LEPAK / GOWAN MGT 430 – Spring 2016 Class 14 - Chapter 11 Pay Incentives and Rewards

LEPAK / GOWAN The Ultimate Purpose of Incentives TO MOTIVATE PEOPLE TO WORK HARDER WORK SMARTER REACH PERSONAL AND PROFESSIONAL GOALS MORE QUICKLY GENERATE COMPETITIVE ADVANTAGES THROUGH ITS PEOPLE

LEPAK / GOWAN Two Types of Human Motivation Intrinsic Motivation refers to motivation that comes from inside an individual rather than from any external or outside rewards, such as money or grades. The motivation comes from the pleasure one gets from the task itself or from the sense of satisfaction in completing or even working on a task.

LEPAK / GOWAN Two Types of Human Motivation Extrinsic motivation refers to motivation that comes from outside an individual. The motivating factors are external, or outside, rewards such as money or grades. These rewards provide satisfaction and pleasure that the task itself may not provide. An extrinsically motivated person will work on a task even when they have little interest in it because of the anticipated satisfaction they will get from some reward.

LEPAK / GOWAN HRM IMPACT ON MOTIVATION Which motivation concept works best for you? Intrinsic or Extrinsic.

LEPAK / GOWAN HRM Impact on Intrinsic Motivation in the Workplace Providing an environment where employees are motivated by intrinsic factors, e.g. ??? Articulating the purpose of work and its ROI. Providing for the employee-identified satisfiers Belonging to a group of like minded colleagues Satisfaction of accomplishment or fear of failure Growth and/or development

LEPAK / GOWAN HRM Impact on Extrinsic Motivation in the Workplace Extrinsic Motivators Salary & benefits Health care coverage Fear of the boss Others Fear of competition

LEPAK / GOWAN SOME MORE CONCEPTS OF MOTIVATION Reinforcement – If people experience positive consequences, they are likely to repeat the actions Goal Setting – Focusing the efforts of employees when the goals are specific, challenging, and attainable Expectancy – Employees make decisions regarding how to act at work based on which behaviors they believe will lead to their most valued work-related rewards and outcomes Agency – Managers motivate their employees by aligning their interests with the interest of other stakeholders

LEPAK / GOWAN Types of Incentive Plans Individual (1) Merit Pay Programs — employees receive a compensation adjustment based on results of their performance evaluation – Permanently raises base salary and company’s costs – Rewards employees for past performance – Might appear insignificant when spread out over 52 paychecks (2) Lump-Sum Merit Bonuses — one-time payment for performance not rolled into employees’ salaries

LEPAK / GOWAN Types of Incentive Plans: Individual (cont.) Piecework Incentive Plans — reward employees for future performance Straight piecework plan —receive a certain rate of pay for each unit produced Differential piecework plan — the pay received per unit produced changes at certain levels of output Employees may focus only on aspects of job that get rewarded Some tasks are difficult to measure Standard Hour Plan - pay rate set based on expected amount of time an employee needs to complete task If employees exceed minimum, they will receive a premium for higher level of work

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More Types of Incentive Plans Individual Awards - used to encourage employees to work toward specific outcomes – SPOT AWARDS - Manager gives awards “on the spot” when they see certain behaviors exhibited by employees – Can be cash or non-cash (e.g., merchandise, gift certificates, paid time off) – Recognition programs like employee-of-the-month can also be used – Can become an expectation, thus eroding its purpose

LEPAK / GOWAN Yet More Types of Incentive Plans Individual Sales Incentive Plans – Straight commission plan — pays an employee a percentage of the total sales they generate – Straight salary plans — employees receive a set compensation, regardless of their level of sales (employees may not be as motivated to sell as much as they can) – Mixed salary/commission plan —employees receive a lower base salary (50%) and the remaining is commission based – Assumes that money motivates!

LEPAK / GOWAN Commission Plan Issues Scenario 1: Selling last year’s models = 15% commission Selling this year’s models – 7.5% commission What is in the client’s/customer’s best interest? What’s in my best interest

LEPAK / GOWAN Group/Organizational Incentives Team Incentive Plans Gain Sharing Plans Profit Sharing Plans

LEPAK / GOWAN TEAM INCENTIVE PLAN All members are rewarded when team reaches or exceeds its target objectives: Team results are based upon individual jobs being interdependent upon one another and collaboration and cooperation are required. Downside = Potential for “free riders” who do not work as hard as others

LEPAK / GOWAN GAIN SHARING PLAN A system of management used by a business to increase profitability by motivating employees to improve their performance through involvement and participation. As their performance improves, employees share financially in the gain (improvement). Gainsharing’s goal is to improve performance and eliminate waste (time, energy, and materials) by encouraging employees to work smarter as a team rather than just working harder.

LEPAK / GOWAN Profit Sharing Plans Provide direct or indirect payments to employees that depend on company's profitability. It is in addition to employees' regular salary and bonuses. In publically traded companies these plans typically amount to allocation of shares to employees. Based on predetermined economic rules that define the split of gains between the company as a principal and the employee as an agent.

LEPAK / GOWAN STOCK OPTION PLANS Provides employees the right to purchase shares of their company stock at some established price and held for period of time Example = Employee is permitted to buy stock at $10 held in trust for three years. If the stock rises to $30 during the 3-year period, employee can sell shares for a gain of $20 per share

LEPAK / GOWAN EMPLOYEE STOCK OWNERSHIP PLANS (ESOP) A company contributes shares of its stock to a trust set up for its employees No taxes until distribution Higher degree of company involvement by employees Lack of knowledge by employees about how the stock market works Poor linkage between an employee’s work efforts and the price of the stock

LEPAK / GOWAN STOCK OPTION PLAN Based upon 1,000 shares – Exercisable after 3 years Price per shareValue 2016 $10$10, $12$12, $15$15, $20$20, $16$16, $8$ 8, $11$11, $28$28,000

LEPAK / GOWAN Executive Compensation: Pay and Incentives Executive compensation has similar components as other compensation packages but the levels and percentages that each make up of total compensation are more variable Common components are: – Base Salary – Short and long-term incentives – Benefits – Services

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HRM CHALLENGES TO EXECUTIVE TO EMPLPOYEE PAY RATIO 1.Why has this ratio increased so dramatically; 2.What should HRM do about it? 3.Is this situation unique to US corporations?

LEPAK / GOWAN HRM Challenge Making Incentive Plans Effective Link plan to firm’s strategic objectives Have clear standards — predetermined levels of performance Sample the full performance domain —all aspects of the job Be attainable Be easy to understand Provide meaningful incentives Evaluate regularly

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PRACTICAL HRM COMPENSATION EXERCISES Please confer with your teammates to discuss the following scenarios Teams 1 & 2- Scenario 1 Teams 3 & 4- Scenario 2 Teams 5 & 6- Scenario 3

LEPAK / GOWAN Scenario 1 Your company employs the following non-exempt people who are earning the following wages: $9.75/hour= 4 employees – 6 months seniority $11.50/hour= 6 employees – 12 months seniority $13.00/hour= 5 employees – 18 months seniority $14.75/hour= 5 employees – 24 months seniority Recent legislation has directed that the minimum wage in your state be set at $15.00 per hour effective on June 1, a.What are the financial ramifications of this legislation to your payroll costs b.Raising the minimum wage from $9.75/hour to $15.00 /hour represents a 35% increase in wages. What do you recommend the company do for the three higher classifications. c.What HRM issues are involved in this scenario

LEPAK / GOWAN Scenario 2 1.The sales manager of your company earns a straight salary of $150,000 per year with no commission opportunity 2.His/her three top sales people each earn a base salary of $100,000 + commissions on all sales. Salesman A earned $35,000 in commissions last year Salesman B earned $75,000 in commissions Salesman C earned $125,000 in commissions 3. What are some of the HRM issues involved in this scenario

LEPAK / GOWAN Scenario 3 In your corporation, the average salary of all of the employees is $75,000 per year. The top executive officers (5 of them) of your corporation earn on average $2,500,000 per year in base pay plus bonus plus stock options. From 2008 to 2012, the value of your company’s stock has risen an average of 5% per year. Since 2012, it has not risen at all and, in 2014, it dropped 2% in value. 1.Please list at least 5 issues involved in this scenario? 2.Why are they important?