Copyright © 2015 Pearson Education, Inc.

Copyright © 2015 Pearson Education, Inc.
12 Benefits and Services Chapter 11 focused on developing the total pay plan and on salaries and wages. Incentives are important components in any pay plan. In Chapter 13 we’ll turn to financial and nonfinancial benefits and services, which comprise the third component of employee compensation packages. The main purpose of this chapter is to explain how managers use incentives to motivate employees. The main topics we’ll discuss are money’s role in motivation, individual employee incentive and recognition programs, incentives for salespeople, incentives for managers and executives, and team and organization-wide incentive plans. There is tension between the concept of providing employees with a secure, stable income, and the idea of linking pay directly to performance. Some feel pay for performance allows employees the ability to be entrepreneurial and take appropriate risks for the company. Improved employee performance must be linked to improved organizational performance if incentive pay is to be more than just another labor cost. Copyright © 2015 Pearson Education, Inc.

Learning Objectives Explain how you would apply four motivation theories in formulating an incentive plan. Discuss the main incentives for individual employees. Discuss the pros and cons of commissions versus straight pay for salespeople. Describe the main incentives for managers and executives. Name and describe the most popular organization-wide incentive plans. After studying this chapter, you will be able to: 1. Explain how you would apply four motivation theories in formulating an incentive plan. 2. Discuss the main incentives for individual employees. 3. Discuss the pros and cons of commissions versus straight pay for salespeople. 4. Describe the main incentives for managers and executives. 5. Name and describe the most popular organization-wide incentive plans. Copyright © 2015 Pearson Education, Inc.

Explain how you would apply four motivation theories in formulating an incentive plan. What is the motivation behind incentive plans? Let’s take a look at this objective. Copyright © 2015 Pearson Education, Inc.

Money and Motivation Strategy Performance Incentive Pay Frederick Taylor was an American mechanical engineer who sought to improve industrial efficiencies. He made three major contributions in the late 1800s. First he defined a fair’s day work using standards of output. Second, he is known as the father of the scientific management approach. This approach emphasized improvement of work methods. Finally, he recognized the use of financial incentives for those whose output exceeded standards. Today, business is characterized by consideration of compensation, shareholder value, and turbulence. The three factors have produced a renaissance for financial incentive/pay-for-performance plans. 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 unit’s) overall profitability; profit-sharing plans (discussed later) are one example. However, confusing as it may be, some experts use the term variable pay to include incentive plans for individual employees. Copyright © 2015 Pearson Education, Inc.

Motivation and Incentives Copyright © 2015 Pearson Education, Inc.
Herzberg’s Two-Factory Theory Deci and demotivators Hygiene Motivators Motivators and Frederick Herzberg – Hygiene-motivator theory divides needs into two factors. Hygiene factors include such things as working conditions, salary, and incentives. Motivators include those factors that make the job more intrinsically motivating, like challenge, feedback, and recognition. He further claimed that the absence of hygiene factors would not foster a motivated individual. However, once hygiene factors had been attended to, the presence of motivator factors would create a motivated employee. Edward Deci found that extrinsic rewards could, at times, actually detract from an employee who already possesses a great deal of intrinsic motivation. There are other reasons for incentive plans’ often-dismal results. For example, many employers ignore the fact that incentives that may motivate some people won’t motivate others. Compensation experts therefore argue that managers should understand the motivational bases of incentive plans. Copyright © 2015 Pearson Education, Inc.

Expectancy Theory, Victor Vroom Expectancy theory suggests that a person’s motivation to exert some level of effort is a function of three things. First is the person’s expectancy (in terms of probability) that his or her effort will lead to performance. Second is the instrumentality, or the individual's perceived connection (if any) between successful performance and actually obtaining the rewards. Third, valence, represents the perceived value the person attaches to the reward. Copyright © 2015 Pearson Education, Inc.

Behavior modification Incentive pay terminology Employee incentives and the law Behavior Modification/Reinforcement and B. F. Skinner – Psychologist B.F. Skinner proposed that to understand behavior, one must understand the consequences of that behavior. Behavior modification means changing behavior through rewards or punishments that are contingent upon performance. Traditionally, all incentive plans are pay-for-performance plans. Variable pay is usually an incentive plan that ties pay to some measure of the firm’s overall profitability. However, confusing as it may be, some experts have used the term “variable pay” to include incentive plans for individual employees. The employer must comply with the overtime provisions of the Fair Labor Standards Act (FLSA) when designing and administering its incentive plans. Certain bonuses are excludable from overtime pay calculations. However, many other types of incentive pay must be included. Copyright © 2015 Pearson Education, Inc.

Review Money and motivation Motivation theories Incentives Terminology The law For this learning objective, we have discussed the relationship between money and motivation. In addition, we covered various theories of motivation including: Herzberg’s Two-Factor Theory De-motivators Expectancy Theory Behavior modification Finally, we touched on the terminology used for incentive pay and the relationship of employee incentives to the law. Let’s now turn our attention to the main incentives for individual employees. Copyright © 2015 Pearson Education, Inc.

Discuss the main incentives for individual employees.
Several incentive plans are particularly suited for use with individual employees. Copyright © 2015 Pearson Education, Inc.

Individual Employee Incentive and Recognition Programs
Piecework plans Straight piecework Standard hour plans Pros and cons Merit pay as an incentive Differential pay increases Merit pay options Piecework is the oldest and still most popular individual incentive plan. Piecework involves paying the worker a specified amount for each piece or unit he/she produces. Straight piecework entails a strict proportionality between results and rewards regardless of output. With a standard hour plan, the worker gets a premium equal to the percent by which his/her performance exceeds the standard. The pluses for piecework are that piecework plans are understandable, appear equitable, and can be powerful incentives, since rewards are proportionate to performance. On the other hand, workers may resist even justified attempts to raise production standards. This may occur in part because a cultural norm has been established between the employees performing the same work. Occasionally, employees may well downplay quality, or resist switching from job to job (since doing so could reduce productivity). Attempts to introduce new technology or processes may trigger resistance, for much the same reason. Merit pay or a merit raise is any salary increase the firm awards to an employee based on his/her individual performance. Merit plan effectiveness depends on truly differentiating among employees. Two adaptations of merit pay plans are popular. One awards merit raises in a lump sum once a year and does not make the raise part of the employee’s salary. The other adaptation ties merit awards to both individual and organizational performance. Copyright © 2015 Pearson Education, Inc.

Individual Employee Incentive and Recognition Programs
Incentives for professional employees Nonfinancial and recognition-based awards Incentives managers can use Online and apps supported awards Job design Professional employees are those whose work involves the application of learned knowledge to the solution of the employer’s problems, such as lawyers, doctors, economists, and engineers. Recognition programs usually refer to formal programs such as employee-of-the-month programs. Social recognition programs are more informal manager-employee exchanges, including praise and approval. First, the best option for motivating employees is also the simplest—make sure the employee has a doable goal with which he or she agrees. Second, simply recognizing an employee’s contribution is a powerful motivation tool. Third, the manager can use casual social recognition as positive reinforcement on a day-to-day basis. There are many reasons to use Internet sites and apps to manage awards programs. The sites can offer a much broader range of products than most employers could catalog and offer by themselves. And perhaps most importantly, the whole process is expedited, so it’s much easier to bestow and deliver the awards. Intuit shifted its employee recognition, years of service, patent awards, and wellness awards programs to Globoforce, an awards vendor, several years ago. Various new apps let employees showcase their awards, contributions, and praise from coworkers. Apps like those at also facilitate employees praising each other. For example, one lets employees “Give recognition by picking out a badge and typing in a quick note to thank the people who matter most ” Others let users post the positive feedback they receive to their LinkedIn profiles. Research has shown that job design, job responsibility, and feedback from a job are primary drivers of employee engagement. Copyright © 2015 Pearson Education, Inc.

IMPROVING PERFORMANCE: HR Tools for Line Managers and Entrepreneurs
For motivation: Employees need a doable goal and agree with it Recognition either alone or in combination with financial rewards Social recognition (such as compliments) as positive reinforcement on a day-to-day basis The individual line manager should not rely just on the employer’s financial incentive plans for motivating subordinates. Those plans may not be very complete, and there are simply too many opportunities to motivate employees every day to let those opportunities pass. What to do? Use these three options and Figure 12-1 has other incentives. FIGURE 12-1 Social Recognition and Related Positive Reinforcement Managers • 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 Discussion Question 12-1: You have decided to verify that recognition does in fact improve performance. To that end, you will use an honest observation to praise someone’s performance today. What was the effect of your experiment? Copyright © 2015 Pearson Education, Inc.

IMPROVING PERFORMANCE: Copyright © 2015 Pearson Education, Inc.
HR as a Profit Center Research: Performance was compared in stores using and not using financial and nonfinancial incentives Measured gross profitability, drive-through time, and employee turnover Financial and nonfinancial incentives improved employee and store performance Implications for Managers Here is what these findings mean for managers designing an incentive plan: 1. Ask: Does it make sense to use incentives? It makes more sense to use an incentive plan when: • Motivation (not ability) is the problem. • Employee effort and results are directly related. • The employees can control the behavior you plan to incentivize. 2. Link the incentive with your strategy. Link the incentive to behavior that is critical for achieving strategic goals. For example, the fast-food restaurant chain’s owners wanted to boost the stores’ performance and profits. Incentivizing employees to work faster and smarter accomplished that. 3. Design the program to be motivational. Victor Vroom would say there should be a clear link between effort and performance, and between performance and reward, and that the reward must be attractive to the employee. Employees must have the skills and training to do the job. Employers should support the incentive plan with performance feedback, as in the form of performance graphs. 4. Don’t forget feedback and recognition. They can be as influential as financial incentives. 5. Set complete standards. For example, don’t just pay for “repeating the customer’s order” if speeding up processing time is important too. 6. Be scientific. Don’t waste money on incentives that seem logical but that may not be contributing to performance. As in this study, gather evidence and analyze the effects of the incentive plan over time. Ascertain whether it is indeed influencing the measures (such as employee turnover) that you want to improve. Discussion Question 12-2: The dean has asked you to design an incentive plan for your professor. How would you apply what you learned in this feature to do so? Copyright © 2015 Pearson Education, Inc.

Review Piecework Merit pay Incentives for professionals Nonfinancial rewards Online Job design For this learning objective, we have discussed the two types of piecework plans and their pros and cons. In addition, we noted that merit pay requires truly differentiating between employees, which is difficult for some managers due either to a lack of effective recordkeeping or reluctance to distinguish between employees. Professionals require different non-financial incentives such as time off for participation in professional organizations. Computer-based management of incentive and recognition programs offer several advantages compared to traditional approaches, including more timely distribution of rewards and tracking. Finally, job design, responsibility and feedback are important to many employees at all levels. Copyright © 2015 Pearson Education, Inc.

Discuss the pros and cons of commissions versus straight pay for salespeople. Employers are moving to align the measures they use to reward their salespeople with their firms’ strategies. Copyright © 2015 Pearson Education, Inc.

Incentives for Salespeople Salary plan Commission plan Combination plan Maximizing sales force results How effective are your incentives? Fixed salaries are offered by some firms. Straight salary makes it simple to switch territories or to reassign salespeople, and it can foster loyalty. A disadvantage is that it can constrict sales and de-motivate potentially high-performing salespeople. Salespeople are paid for results, and only for results. Thus, commission plans tend to attract high-performing salespeople who see that effort clearly leads to rewards. But it may cause them to neglect non-selling duties like servicing small accounts, cultivating dedicated customers, and pushing hard-to-sell items. Most companies pay salespeople a combination of salary and commissions, usually with a sizable salary component. Combination plans give salespeople a floor to their earnings and still provide an incentive for superior performance. Setting effective quotas is an art. In today’s fast-changing business scene, sales quotas must become more flexible than they have been in the past. There is a tendency to set commission rates informally, without considering how much each sale must contribute to covering expenses. To maximize performance, the sales manager typically needs evidence. Answering the following questions will provide such information. Do the sales team members understand the compensation plans? Do they know how we measure and reward performance? Are quotas set fairly? Is there a positive correlation between performance and commission earnings? Are commissions more than covering total salespersons expenses? Does our commission plan maximize sales of our most profitable products? Copyright © 2015 Pearson Education, Inc.

Improving Performance Through HRIS: How Effective Are Your Incentives?
With the aid of VUE Compensation Management® the sales manager can analyze compensation and performance data, conduct “what-if” analyses and reports, and conduct trend analyses. To maximize performance, the sales manager typically needs evidence, such as: Do the salespeople understand the compensation plans? Do they know how we measure and reward performance? Are quotas fair? Is there a correlation between performance and commissions? And, does our commission plan maximize sales of our most profitable products? Spreadsheets don’t easily support these types of analyses. Conducting these analyses requires special enterprise incentive management software applications. Several vendors supply these. One is VUE Software™, which supplies VUE Compensation Management®. With the aid of VUE Compensation Management® the sales manager can analyze compensation and performance data, conduct “what-if” analyses and reports, and do trend analyses. Copyright © 2015 Pearson Education, Inc.

Review Types of sales incentives Maximizing results Effectiveness For this learning objective, we have discussed some of the pros and cons between straight salary plans and commission plans. We also noted that most companies offer a combined program, with a substantial emphasis on salary. To maximize results, we recommended you use formal and systematic methods of setting sales quotas. Finally, to determine how effective your incentive program is, a number of questions must be answered. Some have to do with the level of understanding of your program by your sales force. Others have to do with measuring the correlations between your program and the results produced. Copyright © 2015 Pearson Education, Inc.

Describe the main incentives for managers and executives.
Lets look at how to motivate and reward management for long-term growth in shareholder value. Copyright © 2015 Pearson Education, Inc.

Incentives for Managers and Executives
Strategy and the executive’s long-term and total rewards package Sarbanes-Oxley Act Short-term incentives, annual bonus Eligibility Fund size Individual performance Formula Few HR practices have as profound or obvious an impact on strategic success as the company’s long-term incentives. In creating the compensation package, you should: consider the strategic context; shape each component of the package, then group them; create a plan that gives the package a special character; check for legal compliance and tax effectiveness; and install a review and evaluation process for major business changes. The Sarbanes-Oxley Act affects how employers formulate their executive incentive programs. It also injects a higher level of responsibility into executives’ and board members’ decisions. For short-term incentives, the annual bonus is aimed at motivating the short-term performance of managers and executives. Eligibility usually includes both top and lower-level managers. Fund size refers to the total amount of bonus money the firm makes available. A target bonus and maximum amount is set for each eligible position, and the actual award reflects the person’s performance. Finally, a formula may be used to base the bonus on specific measures critical to the company. Copyright © 2015 Pearson Education, Inc.

Incentives for Managers and Executives
Strategic long-term incentives Stock options Stock option problems Other stock plans Ethics and incentives Other executive incentives Strategic long-term incentives are used to inject a long-term perspective into executives’ decisions. Stock options account for over half of executives’ compensation. A stock option is the right to purchase a specific number of shares of company stock at a specific price during a specific period of time. Stock options can reward managers who experience a less than stellar performance. They also can encourage executives to take riskier ventures to increase profits. Other stock plans include stock appreciation rights, a performance achievement plan and a restricted stock plan. Stock appreciation rights permit the recipient to exercise the stock option (by buying the stock) or to take any appreciation in the stock price. A performance achievement plan awards shares of stock for the achievement of predetermined financial targets. In a restricted stock plan, shares are usually awarded without cost to the executive, but selling the stock is restricted for a specified time period. Simplistic, financial-performance-oriented incentives, in the absence of strong ethical standards may breed unethical behavior. The solution is to foster a forward-looking ethical culture. Companies provide various other incentives to persuade executives to remain with the firm, such as golden parachutes and low- or no-interest loans. Copyright © 2015 Pearson Education, Inc.

IMPROVING PERFORMANCE: HR Practices Around the Globe Chinese companies studied to determine if new incentive plans affected company performance Researchers compared performance of those with management stock-option plans and a control group without plans Differences found between private and government controlled companies One thing they found was that the stock-option plans did improve firm performance in companies controlled by private shareholders, but not in companies controlled by the government. In the latter, goals such as maximizing employment may have outweighed boosting profits, thus limiting managers’ profit-boosting efforts. The findings highlight why managing globally is challenging. In this case, a stock option plan that might improve financial performance in the United States might fail in China, where the government owners’ goals may well differ from the desire of managers to boost profits. Discussion Question 12-3: Given these findings, would it make sense for managers in government-controlled companies to receive stock options tied to something other than profitability, such as “no Employees lose their jobs in this company”? Why? Copyright © 2015 Pearson Education, Inc.

Review Strategy and long-term incentives Federal law Short-term incentives Strategic long-term incentives Other incentives We have discussed the relationship between a firm’s strategy and an executive’s long-term and total rewards package. In doing so, we discovered that the executive’s desires and the needs of the firm are inextricably interwoven. Federal law such as the Sarbanes-Oxley Act mandate a greater sense of personal responsibility and understanding of the workings of a business to remain successful. Short-term incentives and annual bonuses consider eligibility, fund size, and individual performance. Some firms use a formula to calculate the proper incentives. Typical strategic, long-term incentives include stock options, stock plans, and ethical considerations. Finally, some firms may offer golden parachutes or low- or no-interest loans to top tier executives in order to entice them to stay aboard. Copyright © 2015 Pearson Education, Inc.

Name and describe the most popular organization-wide incentive plans.
We’ve focused to this point on individual employee incentives such as piecework, commissions, and executive bonuses. Let’s look now at incentives for teams, and for all employees company-wide. Copyright © 2015 Pearson Education, Inc.

Team and Organization-Wide Incentive Plans
Designing team incentives Engineered standards Pros and cons HR inequities that undercut team incentives There are three approaches to designing team incentives. First, members are paid based on one of three team-based formulas wherein all members receive the pay (a) earned by the highest producer, (b) earned by the lowest producer, or (c) equal to the average pay earned by the group. Second, set a production standard based on the final output of the group as a whole. Finally, tie rewards to goals based on some overall standard of group performance. A lot of our work today is organized around teams, so team incentives make sense to encourage cooperation and training. But exceptionally hard-working employees do not get paid according to their efforts, which may reduce motivation. Some studies suggest that team incentives are often counterproductive. The fundamental problem was inequity. Unless you actively minimize inequities, it’s probably best to pay employees based on their individual contributions to the team, rather than on collective team performance. Copyright © 2015 Pearson Education, Inc.

Team and Organization-Wide Incentive Plans
Profit-sharing plans Scanlon plans Other gain-sharing plans At-risk pay plans Employee stock ownership plans Broad based Profit-sharing plans involve employees receiving a share of the company’s annual profits. A Scanlon Plan is an incentive plan developed in 1937 by Joseph Scanlon. The basic features of the plan include: philosophy of cooperation, identity, competence, involvement system, and sharing of benefits formula. Other gain-sharing plans are incentive plans that engage many or all employees in a common effort to achieve a company’s productivity objectives. At-risk pay plans put some portion of the employee’s weekly pay at risk, subject to the firm meeting its financial goals. Employee stock ownership plans (ESOP) are company-wide plans in which a firm contributes shares of its own stock (or cash to purchase the stock) to a trust. The trust is established to purchase shares of the firm’s stock for employees. Copyright © 2015 Pearson Education, Inc.

Incentive Plans in Practice: Nucor
The production incentive plan at Nucor steel also has a: Department manager incentive plan Professional and clerical bonus plan Senior officer incentive plan Nucor Corp. is the largest steel producer in the United States. It also has the highest productivity and lowest labor cost per ton. Employees can earn bonuses of 100% or more of base salary, and all Nucor employees participate in one of four performance-based incentive plans. With the production incentive plan, operating and maintenance employees and supervisors get weekly bonuses based on their work groups’ productivity. The department manager incentive plan pays department managers annual incentive bonuses based mostly on the ratio of net income to dollars of assets employed for their division. With the professional and clerical bonus plan, employees who are not in one of the two previous plans get bonuses based on their divisions’ net income return on assets. Finally, under the senior officer incentive plan, Nucor senior managers (whose base salaries are lower than those in comparable firms) get bonuses based on Nucor’s Annual overall percentage of net income to stockholders equity. Nucor also divides 10% of its operating profits yearly among all employees (except senior officers). Depending on company performance, this may be from 1% to over 20% of an employee’s pay. Copyright © 2015 Pearson Education, Inc.

Review Team incentives Inequities Profit-sharing Scanlon and gain-sharing At-risk ESOPs Since many firms are moving to a team-based environment, we have discussed the need for incentive plans that reward teams. We also discussed issues related to why some team-based programs fail or are counterproductive. The chief issue is to manage any inequities in the systems, real or perceived. Profit-sharing, Scanlon plans, gain-sharing, at-risk pay plans and Employee Stock Ownership Plans (ESOPs) are all ways to recognize and reward employees based on company results. Copyright © 2015 Pearson Education, Inc.

Improving Performance at The Hotel Paris
Do you agree with the measurable criteria Lisa set for the new incentive plan? Given what you know about the Hotel Paris’s strategic goals, list specific behaviors you would incentivize for front-desk clerks, hotel managers, valets and housekeepers. The New Incentive Plan Lisa knew from industry studies that in top firms, over 80% of the workforce had merit pay or incentive pay tied to performance. She also knew that in high-performing firms, there was at least a 5% or 6% difference in incentive pay between a low-performing and a high-performing employee. Lisa and the company’s CFO laid out three measurable criteria that the new incentive plan had to meet. First, at least 90% (and preferably all) of the Hotel Paris’s employees must be eligible for a merit increase or incentive pay that is tied to performance. Second, there must be at least a 10% difference in incentive pay between a low performing and high performing employee. Third, the new incentive plan had to include specific bonuses and evaluative mechanisms that linked employee behaviors in each job category with strategically relevant employee capabilities and behaviors. For example, front-desk clerks were to be rewarded in part based on the friendliness and speed of their check-ins and check-outs, and the housecleaning crew was to be evaluated and rewarded in part based on the percentage of room cleaning infractions. The incentive structure for all the company’s managers, including hotel managers, assistant managers, and departmental managers, now ties at least 10% of each manager’s annual pay to the degree to which his or her hotel achieves its strategic aims. The plan measures this in terms of ratings on the guest satisfaction index, average length of guest stay, and frequency of guest returns. Ratings on all these metrics soon began to rise. Discussion Question: Lay out a complete incentive plan (including all long- and short-term incentives) for the Hotel Paris’s hotel managers. Copyright © 2015 Pearson Education, Inc.

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