1. Pay for Performance and Financial Incentives
Part 4 | Compensation
Chapter 12
Pay for Performance and Financial Incentives

2. After studying this chapter, you should be able to:
Discuss the main incentives for individual employees.
Discuss the pros and cons of incentives for salespeople.
Name and define the most popular organizationwide variable pay plans.
Describe the main incentives for managers and executives.
Outline the steps in developing effective incentive plans.

3. 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

4. Employee Incentive Plans
Individual Employee Incentive and Recognition Programs
Sales Compensation Programs
Pay-for-Performance Plans
Team/Group-based Variable Pay Programs
Organizationwide Incentive Programs
Executive Incentive Compensation Programs

5. Incentives for Salespeople
Salary Plan
Straight salaries
Best for: prospecting (finding new clients), account servicing, training customer’s salesforce, 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.

6. 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.

7. Specialized Combination 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 are paid for directed activities like selling slow-moving items.

8. 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.

9. Team/Group Incentive Plans (cont’d)
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”

10. Organizationwide Incentive Plans
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.

11. Philosophy of Cooperation Sharing of Benefits Formula
Gainsharing Plans
Philosophy of Cooperation
Involvement System
Identity
Scanlon Plan
Competence
Sharing of Benefits Formula

12. 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 forgo some of the pay they would normally have earned.

13. Incentives for Managers and Executives
Short-Term Incentives: The Annual Bonus
Plans that are designed to motivate short-term performance of managers and are tied to company profitability.
Issues in Awarding Bonuses
Eligibility basis
Fund size basis
Individual awards

14. K E Y T E R M S financial incentives fair day’s work
scientific management
expectancy
instrumentality
valence
behavior modification
variable pay
piecework
straight piecework
standard hour plan
merit pay (merit raise)
team or group incentive plan
organization wide incentive plans
profit-sharing plan
employee stock ownership plan (ESOP)
Scanlon plan
gainsharing plan
at-risk variable pay plans
annual bonus
stock option
golden parachutes