1. Chapter 12 recognizing employee contributions with pay
Fundamentals of human resource management 5th edition By R.A. Noe, J.R. Hollenbeck, B. Gerhart, and P.M. Wright
Chapter 12 recognizing employee contributions with pay
The focus of this chapter is using pay to recognize and reward employees’ contributions to the organization’s success. Employees’ pay does not depend solely on the jobs they hold. Instead, organizations vary the amount paid according to differences in performance of the individual, group, or whole organization, as well as differences in employee qualities such as seniority and skills the choices available to organizations with regard to incentive pay. This chapter describes the link between pay and performance, ways organizations provide a variety of pay incentives to individuals and pay related to group and organizational performance. The organization’s processes that can support the use of incentive pay and incentive pay for the organization’s executives is also discussed.. organizations may combine a number of incentives so employees do not focus on one measure to the exclusion of others.

2. Need to Know
Connection between incentive pay and employee performance.
How organizations recognize individual performance.
Ways to recognize group performance.
How organizations link pay to overall performance.
How organizations combine incentive plans in a “balanced scorecard.”
Processes that can contribute to the success of incentive programs.
issues related to performance-based pay for executives.
After reading and discussing this chapter, you need to know:

3. Incentive Pay
Incentive pay – forms of pay linked to an employee’s 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 organization’s success, pay plans must be well designed.
Along with wages and salaries, many organizations offer incentive pay – that is, pay specifically designed to energize, direct, or control employees’ behavior. The next slide illustrates the popularity of this type of pay.

4. Effective incentive pay plans meet the following requirements:
Performance measures are linked to the organization’s goals.
Employees believe they can meet performance standards.
Organization gives employees the resources they need to meet their goals.
Employees value the rewards given.
Employees believe the reward system is fair.
Pay plan takes into account that employees may ignore any goals that are not rewarded.
For incentive pay to motivate employees to contribute to the organization’s success, the pay plans must be well designed. In particular, effective plans meet the requirements listed on this slide.

5. Pay for Individual Performance
Piecework rates
Standard hour plans
Merit pay
Individual bonuses
Sales commissions
Earning money is not the only reason people try to do a good job. people also want interesting work, appreciation for their efforts, flexibility, and a sense of belonging to the work group and inner satisfaction of work well done. Therefore, a complete plan for otivating and compensating employees has many components, from pay to work design to developing managers so they can exercise positiveleadership .Organizations may reward individual performance with a variety of incentives:
Piecework rates
Standard hour plans
Merit pay
Individual bonuses
Sales commissions

6. Pay for Individual Performance: Piecework Rates
A wage based on the amount workers produce.
Straight Piecework Plan
Incentive pay in which the employer pays the same rate per piece, no matter how much the worker produces.
Differential Piece Rates
Incentive pay in which the piece rate is higher when a greater amount is produced.
As an incentive to work efficiently, some organizations pay production workers a piecework rate, a wage based on the amount they produce. The amount paid per unit is set at a level that rewards employees for above-average production volume. An obvious advantage of piece rates is the direct link between how much work the employee does and the amount the employee earns. This type of pay is easy to understand and seems fair to many people, if they think the production standard is reasonable Most jobs, including those of managers, have no physical output, so it is hard to develop an appropriate performance measure. This type of incentive is most suited for very routine, standardized jobs with output that is easy to measure. For complex jobs or jobs with hard-to-measure outputs, piecework plans do not apply very well. Also, unless a plan is well designed to include performance standards, it may not reward employees for focusing on quality or customer service. satisfaction if it interferes with the day’s output.

7. Figure 12.1: How Incentives Sometimes “Work”
Unless a plan is well designed to include performance standards, it may not reward employees for focusing on quality or customer satisfaction if it interferes with the day’s output. In Figure 12.1 the employees quickly realize they can earn huge bonuses by writing software “bugs” and then fixing them, while writing bug-free software affords no chance to earn bonuses.
SOURCE: DILBERT (c) 1995 Scott Adams. Used by permission of UNIVERSAL UCLICK. All rights reserved.

8. Pay for Individual Performance: Standard Hour Plans and Merit Pay
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.
A system of linking pay increases to ratings on a performance scale.
They make use of a merit increase grid.
The system gives lowest paid best performers the biggest pay increases.

9. Table 12.1: Sample Merit Increase Grid
As shown in Table 12.1, decisions about merit pay are based on two factors:
The individual’s performance rating, and
The individual’s compa-ratio (pay relative to average pay. This system gives the biggest pay increases to the best performers and to those whose pay is relatively low for their job.

10. Figure 12.2: Ratings and Raises – Underrewarding the Best
As Figure 12.2 shows, companies typically spread merit raises fairly evenly across all employees. Imagine if the raises given to the bottom two categories in Figure 12.2 instead went toward 6 percent raises for top performers. This type of decision signals that excellence is rewarded.

11. 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.
Bonuses for individual performance can be extremely effective and give the organization great flexibility in deciding what kinds of behavior to reward. organizations also may motivate employees with one-time bonuses. When one organization acquires another, it usually wants to retain certain valuable employees in the organization it is buying, so organizations involved in an acquisition may pay retention bonuses —one-time incentives paid in exchange for remaining with the company—to top managers, engineers, top-performing salespeople, and information technology specialists.

12. Pay for Individual Performance: Sales Commissions
Commissions – incentive pay calculated as a percentage of sales.
Some earn a commission in addition to a base salary.
Straight commission plan – some earn only commissions.
Some earn no commissions at all, but a straight salary.
A variation on piece rates and bonuses is the payment of commissions, or pay calculated as a percentage of sales. Commission rates vary tremendously from one industry and company to another. Paying most or all of a salesperson’s compensation in the form of salary frees the salesperson to focus on developing customer goodwill. Paying most or all of a salesperson’s compensation in the form of commissions encourages the salesperson to focus on closing sales. In this way, differences in salespeople’s compensation directly influence how they spend their time, how they treat customers, and how much the organization sells. The nature of salespeople’s compensation also affects the kinds of people who will want to take and keep sales jobs with the organization.

13. Ask students: “What type of individual might enjoy a job like this?”
Hard-driving, ambitious, risk-taking salespeople might enjoy the potential rewards of a straight commission plan. An organization that wants salespeople to concentrate on listening to customers and building relationships might want to attract a different kind of salesperson by offering more of the pay in the form of a salary. Basing part or all of a salesperson’s pay on commissions assumes that the organization wants to attract people with some willingness to take risks—probably a reasonable assumption about people whose job includes talking to strangers and encouraging them to spend money.
Many car salespeople earn a straight commission, meaning that 100% of their pay comes from commission instead of salary.
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14. Test Your Knowledge
John works twisting pretzels in a pretzel factory. Pablo works on IT systems integration at a credit card company. The best pay plans for these individuals would be ________ and _______, respectively.
Merit pay, individual bonus
Sales commissions; merit pay
Piecework, Merit pay
Individual bonus, sales commissions
John works twisting pretzels in a pretzel factory. Pablo works on IT systems integration a credit card company. The best pay plans for these individuals would be ________ and _______, respectively.
Merit pay, individual bonus
Sales commissions; merit pay
Piecework, Merit pay
Individual bonus, sales commissions
Answer: C

15. Pay for Group Performance
Gainsharing
Bonuses
Team Awards
Employers may address the drawbacks of individual incentives by including group incentives in the organization’s compensation plan.
To win group incentives employees must cooperate and share knowledge so that the entire group can meet its performance targets.
Common group incentives include:
Gainsharing
Bonuses
Team awards

16. Pay for Group Performance: Gainsharing
Gainsharing – group incentive program that measures improvements in productivity and effectiveness and distributes a portion of each to employees.
Addresses challenge of identifying appropriate performance measures for complex jobs.
Frees employees to determine how to improve their own and their group’s performance.
Organizations that want employees to focus on efficiency may adopt a gainsharing, Knowing they can enjoy a financial benefit from helping the company be more productive, employees supposedly will look for ways to improve and work more efficiently.

17. 10 Conditions Necessary for Gainsharing to Succeed
Management commitment.
Need for change or strong commitment to continuous improvement.
Management acceptance and encouragement of employee input.
High levels of cooperation and interaction.
Employment security.
Information sharing on productivity and costs.
Goal setting.
Gainsharing is most likely to succeed when organizations provide the right conditions. Among the conditions identified, the ones listed on this slide (and the following slide) are among the most common.

18. Conditions Necessary for Gainsharing to Succeed
Commitment of all involved parties to the process of change and improvement.
Performance standard and calculation that employees understand and consider fair and that is closely related to managerial objectives.
Employees who value working in groups.

19. 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.
A popular form of gainsharing is the Scanlon plan, developed in the 1930s by Joseph N. Scanlon, president of a union local at Empire Steel and Tin Plant in Mansfield, Ohio. The Scanlon plan gives employees a bonus if the ratio of labor costs to the sales value of production is below a set standard. In the example provided in Figure 12.3, the standard is a ratio of 20/100, or 20 percent, and the workers produced parts worth $1.2 million. To meet the standard, the labor costs should be less than 20 percent of $1.2 million, or $240,000. Since the actual labor costs were $210,000, the workers will get a gainsharing bonus based on the $30,000 difference between the $240,000 target and the actual cost.

20. Pay for Group Performance: Group Bonuses and Team Awards
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.
Similar to group bonuses, but more likely to use a broad range of performance measures:
Cost savings
Successful completion of a project
Meeting deadlines
Both types of incentives have the advantage that they encourage group or team members to cooperate so that they can achieve their goal. Depending on the reward system, competition among individuals may be replaced by competition among groups. The organization should carefully set the performance goals for these incentives so that concern for costs or sales does not obscure other objectives, such as quality, customer service, and ethical behavior.

21. Ask students: “What are some advantages and disadvantages of group bonuses?”
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.
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22. Figure 12.4: Types of Pay for Organizational Performance
Two important ways organizations measure their performance are in terms of their profits and their stock price. In a competitive marketplace, profits result when an organization is efficiently providing products that customers want at a price they are willing to pay. Stock is the owners’ investment in a corporation; when the stock price is rising, the value of that investment is growing. Rather than trying to figure out what performance measures will motivate employees to do the things that generate high profits and a rising stock price, many organizations offer incentive pay tied to those organizational performance measures. The expectation is that employees will focus on what is best for the organization.

23. Pay for Organizational Performance: Profit Sharing
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.
Profit sharing may encourage employees to think like owners.
Evidence is not clear whether profit sharing helps organizations perform better.
Given the limitations of profit sharing plans, one strategy is to use them as a component of a pay system that includes other kinds of pay more directly linked to individual behavior. This increases employees’ commitment to organizational goals while addressing concerns about fairness.

24. Considerations for Setting Up a Profit-Sharing Plan
Get supervisors on board with the plan.
Make sure employees understand how the plan works.
Identify behaviors and results that contribute to greater profits.
Make sure managers understand that they contribute to profit-sharing goals by encouraging their employees and keeping them focused on their goals.
This and the following slide present some ideas for setting up a profit-sharing plan that motivates employees.

25. Considerations for Setting Up a Profit-Sharing Plan
Consider linking rewards to the department’s or division’s performance, if profits can be assigned to the group.
Make rewards big enough to matter.
Time the profit-sharing payments for maximum effect.

26. Pay for Organizational Performance: Stock Ownership
Stock Options
ESOPs
Rights to buy a certain number of shares of stock at a specified price.
Traditionally, stock options have been granted to executives.
(ESOP) – 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.
While profit-sharing plans are intended to encourage employees to “think like owners,” a stock ownership plan actually makes employees part owners of the organization. Like profit sharing, employee ownership is intended as a way to encourage employees to focus on the success of the organization as a whole. Some companies are trying to push eligibility for options further down the organization’s structure.

27. Figure 12.5: Number of ESOPs
ESOPs are the most common form of employee ownership. Figure 12.5 shows the growth in the number of ESOPs in the United States. One reason for ESOPs’ popularity is that earnings of the trust holdings are exempt from income taxes. ESOPs raise a number of issues. They carry a significant risk for employees. By law, an ESOP must invest at least 51 percent of its assets in the company’s own stock (in contrast to other kinds of stock funds that hold a wide diversity of companies).
SOURCE: National Center for Employee Ownership, “A Statistical Profile of Employee Ownership,” NCEO website,
updated February 2012,

28. Test Your Knowledge
For each of the following jobs, identify the best type of incentive (e.g., individual, group, organizational). Be prepared to explain your answer.
Director of Marketing, Pepsi
Recruiter, Verizon
Cashier, CVS (drugstore)
Salesperson, Macy’s
Individual
Group
Organizational
Use this question as way to start discussion about the issues when applying incentive pay programs to different types of jobs. Depending on their rationale, there could be multiple correct answers. For each of the following jobs, identify the best type of incentive (e.g., individual, group, organizational) and explain why you chose it.
Director of Marketing, Pepsi - B or C; probably need to be a part of a team, so individual contribution could be measured by success of the marketing team, could receive portion of the proceeds attributed to increased market share by her team
Recruiter, Verizon- A or B; could be individual, although you’d need a good tracking system, would want as many good people as possible, could cause problems if it got too competitive
Cashier, CVS (drugstore) C – organizational because can’t really reward individually unless you were able to monitor customer service, performing the cashier job does not have tremendous variability so may want to reward staying with the company by promising the chance to share the organization’s profits
Salesperson, Macy’s; A or B– could definitely be individual because you can track purchases made by salesperson, want them to sell as much as possible

29. Balanced Scorecard
Balanced scorecard – a combination of performance measures directed toward the company’s long- and short-term goals and used as the basis for awarding incentive pay.
Four categories of a balanced scorecard include:
financial
customer
internal
learning and growth
Any form of incentive pay has advantages and disadvantages. Because of this, many organizations design a mix of pay programs. The aim is to balance the disadvantages of one type of incentive pay with the advantages of another type. One way of accomplishing this goal is to design a balanced scorecard – a combination of performance measures directed toward the company’s long- and short-term goals and used as the basis for awarding incentive pay.

30. Tellabs uses a balanced scorecard.
- Conducts quarterly meetings at which employees learn how their performance will be evaluated according to the scorecard.
- Makes this information available on the their intranet.

31. Table 12.2: Sample Balanced Scorecard for an Electric Cooperative
Table 12.2 shows the kinds of information that go into a balanced scorecard. The balanced scorecard combine the advantages of different incentive-pay plans and helps employees understand the organization’s goals. By communicating the balanced scorecard to employees, the organization shows employees information about what its goals are and what it expects employees to accomplish. In Table 12.2, for example, the organization indicates not only that the manager should meet the four performance objectives but also that it is especially concerned with the financial target, because half the incentive is based on this one target. This scorecard for an Electric Cooperative includes four performance measures:
Financial performance
Internal processes
Innovation and learning
Member service

32. Processes That Make Incentives Work
Participation in Decisions
Communication
Employee participation in pay-related decisions can be part of a general move toward employee empowerment.
Employee participation can contribute to the incentive plan’s success.
Communication demonstrates that the pay plan is fair.
When employees understand the incentive pay plan’s requirements, the plan is more likely to influence their behavior as desired.
Important when changing the pay plan.
Communication and employee participation can contribute to the belief that the organization’s pay structure is fair. The process by which the organization creates and administers incentive pay can help it use incentives to achieve the goal of motivating employees.

33. Incentive Pay for Executives
Short-Term Incentives
Long-Term Incentives
Bonuses based on ROI, year’s profits, or other measures related to the organization’s goals.
Actual payment of bonus may be delayed to gain tax advantages.
Include stock options and stock purchase plans.
Rationale is that executives will want to do what is best for the organization because that will cause the value of their stock to grow.
Because executives have a much stronger influence over the organization’s performance than other employees do, incentive pay for executives warrants special attention.

34. Table 12.3: Balanced Scorecard for Whirlpool Executives
The balanced scorecard approach is useful in designing executive pay. Whirlpool, for example, has used a balanced scorecard that combines measures of whether the organization is delivering value to shareholders, customers, and employees. These measures are listed in Table Rewarding achievement of a variety of goals in a balanced scorecard reduces the temptation to win bonuses by manipulating financial data.

35. 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 company’s performance even when dishonesty or clever shading of the truth offers the tempting potential for large earnings.
Executive positions demand individuals who maintain the highest ethical standards.

36. 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.
It is influential because the amount paid is linked to predefined behaviors or outcomes.

37. Summary
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.
Piecework rates pay employees according to the amount they produce. Standard hour plans pay workers extra for work done in less than a preset “standard time.” Merit pay links increases in wages or salaries to ratings on performance appraisals. Bonuses are similar to merit pay, because they are paid for meeting individual goals, but they are not rolled into base pay, and they usually are based on achieving a specific output, rather than subjective performance ratings. A sales commission is incentive pay calculated as a percentage of sales closed by a salesperson. Gainsharing programs, such as Scanlon plans, measure increases in productivity and distribute a portion of each gain to employees. Group bonuses reward the members of a group for attaining a specific goal, usually measured in terms of physical output. Team awards are more likely to use a broad range of performance measures, such as cost savings, successful completion of a project, or meeting a deadline. Profitsharing plans pay workers a percentage of the organization’s profits; these payments do not become part of the employees’ base salary. Stock ownership incentives may take the form of stock options or employee stock ownership plans.

38. Summary
Communication is especially important when the organization is changing its pay plan.
Because executives have such a strong influence over the organization’s performance, incentive pay for them receives special attention.
Performance measures should encourage behavior that is in the organization’s best interests, including ethical behavior.
Communicating with employees is important because it demonstrates that the pay plan is fair and helps them understand what is expected of them.. Executives need ethical standards that keep them from insider trading or deceptive practices designed to manipulate the organization’s stock price.

39. Summary
A balanced scorecard can be used as the basis for awarding incentive pay. It helps employees to understand and care about the organization’s goals.
Mix of pay programs is intended to balance disadvantages of one type of incentive with advantages of another type.