Incentive Plans

Pay influences employees through Reinforcement theory Expectancy theory

Reinforcement Theory Behavior that is rewarded will be repeated.

Expectancy Theory Motivational Force = E * I * V Expectancy If I attempt this level of performance, am I likely to succeed? Motivational Force = E * I * V Instrumentality If I achieve this level of performance, am I likely to be rewarded? Valence What value do I place on the rewards available to me?

Incentive Programs Differ by Fitting program to situation depends on payment method frequency of payout ways of measuring performance choice of which employees are covered Fitting program to situation depends on organizational structure management style type of work

Types of Plans Merit Pay Individual Incentives Profit Sharing Ownership Gainsharing Group Incentives Alternative Reward Systems

Merit Pay Programs link performance appraisal ratings to annual pay increases focus: identifying individual differences in performance better performance results in higher reward, contingent on position in the range (compra-ratio)

Criticisms of Merit Pay merit pay systems focusing on individual performance discourage teamwork if performance is not measured fairly and accurately, the whole process will be contaminated apparent differences between people arise almost entirely from the system that they work in, not the people themselves coworkers, job materials, customers, management, supervision

Individual Incentives reward individual performance payments are NOT rolled into base pay performance is usually measured as a physical output rather than subjective ratings

Individual Incentives are rare because most jobs have no physical output measure administrative problems of setting and maintaining acceptable standards plans may be inconsistent with other goals (e.g. acquiring multiple skills, proactive problem solving) people may focus on what they get paid for and nothing else plans may reward output at the expense of quality

Profit Sharing payments are based on a measure of organizational performance (profits) payments do NOT become a part of base pay Advantage: may encourage workers to think more like owners Drawbacks: workers may perceive their performance has little to do with profit deferred nature of payouts

Ownership encourages employees to focus on the success of the organization as a whole but may not result in motivation for high individual performance gains not realized until stock sold (employees leaving company?) Methods: stock options ESOPs (employee stock ownership plans)

Gainsharing sharing productivity gains with employees differs from profit sharing in that instead of using an organization-level performance measure (profits) plans measure group or plant performance better for motivation Examples: Scanlon plan, Rucker plan, Improshare goes beyond money -- participation in problem solving = key

Conditions for effective Gainsharing management commitment need to change or a process of continuous improvement management acceptance & encouragement of employee input high levels of cooperation and interaction employment security information sharing on all productivity and costs goal setting commitment of all involved parties to change and improvement agreement on a performance standard calculation that is understandable, perceived as fair, closely related to managerial objectives

Group Incentives Focus = smaller work groups While gainsharing typically measures physical output, group incentives tend to measure performance in terms of a broader array such as cost savings successful completion of product design meeting deadlines Drawback: competition among teams

Alternative Reward Systems alternatives to cash -- travel merchandise earned time off symbolic awards plaques, coffee cups, bananas

Incentive Plans

Conditions for Effective Incentive Plans Plan is clearly communicated. Plan is understood by employees and management. Bonuses are easy to calculate. Employees participate in administrating the plan. Employees believe they are being treated fairly. Employees believe they can trust the company and that they have security. Bonuses are awarded as soon as possible after the desired performance.

Pay for Performance Plans

Conditions for Effective Performance-Based Pay Systems Pay-performance linkage must be perceived by employees Pay is valued by employees Employees must perceive that effort and ability lead to rewarded behavior Performance measurement must be fair Employees must trust the organization Pay program must be understood Employees must be able to control their performance Performance appraisal system cannot be biased There must be enough money to fund incentives A valid job evaluation must have been conducted