1. Chapter 11: Incentives and Rewards

2. Objectives After reading this chapter, you should be able to:
Explain the theories behind how incentive plans motivate employees.
Compare and contrast the different types of individual incentives.
Discuss the major team- and group-based incentive plans.
Compare and contrast the relative merits of the different types of group-level incentive plans.
Explain how to design an effective incentive plan.
Describe how organizational demands affect a firm’s incentive plans.
Explain how environmental factors affect a firm’s incentive plans.

4. Motivation Theories
Reinforcement theory — people are likely to repeat actions that result in positive consequences
Goal setting theory – goals serve as a motivator to focus the efforts of employees when the goals are:
Specific
Challenging
Attainable

5. Motivation Theories (continued)
Expectancy theory — employees make decisions regarding how to act at work based on which behaviors they believe will lead to their most valued rewards and outcomes.
Expectancy — the degree to which employees believe they will be able to achieve the objective
Instrumentality — employees believe that achieving the objective will be rewarded
Valence — the degree of value employees place on different rewards
Agency theory — managers motivate their employees to act in certain ways by aligning their interests with the firm’s other stakeholders (e.g., the owners)

7. 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

9. Types of Incentive Plans Individual (continued)
(3) 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
(4) 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

11. Types of Incentive Plans Individual (continued)
(5) Awards - used to encourage employees to work toward specific outcomes
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

12. Types of Incentive Plans Individual (continued)
(6) 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

13. Group/Organizational Incentives
(1) Team Incentive Plans - All members are rewarded when team reaches or exceeds its target objectives
Potential for “free riders” who do not work as hard as others
(2) Gain Sharing Plans — designed to help increase a company’s efficiency by rewarding teams that exceed productivity levels with a share of the gains realized

14. Group/Organizational Incentives (continued)
(2) Gain Sharing Plans (continued)
Scanlon plan — employees make suggestions for how to improve a firm’s productivity and the gains of that efficiency are shared with employees
Improshare plan — based on number of hours a firm expects to reach a level of output. If employees reach target before expected, they share in reward

15. Group/Organizational Incentives (continued)
(3) Profit Sharing Plans - company profits are shared with employees
Encourages collaboration and teamwork
Paid only when a company is doing well
May take a while for employees’ efforts to translate into profits

16. Group/Organizational Incentives (continued)
(4) Ownership Plans
Stock option plans — provides employees the right to purchase shares of their company stock at some established price for period of time
Broad-based stock option — plans that apply widely to a firm’s employees
Employee stock ownership plan (ESOP) —company contributes shares of its stock to a trust set up for its employees
Leveraged ESOP — the trust borrows against the company’s future earnings and as debt is repaid, employees receive shares of stock from trust

17. Group/Organizational Incentives (continued)
(5) Mixed-level plans — multiple incentives are used simultaneously.
Goal is to maximize the benefits of each plan and minimize the downsides of each

18. 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

20. 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

23. Incentives and Rewards in Practice: Organizational Demands
Strategy
What is rewarded
Which incentive plans are used
Company characteristics
Feasibility of different incentive plans
Impact of incentives on employees

24. Incentives and Rewards in Practice: Organizational Demands (continued)
Culture
Incentive plans managers choose
Employees’ acceptance of incentive plans
Employee concerns
Fairness of incentive plan standards
Likelihood of receiving incentives
Acceptability of incentive payouts

25. Incentives and Rewards in Practice: Environmental Influences
Labor market
Using incentives to increase diversity
Desirability of different rewards
Technology
How incentives are managed
Incentive plans for a virtual workforce

26. Incentives and Rewards in Practice: Environmental Influences (continued)
Globalization
What is rewarded
Acceptability of incentive plans
Ethics
Ethical employee behavior
How employees and communities view executive incentive plans

27. Performance Management in Practice: Regulatory Issues
Bias and Discrimination
Stock Option Backdating

28. Learning Exercise 1