Human Resources Management 12e Gary Dessler

Human Resources Management 12e Gary Dessler
Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

WHERE WE ARE NOW… Incentives play an important role in any pay plan. The main purpose of this chapter is to explain how managers use performance-based incentives to motivate employees. After a brief overview of motivation theories, we’ll discuss incentives for individual employees, and then for managers and executives, salespeople, and professionals, as well as organizationwide incentive plans. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

LEARNING OUTCOMES Explain how you would apply five motivation theories in formulating an incentive plan. Discuss the main incentives for individual employees. Discuss the pros and cons of commissions versus straight pay incentives for salespeople. Describe the main incentives for managers and executives. Name and define the most popular organizationwide variable pay plans. Outline the steps in designing effective incentive plans. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

Motivation, Performance, and Pay
Human Resources Management 12e Gary Dessler Motivation, Performance, and Pay Incentives Financial rewards paid to workers whose production exceeds a predetermined standard. Frederick Taylor Popularized scientific management and the use of financial incentives in the late 1800s. Systematic soldiering Fair day’s work Linking Pay and Performance Understanding the motivational bases of incentive plans Frederick Taylor popularized using financial incentives—financial rewards paid to workers whose production exceeds some predetermined standard—in the late 1800s. Compensation experts argue that managers need to have a better understanding of the motivational bases of incentive plans in order for their plans to succeed. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

The Hierarchy of Needs Maslow’s Hierarchy of Needs: Physiological (food, water, warmth) Security (a secure income, knowing one has a job) Social (friendships and camaraderie) Self-esteem (respect) Self-actualization (becoming a whole person) Maslow’s prepotency process principle: People are motivated first to satisfy each lower-order need and then, in sequence, each of the higher-level needs. Abraham Maslow made what may be the most popular observation on what motivates people in proposing that people have a hierarchy of needs that they are motivated to satisfy. Maslow’s theory has many practical implications for managers using incentive programs. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

Herzberg’s Hygiene–Motivator Theory
Human Resources Management 12e Gary Dessler Herzberg’s Hygiene–Motivator Theory Hygienes (extrinsic job factors) Satisfy lower-level needs Inadequate working conditions, salary, and incentive pay can cause dissatisfaction and prevent satisfaction. Motivators (intrinsic job factors) Satisfy higher-level needs Job enrichment (challenging job, feedback, and recognition) addresses higher-level (achievement, self-actualization) needs. Premise: The best way to motivate someone is to organize the job so that doing it provides feedback and challenge that helps satisfy the person’s higher-level needs. Frederick Herzberg said the best way to motivate someone is to organize the job so that doing it provides the feedback and challenge that helps satisfy the person’s “higher-level” needs for things like accomplishment and recognition. Herzberg’s theory makes the point that relying exclusively on financial incentives is risky. The employer should also provide the recognition and challenging work that most people desire. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

Demotivators and Edward Deci
Human Resources Management 12e Gary Dessler Demotivators and Edward Deci Intrinsically motivated behaviors are motivated by the individual’s 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. Psychologist Edward Deci’s work highlights another potential downside to relying too heavily on extrinsic rewards: They may backfire. Deci found that extrinsic rewards could at times actually detract from the person’s intrinsic motivation. Managers should be cautious in devising incentive pay for highly motivated employees, lest they inadvertently demean and detract from the desire they have to do the job out of a sense of responsibility. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

Victor Vroom’s Expectancy Theory
Human Resources Management 12e Gary Dessler Victor Vroom’s Expectancy Theory Motivation is a function of: Expectancy: the belief that effort will lead to performance. Instrumentality: the connection between performance and the appropriate 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. Employee confidence building and training, accurate appraisals, and knowledge of workers’ desired rewards can increase employee motivation. Victor Vroom’s expectancy motivation theory posits that people will pursue rewards they desire when they believe that they are likely to be successful in obtaining the rewards. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

Behavior Modification / Reinforcement Theory
Human Resources Management 12e Gary Dessler Behavior Modification / Reinforcement Theory B. F. Skinner’s Principles 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 can be changed by providing properly scheduled rewards (or punishments). Managers apply Skinner’s principles by using behavior modification. Behavior modification means changing behavior through rewards or punishments that are contingent on performance. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

Incentive Pay Terminology
Human Resources Management 12e Gary Dessler Incentive Pay Terminology Pay-for-Performance Plan Ties employee’s pay to the employee’s performance Variable 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 Managers often use two terms synonymously with incentive plans. Traditionally, all incentive plans are pay-for-performance plans. They all tie employees’ pay to the employees’ performance. Variable pay is more specific: It is usually an incentive plan that ties a group or team’s pay to some measure of the firm’s (or the facility’s) overall profitability. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

Employee Incentives and the Law
Human Resources Management 12e Gary Dessler Employee Incentives and the Law FLSA Wage Calculations and Incentive Payments Bonuses included in overtime calculations: Those promised to newly hired employees Those provided for in union contracts or other agreements Those announced to induce employees to work more productively, steadily, rapidly, or efficiently or to induce them to remain with the firm Bonuses excluded from overtime calculations: Christmas and gift bonuses not based on hours worked. Bonuses so substantial that employees don’t consider them a part of their wages Purely discretionary bonuses in which the employer retains discretion over how much, if anything, to pay Managers must be aware of how incentive programs can affect how individuals must be properly compensated under the Fair Labor Standards Act (FLSA) Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

Types of Employee Incentive Plans
Human Resources Management 12e Gary Dessler Types of Employee Incentive Plans Individual Employee Incentive and Recognition Programs Sales Compensation Programs Organizationwide Incentive Programs Executive Incentive Compensation Programs Team/Group-based Variable Pay Programs Pay-for-Performance Plans Managers should seek to choose the incentive plan that best suits the work that an employee does. Various incentive plans focus on either individuals, groups or teams, or organizations. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

Individual Incentive Plans
Human Resources Management 12e Gary Dessler Individual Incentive Plans Piecework Plans The worker is paid a sum (“piece rate”) for each unit he or she produces. Straight piecework Standard hour plan Piecework is the oldest and still most popular individual incentive plan. Here the worker is paid a sum (called a piece rate) for each unit he or she produces. The standard hour plan is like the piece rate plan, except that, instead of getting a rate per piece, the worker gets a premium equal to the percent by which his or her performance exceeds the standard. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

Pros and Cons of Piecework
Human Resources Management 12e Gary Dessler Pros and Cons of Piecework Easily understandable, equitable, and powerful incentives Employee resistance to changes in standards or work processes affecting output Quality problems caused by an overriding output focus Possibility of violating minimum wage standards Employee dissatisfaction when incentives either cannot be earned or are withdrawn Piecework plans are understandable, appear equitable in principle, and can be powerful incentives, since rewards are proportionate to performance. However, employees may not respond positively to changes in output or their ability to earn incentives. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

Individual Incentive Plans (cont’d)
Human Resources Management 12e Gary Dessler Individual Incentive Plans (cont’d) Merit 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 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. Merit pay or a merit raise is a permanent salary increase the firm awards to an individual employee based on his or her individual performance. Merit pay advocates argue that awarding pay raises across the board (without regard to individual merit) may actually detract from performance, by showing employees they’ll be rewarded regardless of how they perform. The solution is not to throw out merit raises, but to design them to be more effective. Among other things, this means establishing effective appraisal procedures and ensuring that managers in fact tie merit pay awards to performance. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

TABLE 12–1 Merit Award Determination Matrix (an Example) Company Performance (Weight = 0.50) Employee Performance Rating (Weight = .50) Outstanding Excellent Good Marginal Unacceptable 1.00 0.90 0.80 0.70 0.00 0.60 0.50 — To determine the dollar value of each employee’s incentive award: (1) multiply the employee’s annual, straight-time wage or salary as of June 30 times his or her maximum incentive award and (2) multiply the resultant product by the appropriate percentage figure from this table. Example: if an employee had an annual salary of $20,000 on June 30 and a maximum incentive award of 7% and if her performance and the organization’s performance were both “excellent,” the employee’s award would be $1,120 ($20,000 × 0.07 × 0.80 = $1,120). Table 12-1 presents a sample matrix for merit award determination. In this example, the company’s performance is measured by, say, rate of return, or sales divided by payroll costs. Company performance and the employee’s performance (using his or her performance appraisal) receive equal weight in computing the merit pay. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

Incentives for Professional Employees
Human Resources Management 12e Gary Dessler Incentives for Professional Employees Professional 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 Incentives Bonuses, stock options and grants, profit sharing Better vacations, more flexible work hours Improved pension plans Equipment for home offices Professional employees are those whose work involves the application of learned knowledge to the solution of the employer’s problems. They include lawyers, doctors, economists, and engineers. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

Nonfinancial and Recognition Awards
Human Resources Management 12e Gary Dessler Nonfinancial and Recognition Awards Effects 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 Recognition Social recognition Performance-based recognition Performance feedback Recognition programs are one of several types of nonfinancial incentives. The term recognition program usually refers to formal programs, such as employee-of-the-month programs. Social recognition program generally refers to informal manager-employee exchanges such as praise, approval, or expressions of appreciation for a job well done. Performance feedback means providing quantitative or qualitative information on task performance for the purpose of changing or maintaining performance; showing workers a graph of how their performance is trending is an example. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

FIGURE 12–1 Social 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 Figure 12-1 presents a short list of social recognition (such as compliments) actions that can be used as positive reinforcements on a day-to-day basis. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

Online and IT-Supported Awards
Human Resources Management 12e Gary Dessler Online and IT-Supported Awards Information Technology and Incentives Enterprise incentive management (EIM) Software that automates planning, calculation, modeling, and management of incentive compensation plans Enabling companies to align their employees with corporate strategy and goals Online Award Programs Programs offered by online incentives firms that improve and expedite the awards process Broader range of awards More immediate rewards Many firms—including Levi Strauss & Co., Barnes & Noble, Citibank, and Wal-Mart—now join with online awards firms to expedite or outsource the entire administrative process of their incentive programs. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

Incentives for Salespeople
Human Resources Management 12e Gary Dessler Incentives for Salespeople Salary 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 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 external factors rather than to salesperson’s performance Can increase turnover of salespeople Sales compensation plans typically rely heavily on incentives in the form of sales commissions. However, some salespeople get straight salaries, and most receive a combination of salary and commissions. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

Incentives for Salespeople (cont’d)
Human Resources Management 12e Gary Dessler Incentives for Salespeople (cont’d) Combination 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. Most companies pay salespeople a combination of salary and commissions, usually with a sizable salary component. An incentive mix of about 70% base salary / 30% incentive seems typical; this cushions the salesperson’s downside risk (of earning nothing), while limiting the risk that the commissions could get out of hand from the firm’s point of view. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

Specialized Commission Plans
Human Resources Management 12e Gary Dessler Specialized Commission Plans Commission-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 Plan Pay is mostly based on commissions. Small bonuses (“spiffs”) are paid for directed activities like selling add-ons or slow-moving items. In a “commission-plus-drawing-account” plan, the salesperson is paid based on commissions. However, he or she can draw on future earnings to get through low sales periods. Similarly, in the “commission-plus-bonus” plan, the firm pays its salespeople mostly based on commissions. However, they also get a small bonus for directed activities like selling slow-moving items. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

Maximizing Sales Force Results: Setting Sales Quotas
Human Resources Management 12e Gary Dessler Maximizing Sales Force Results: Setting Sales Quotas Should quotas be locked in for a period of time? Have quotas been communicated to the sales force within one month of the start of the period? Does the sales force know exactly how its quotas are set? Do you combine bottom-up information (like account forecasts) with top-down requirements (like the company business plan)? Do 60% to 70% of the sales force generally hit their quota? Do high performers hit their targets consistently? Do low performers show improvement over time? Are quotas stable through the performance period? Are returns and debookings reasonably low? Has your firm generally avoided compensation-related lawsuits? Is 10% of the sales force achieving higher performance than previously? Is 5% to 10% of the sales force achieving below-quota performance and receiving coaching? In setting sales quotas and commission rates, the employer wants to motivate sales activity but avoid having commissions become excessive. Unfortunately, there is a tendency to set commission rates informally, without considering how much each sale must contribute to covering expenses. Employers often discover that they barely break even on a sale once all commissions are paid. Setting effective quotas is an art. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

Incentives for Managers and Executives
Human Resources Management 12e Gary Dessler Incentives for Managers and Executives Executive Total Reward Package Base salary (cash) Short-term incentives (bonuses) Long-term incentives (e.g., stock options) Sarbanes-Oxley Act of 2002 Makes executives and the board of directors personally liable for violating their fiduciary responsibilities to their shareholders. Requires the CEO and CFO to repay bonuses, incentives, or equity-based compensation received following issuance of a financial statement that the firm must restate. Managers play a crucial role in divisional and company-wide profitability, and most firms therefore put considerable thought into how to reward them. Most managers get short-term and long-term incentives in addition to salary. The Sarbanes-Oxley Act of 2002 affects how employers formulate their executive incentive programs. Congress passed Sarbanes-Oxley to inject a higher level of responsibility into executives’ and board members’ decisions. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

Short- and Long-Term Incentives
Human Resources Management 12e Gary Dessler Short- and Long-Term Incentives Short-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 As noted, most firms have annual bonus plans aimed at motivating managers’ short-term performance. Short-term bonuses can easily result in plus or minus adjustments of 25% or more to total pay. Three factors influence one’s bonus: eligibility, fund size, and individual performance. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

TABLE 12–2 Multiplier Approach to Determining Annual Bonus Company’s Performance (Based on Sales Targets, Weight = 0.50) Individual Performance (Based on Appraisal, Weight = .50) Excellent Good Fair Poor 1.00 0.90 0.80 0.70 0.60 0.50 0.00 Note: To determine the dollar amount of a manager’s award, multiply the maximum possible (target) bonus by the appropriate factor in the matrix. Use the multiplier method to make a bonus a product of both individual and corporate performance. As Table 12-2 illustrates, multiply the target bonus by 1.00, .80, or zero (if the firm’s performance is excellent, and the person’s performance is excellent, good, fair, or poor). Here a manager whose own performance is poor does not even receive the company-based bonus. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

Creating an Executive Compensation Plan
Human Resources Management 12e Gary Dessler Creating an Executive Compensation Plan Define the strategic context for the executive compensation program. Shape each component of the package to focus the manager on achieving the firm’s strategic goals. Check the executive compensation plan for compliance with all legal and regulatory requirements and for tax effectiveness. Install a process for reviewing and evaluating the executive compensation plan whenever a major business change occurs. Employers should design long-term incentives that support their firm’s strategy. The executives’ total reward package—base salary, short- and long-term incentives, and perks—must align with each other and with the goal of achieving the company’s strategic aims. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

Team/Group Incentive Plans
Human Resources Management 12e Gary Dessler Team/Group Incentive Plans Team (or Group) Incentive Plans Incentives are based on team’s performance. How 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. Firms increasingly rely on teams to manage their work. They therefore need incentive plans that encourage teamwork and focus team members’ attention on performance. Team (or group) incentive plans pay incentives to the team based on the team’s performance. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

Pros and Cons of Team Incentives
Human Resources Management 12e Gary Dessler Pros and Cons of Team Incentives Pros Reinforces team planning and problem solving Helps ensure collaboration Encourages a sense of cooperation Encourages rapid training of new members Cons Pay is not proportionate to an individual’s effort Rewards “free riders” Team incentives often make sense. They reinforce team planning and problem solving, and can help ensure collaboration. In Asia in general (and Japan in particular), the tendency is to reward the group—to reduce jealousy, to make group members indebted to one another, and to encourage a sense of cooperation. Team incentives also facilitate training, since each member has an interest in getting new members trained as fast as possible. The main disadvantage is that a good worker’s pay may not be proportionate to his or her personal efforts. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

Organizationwide Incentive Plans
Human Resources Management 12e Gary Dessler Organizationwide Incentive Plans Profit-Sharing Plans Current profit-sharing (cash) plans Employees receive cash shares of the firm’s profits at regular intervals. Deferred profit-sharing plans A predetermined portion of profits based on the employee’s contribution to the firm’s profits is placed in each employee’s retirement account under a trustee’s supervision. Employees’ income taxes on the distributions are deferred, often until the employee retires. Organizationwide incentive plans are plans in which all or most employees can participate, and which generally tie the reward to some measure of company-wide performance. Profit-sharing plans are plans in which all or most employees receive a share of the firm’s annual profits. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

Gainsharing Plans Philosophy of cooperation Involvement system Identity Scanlon Plan Components Competence Benefits sharing formula The Scanlon plan, an incentive plan developed in 1937 by Joseph Scanlon is still popular today. The Scanlon gainsharing formula divides payroll expenses by total sales (or, sometimes, by total sales plus increases in inventory). It fosters employee commitment by synchronizing the firm’s goals with those of its employees—in other words, to ensure that by pursuing his or her goals, the worker pursues the employer’s goals as well. In addition to the Scanlon plan, other popular gainsharing plans include the Lincoln, Rucker, and Improshare plans. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

Implementing a Gainsharing Plan
Human Resources Management 12e Gary Dessler Implementing a Gainsharing Plan Establish general plan objectives. Choose specific performance measures. Decide on a funding formula. Decide on a method for dividing and distributing the employees’ share of the gains. Choose the form of payment. Decide how often to pay bonuses. Develop the involvement system. Implement the plan. This slide lists the eight basic steps in implementing a gainsharing plan. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

At-Risk Variable Pay Plans
Human Resources Management 12e Gary Dessler At-Risk Variable Pay Plans 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. At-risk variable pay plans (sometimes called risk-sharing plans) are plans that put some portion of the employee’s weekly, monthly, or yearly pay at risk. If employees meet or exceed their goals, they earn back not only the portion of their pay that was at risk, but also an incentive. If they fail to meet their goals, they forego some of the pay they would normally have earned. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

Organizationwide Incentive Plans (cont’d)
Human Resources Management 12e Gary Dessler Organizationwide Incentive Plans (cont’d) Employee Stock Ownership Plan (ESOP) A firm annually contributes its own stock—or cash (with a limit of 15% of compensation) to be used to purchase the stock—to a trust established for the employees. The trust holds the stock in individual employee accounts and distributes it to employees upon separation from the firm if the employee has worked long enough to earn ownership of the stock. Employee stock ownership plans (ESOPs) are company-wide plans in which the employer contributes shares of its own stock (or cash to be used to purchase such stock) to a trust established to purchase shares of the firm’s stock for employees. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

Advantages of ESOPs For the Company Can take a tax deduction equal to the fair market value of the shares transferred to the ESOP trustee Gets an income tax deduction for dividends paid on ESOP-owned stock Can borrow against ESOP in trust and then repay the loan in pretax rather than after-tax dollars For the Employees Develop a sense of ownership in and commitment to the firm. Do not pay taxes on ESOP earnings until they receive a distribution. For the Shareholders of Closely-Held Corporations Can place assets into an ESOP trust which will allow them to purchase other marketable securities to diversify their holdings ESOPs offer tax deferral and other advantages to participants. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

Implementing an Effective Incentive Plan
Human Resources Management 12e Gary Dessler Implementing an Effective Incentive Plan Ask: Does it make sense to use an incentive here? Link the incentive with your strategy. Make sure the program is motivational. Set complete standards. Be scientific in analyzing the effects of the plan. Because so many incentive plans fail, designing effective incentive programs is crucial. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

Why Incentive Plans Fail
Human Resources Management 12e Gary Dessler Why Incentive Plans Fail Performance pay can’t replace good management. You get what you pay for. “Pay is not a motivator.” Rewards punish. Rewards rupture relationships. Rewards can have unintended consequences. Rewards may undermine responsiveness. Rewards undermine intrinsic motivation. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

TABLE 12–3 Express Auto Compensation System Express Auto Team Responsibility of Team Current Compensation Method 1. Sales force Persuade buyer to purchase a car. Very small salary (minimum wage) with commissions. Commission rate increases with every 20 cars sold per month. 2. Finance office Help close the sale; persuade customer to use company finance plan. Salary, plus bonus for each $10,000 financed with the company 3. Detailing Inspect cars delivered from factory, clean, and make minor adjustments. Piecework paid on the number of cars detailed per day. 4. Mechanics Provide factory warranty service, maintenance, and repair. Small hourly wage, plus bonus based on (1) number of cars completed per day and (2) finishing each car faster than the standard estimated time to repair 5. Receptionists/ phone service personnel Primary liaison between customer and sales force, finance, and mechanics Minimum wage Table 12-3 describes Express Auto’s current compensation system. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

K E Y T E R M S financial incentives fair day’s work scientific management movement expectancy instrumentality valence behavior modification variable pay piecework straight piecework standard hour plan merit pay (merit raise) annual bonus stock option golden parachutes team (or group) incentive plan organizationwide incentive plans profit-sharing plan Scanlon plan gainsharing plan at-risk variable pay plans employee stock ownership plan (ESOP) Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Printed in the United States of America. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall

Human Resources Management 12e Gary Dessler

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