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CHAPTERS 11
Rewarding Performance

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Chapter Objectives

Develop pay-for-performance plans that are appropriate for different levels in an organization Identify the potential benefits and drawbacks of different pay-forperformance systems and choose the plan that is most appropriate for a particular firm Design an executive compensation package that motivates executives to make decisions that are in the firms best interests Weigh the pros and cons of different compensation methods for sales personnel and create an incentive plan that is consistent with the firms marketing strategy

Review Key Terms

Employee stock ownership plans (ESOPs) Gainsharing Incentives Pay-for-performance Profit-sharing

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Motivation, Performance, and Pay

Incentives
Financial

rewards paid to workers whose production exceeds a predetermined standard

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Individual Differences
Law

of Individual Differences

The

fact that people differ in personality, abilities, values, and needs. Different people react to different incentives in different ways. Managers should be aware of employee needs and fine-tune the incentives offered to meets their needs. Money is not the only motivator.

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Needs and Motivation

Abraham
Five

Maslows Hierarchy of Needs

(food, water, sex)

increasingly higher-level needs:

(a safe environment) (a sense of personal worth) (becoming the desired self)

physiological security social

(relationships with others)

self-esteem

self-actualization

Lower

level needs must be satisfied before higher level needs can be addressed or become of interest to the individual.

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Needs and Motivation

Herzbergs
Hygienes

HygieneMotivator theory
(extrinsic job factors)

Inadequate

working conditions, salary, and incentive pay can cause dissatisfaction and prevent satisfaction.

Motivators
Job

(intrinsic job factors)

enrichment (challenging job, feedback and recognition) addresses higher-level (achievement, self-actualization) needs.

The

best way to motivate someone is to organize the job so that doing it helps satisfy the persons higherlevel needs.

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Instrumentality and Rewards

Vrooms Expectancy Theory

A persons motivation to exert some level of effort is a function of three things:

Expectancy: that effort will lead to performance. Instrumentality: the connection between performance and the appropriate reward. Valence: the value the person places on the reward. 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.

Motivation = E x I x V

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Pay-for-performance: The Challenges

The

do only what you get paid for syndrome Unethical Behaviors Negative effects on the spirit of cooperation Lack of control Difficulties in measuring performance Psychological contracts The credibility gap Job dissatisfaction and stress Potential reduction of intrinsic drives

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Meeting the Challenges of Pay-for-performance Systems

Link

pay and performance appropriately

Straight

piecework: A fixed sum is paid for each unit the worker produces under an established piece rate standard. An incentive may be paid for exceeding the piece rate standard. hour plan: The worker gets a premium equal to the percent by which his or her work performance exceeds the established standard.

Standard

Use

pay-for-performance as part of a broader HRM system Build employee trust

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Meeting the Challenges of Pay-for-performance Systems

Promote

the belief that performance makes a difference Use multiple layers of rewards Increase employee involvement Stress the Importance of Acting Ethically Use motivation and non-financial incentives

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Employee Preferences for Non-cash Incentives

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Types of Pay-for-performance Plans

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Types of Incentive Plans

Individual

incentive/recognition programs

Sales

compensation programs
variable pay programs

Team/group-based

Organization-wide
Executive

incentive programs

incentive compensation programs

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Types of Pay-for-performance Plans Individual-based plans

Individual-based plans

Merit pay Bonus programs Lump-sum payments

Rewarded performance is likely to be repeated expectancy theory Financial incentives can shape an individual's goals Help the firm achieve individual equity Fit in with an individualistic culture

Advantages

Disadvantages

May promote single-mindedness Employees do not believe pay and performance are linked They may work against achieving quality goals, and they may promote inflexibility.

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Types of Pay-for-performance Plans Individual-Based Plans

Conditions
When

under which individual-based plans are most likely to succeed

the contributions of individual employees can be accurately isolated When the job demands autonomy When cooperation is less critical to successful performance or when competition is to be encouraged

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Types of Pay-for-performance Plans Sales Compensation Programs

Salary plan

Straight salaries

Best for: prospecting (finding new clients), account servicing, training customers sales force, or participating in national and local trade shows.

Commission plan

Pay is only a percentage of sales

Keeps sales costs proportionate to sales revenues. May cause a neglect of non-selling duties. Can create wide variation in salespersons income. Likelihood of sales success may linked to external factors rather than to salespersons performance. Can increase turnover of salespeople.

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Types of Pay-for-performance Plans Sales Compensation Programs

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. Commissions are paid but a draw on future earnings helps the salesperson to get through low sales periods.

Commission-plus-drawing-account plan

Commission-plus-bonus plan

Pay is mostly based on commissions. Small bonuses are paid for directed activities like selling slow-moving items.

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Types of Pay-for-performance Plans Team-based Plans

Team-based plans attempt to support other efforts to increase the flexibility of the work force within a firm. These plans normally reward all team members equally based on group outcomes. Advantages

Foster group cohesiveness Facilitate performance measurement Possible lack of fit with individualistic cultural values Free-riding effect Social pressures to limit performance Difficulties in identifying meaningful groups Inter-group competition leading to a decline in overall performance.

Disadvantages

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Types of Pay-for-performance Plans Team-based Plans

Conditions under which team-based plans are most likely to succeed

When work tasks are so intertwined it is difficult to single out who did what When the firms organization facilitates the implementation of team-based incentives When the objective is to foster entrepreneurship in selfmanaged work groups

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Advantages and Disadvantages

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Types of Pay-for-performance Plans Plant-wide Plans

Plant-wide plans

Generally referred to as gainsharing programs because they return a portion of the company's cost savings to the workers, usually in the form of a lump-sum bonus. Firm size Technology Historical performance Corporate culture Stability of the product market Scanlon Plan

Conditions to be considered

Three major types:

Rewards labor savings, most appropriate for companies that have a "high touch labor" content Most appropriate for organizations that want to improve other variables, such as scrap reduction or energy consumption, in addition to labor. easiest of the gainsharing plans to understand and install

Rucker Plan

Improshare

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Types of Pay-for-performance Plans Plant-wide Plans

Advantages
eliciting

active employee input increasing the level of cooperation fewer measurement difficulties improved quality
Disadvantages
protection

of low performers problems with the criteria used to trigger rewards management-labor conflict

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Types of Pay-for-performance Plans Corporate-wide Plans

Corporate-wide Plans

macro type of incentive program and is based on the entire corporation's performance no attempt is made to reward workers for productivity improvements they are very mechanistic they may used to fund retirement programs although there are exceptions Cash plans

Differences between Corporate-wide Plan and Gainsharing

Profit-sharing plans

Employees receive cash shares of the firms profits at regular intervals. Profits are distributed to employees based on their individual merit rating. A predetermined portion of profits is placed in each employees account under a trustees supervision.

The Lincoln incentive system

Deferred profit-sharing plans

Employee stock ownership plans (ESOPs)

A corporation annually contributes its own stockor cash (with a limit of 15% of compensation) to be used to purchase the stockto 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.

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Types of Pay-for-performance Plans Corporate-wide Plans

Advantages
Financial

flexibility for the firm Increased employee commitment Tax advantages

Disadvantages
Risk

for employees Limited effect on productivity Long-run financial difficulties.

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Types of Pay-for-performance Plans Corporate-wide Plans

Conditions favoring corporate-wide plans

Firm size Interdependence of different parts of the business Market conditions The presence of other incentives

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Designing Pay-for-performance Plans

Managers and Executives

Annual
Plans

bonus

that are designed to motivate short-term performance of managers and are tied to company profitability.
Eligibility

basis: job level, base salary, and impact on profitability

size basis : nondeductible formula (net income) or deductible formula (profitability) awards: personal performance/contribution

Fund

Individual

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Designing Pay-for-performance Plans

Managers and Executives

Stock
The

option

right to purchase a specific number of shares of company stock at a specific price during a specific period of time.
Nonqualified Indexed

stock option

option priced option

Premium

Options

have no value (go underwater) if the price of the stock drops below the options strike price (the options stock purchase price).

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Designing Pay-for-performance Plans

Managers and Executives

Other plans

Guaranteed loans to directors

Loans provided to buy company stock. A highly risky and now frowned upon practice Key employee program

Golden parachutes

Payments companies make to departing executives in connection with a change in ownership or control of a company.
Plans whose payment or value is contingent on financial performance measured against objectives set at the start of a multi-year period

Performance plans

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Designing Pay-for-performance Plans

Managers and Executives

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 achieve the firms strategic goals. Create a stock option plan to meet the needs of the executives and the company and its strategy. 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.

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Key Strategic Pay Questions

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Why Incentive Plans Fail

Performance pay cant 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.

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Implementing Effective Incentive Plans

Ask: Is effort clearly instrumental in obtaining the reward? Link the incentive with your strategy. Make sure effort and rewards are directly related. Make the plan easy for employees to understand. Set effective standards. View the standard as a contract with your employees. Get employees support for the plan. Use good measurement systems. Emphasize long-term as well as short-term success. Adopt a comprehensive, commitment-oriented approach.

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HR Activities that Build Commitment

Clarifying and communicating the goals and mission of the organization. Guaranteeing organizational justice. Creating a sense of community by emphasizing teamwork and encouraging employees to interact. Supporting employee development by emphasizing promotion from within, developmental activities, and career-enhancing activities. Generally committing to people-first values.