  Base salary (cash)  Short-term incentives (bonuses)  Long-term incentives (e.g., stock options)

44 Short- and Long-Term Incentives Short-Term Incentives: The Annual BonusShort-Term Incentives: The Annual Bonus  Plans intended to motivate short-term performance of managers and tied to company profitability.  Issues in awarding bonuses  Eligibility basis  Fund size basis  Individual performance award  Long-term incentives  Stock options  Performance shares  Indexed options  Premium price options  Stock appreciation rights  Perks  Golden parachutes

45 Other Types of Long-term Incentive Plans

46 The “Sweetness” of Executive Perks

47 Types of Incentive Plans IndividualGroup/TeamEnterprise/Organization Piecework Team Incentive Plans Profit sharing Bonuses Gainsharing Scanlon plan Improshare Rucker plan Earnings-at-risk Employee stock ownership plans (ESOPs) Merit pay Stock options Lump sum merit pay Incentive awards Sales incentives Executive compensation

48 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.

49 Pros and Cons of Team Incentives 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”

50 Group Incentive Plans Gainsharing PlansGainsharing Plans  Programs under which both employees and the organization share the financial gains according to a predetermined formula that reflects improved productivity and profitability.  A form of group compensation based on group or plant performance (rather than organization wide profits) that does not become part of the employee’s base salary.

51 Reasons for adopting gainsharing

52 Implementing a Gainsharing Plan 1.Establish general plan objectives. 2.Choose specific performance measures. 3.Decide on a funding formula. 4.Decide on a method for dividing and distributing the employees’ share of the gains. 5.Choose the form of payment. 6.Decide how often to pay bonuses. 7.Develop the involvement system. 8.Implement the plan.

53 Scanlon Plan Rewards come from employee participation in improving productivity and reducing costs. Rucker Plan Shared rewards come from the difference between labor costs and sales value of production. Improshare Gainsharing based on increases in productivity of the standard hour output of work teams. Gainsharing Incentive Plans Earnings-at-risk Encourages employees to achieve higher output and quality standards by placing a portion of their base salary at risk of loss.

54 The Scanlon Leadership Network For more information on the program go toFor more information on the program go to

55 Gainsharing Plans Philosophy of cooperation Involvement systemIdentity Scanlon Plan Components CompetenceBenefits sharing formula

56 Scanlon Plan Suggestion Process

57 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 forego some of the pay they would normally have earned.

58 Types of Incentive Plans IndividualGroup/TeamEnterprise/Organization Piecework Team Profit sharing Bonuses Gainsharing Scanlon plan Improshare Rucker plan Earnings-at-risk Employee stock ownership plans (ESOPs) Merit pay Stock options Lump sum merit pay Incentive awards Sales incentives Executive compensation

59 Enterprise/Organization Wide Incentive Plans Profit SharingProfit Sharing  Any procedure by which an employer pays, or makes available to all regular employees, in addition to their base pay, current or deferred sums based upon the profits of the enterprise.  Challenges:  Agreement over the percentages of shared of profits and the forms of distribution (cash or deferred) of profits between company and employees  Annual variations and possibility of no payout due to financial condition of company  Maintaining motivational connection of profit-sharing to performance of employees

60 Enterprise Incentive Plans (cont’d) Stock OptionsStock Options  Granting employees the right to purchase a specific number of shares of the company’s stock at a guaranteed price (the option price) during a designated time period.  The value of an option is subject to stock market conditions at the time that option is exercised.

61 Employee Stock Option Plans What Is a Stock Option? A stock option gives an employee the right to buy a certain number of shares in the company at a fixed price for a certain number of years. The price at which the option is provided is called the “grant” price and is usually the market price at the time the options are granted. Employees who have been granted stock options hope that the share price will go up and that they will be able to “cash in” by exercising (purchasing) the stock at the lower grant price and then selling the stock at the current market price. How Stock Option Plans Work Here is an example of a typical employee stock option plan. An employee is granted the option to purchase 1,000 shares of the company’s stock at the current market price of $5 per share (the “grant” price). The employee can exercise the option at $5 per share—typically the exercise price will be equal to the price when the options are granted. Plans allow employees to exercise their options after a certain number of years or when the company’s stock reaches a certain price. If the price of the stock increases to $20 per share, for example, the employee may exercise his or her options to buy 1,000 shares at $5 per share and then sell the stock at the current market price of $20 per share. Companies sometimes revalue the price at which the options can be exercised. This may happen, for example, when a company’s stock price has fallen below the original exercise price. Companies revalue the exercise price as a way to retain their employees.

62 Enterprise Incentive Plans (cont’d) Employee Stock Ownership Plans (ESOPs)Employee Stock Ownership Plans (ESOPs)  Stock plans in which an organization contributes shares of its stock to an established trust for the purpose of stock purchases by its employees.  The employer establishes an ESOP trust that qualifies as a tax-exempt employee trust under Section 401(a) of the Internal Revenue Code  Stock bonus plans are funded by direct employer contributions of its stock or cash to purchase its stock.  Leveraged plans are funded by employer borrowing to purchase its stock for the ESOP.

63 Employee Stock Ownership Plans Rewards and Risks of ESOPS Advantages Disadvantages Liquidity and value Pride of ownership Deferred taxes Single funding basis Not insured Retirement benefits

64 FRINGE BENEFITS

65 FEATURES OF FRINGE BENEFITS An employee enjoys them in addition to the salary he/she receives.An employee enjoys them in addition to the salary he/she receives. They are not given for specific jobs performed but to make jobs more attractive.They are not given for specific jobs performed but to make jobs more attractive. They are not linked to productivity so do not reward performance in any way, criteria used is other than performance.They are not linked to productivity so do not reward performance in any way, criteria used is other than performance. They have an indirect impact on workers’ efficiency. If impact is direct, it is not a fringe benefit.They have an indirect impact on workers’ efficiency. If impact is direct, it is not a fringe benefit.

66 Types of Fringe Benefits Pay for time not workedPay for time not worked Employee securityEmployee security Safety and healthSafety and health Welfare and recreationWelfare and recreation Old age and retirementOld age and retirement

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68 THANK YOU


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