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Lecture 5

BUS 272 Lecture Notes - Lecture 5: Employee Stock Ownership Plan, Flexible Spending Account, Cognitive Evaluation Theory

Business Administration
Course Code
BUS 272
Lieketen Brummelhuis

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BUS 272
Some recap from last chapter: Theory X suggests that individuals need to be extrinsically
motivated; Maslo’s Need Hieah theo suggests that idiiduals’ asi eeds ust e
met, including food, shelter, and safety-therefore more money can satisfy their these needs;
Hezeg’s otiatio-hygiene theory suggests that money and other extrinsic motivators
are necessary but not sufficient conditions for individuals to be motivated; Process theories
are silent about the role of money specifically, indicating more how rewards motivate,
without specifying the particular type of needs; Expectancy theory notes that individuals
need to value the reward, or it will not be very motivational.
*Money is not the sole motivator for baby boomers and millennial employees.
*People who highly value money score higher on sensation seeking, competitiveness,
materialism, and control. People who desire money score higher on self-esteem, and for
Rewards include pay, recognition programs, bonuses, social security and health
Therefore, there are 2 major categories,
a. Pay, which includes fixed salary either paid bi-weekly, monthly, etc.
b. Variable pay program includes all other benefits
How are individuals contributions recognized?
1. What to pay? Establishing a pay structure
Balance between internal equity (the worth of the job to the organization, established
though jo ealuatio ad eteal euit the opetitieess of a ogaizatio’s pa i
relative to the pay given by its competitors, through pay surveys)
2. How to pay? Rewarding individuals through variable-pay programs
Piece-rate wages, merit0based pay, bonuses, gainsharing, profit-sharing plans, stock
options, and employee stock ownership plans are all forms of a variable-pay program,
hih ases a potio of a eploee’s pa o soe idiidual, goup, ad/o
organizational measure of performance. Whe pa is tied to pefoae, the eploee’s
earnings recognize the contribution rather than become a form of entitlement.
Rewards in practice:
a. Piece-rate wages: The piece-rate pay plan has long been popular as a means
for compensating production employees with a fixed sum for each unit of
production completed.
b. Merit-based pay plans: pay for an individual performance based on
appraisal/ performance ratings. For merit-pay to be effective, however,
employees, need to perceive a strong relationship between their
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performance and their rewards. Projected level of future performance also
plays a role. It has it’s daaks: the ae tpiall ased o a aual
performance appraisal and thus are only valid as the performance ratings;
the pay raise pool fluctuates based on economic or other conditions that
hae little to do ith a idiidual eploee’s pefoae. Under this
system, there may be gender and racial discrimination in pay.
c. Bonuses: An annual bonus is a significant component of total compensation
for many jobs. Bonuses reward employees on recent performance rather
than historical performance and are one-time rewards than ongoing
entitlements. However, bonuses are not free from organizational politics.
d. Skill-based pay: Also called competency-based or knowledge-based pay, is an
alternative to job-based pay and bases pay levels on the basis of how many
skills employees have or how many jobs they can do. However, in order to
get the maximum pay or high pays, employees may learn many skills but may
later get frustrated with the challenges posed by an environment of learning,
growth, and continual pay rises.
a. Gainsharing: It is a group based incentive plan in which improvements in
group productivity determine the total amount of money to be shared. 50-50
sharing is considered ideal and typical.
a. Profit-sharing plans: distributes compensation based on some established
foula desiged aoud a opa’s pofitailit. These plans do not
necessarily focus employees on the future, because employees and managers
look for ways to cut costs today, without considering longer term
organizational needs. They also ignore customer service, employee
development. There is a feeling of psychological ownership.
b. Employee-stock ownership plans and stock options: An ESOP is a company-
established benefit plan in which employees acquire stock as a part of their
benefits. Stock options give employees the right to buy stocks in the
company at a later date at a guaranteed price. Employees have an incentive
to do better because they now are part owners of the organization and their
performance will directly affect the returns from their holdings in the
3. Flexible Benefits: Developing a benefits package
Flexible benefits plan allows each individual to put together a benefits package individually
tailored to his or her own needs and situation.
They are of 3 types:
a. Modular plans are pre-designed packages of benefits, with each module put
together to meet the needs of a specific group of employees.
b. Core-plus plans consist of a core of essential and a menu-like selection of other
benefit options from which employees can select.
c. Flexible spending accounts allow employees to set aside pretax dollars up to the
dollar amount offered in the plan to pay for particular benefits such as eye care and
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