Chapter 12: Pay-For-Performance and Financial Incentives
Money and Motivation
variable pay, any plan that ties to pay to productivity or profitability. The fundamental premise of variable pay plans is
that top performers must get top pay in order to secure their commitment to the organization.
Types of Incentive Plans
Individual incentive programs give income over and above base salary to individual employees who meet a specific
individual performance standard.
Spot bonuses, a spontaneous incentive awarded to individuals for accomplishments not readily measured by a standard.
Group incentives programs are like individual incentive plans, but they give pay over and above salary to all team
members when the group or team collective meets a specified standard for performance, productivity, or other work-
Profit sharing plans, provide employees with a share of the organization's profits in a specified period
Gain sharing programs are organization wide pay plans designed to reward employees for improvements in the
Incentive's for operations Employees
piecework, a system of pay based on the number of items processed by each individual worker in a unit of time, such as
items per hour or item per day.
Straight piecework plan, a set payment for each piece produced or processed in a factory or shop
guaranteed piecework plan, the minimum hourly wage plus an incentive for each piece produced above a set number
of piece per hour.
Advantages and Disadvantages
they are simple to calculate and easily understood by employees. Piece plans appear equitable in principle, and their
incentive value can be powerful since rewards are directly tied to performance.
Employers raise production standards whenever they found their workers earning excessive wages. (bad). When an
attempt is made to revise production standards, it meets considerable worker resistance, even if the revision is fully
Standard Hour Plan
The standard hour plan is like piece rate plan, with one major difference. With a piece rate plan, the worker is paid a
particular rate for each piece that he or she produces. With the standard hour plan, the worker is rewarded by a premium
that equals the percentage by which his or her performance exceed the standard.
So if he did 10 hours of work, in 8 hours....he will be paid 10 hours his hourly rate.
Team or Group Incentive Plans
team or group incentive plan, a plan in which a production standard is set for a specific work group, and its members
are paid incentives if the group exceeds the production standard. There are paid based on one of the three formulas:
1. all members receive the pay earned by the highest producer
2. all members receive the pay earned by the lowest producer.
3. All members receive equal to the average pay earned by the group.
Sometimes, several jobs are interrelated as they are on project teams. Here one worker's performance reflect not only his
or her own effort but that of co-workers as well; thus, team incentives make sense. Rewards as a group reduce jealousy,
make group member indebted to one another, and encourage a sense of cooperation.
One disadvantage is that employees might not be motivated as much, there is no direct link to performance and rewards.
“Dear diary, i did ch12, ate goldfish, and listened to Miley Cyrus all day.....maybe masturbate later tonight” Incentives for Senior Managers and Executives
Short-Term Incentives: The Annual Bonus
annual bonus, plans that are designed to motivate the short-term performance of managers and are tied to company
The simplest approach is just to use salary level as a cutoff. Amanager might be able to make 75% of their salary in
bonus', while a line worker can be capped at 10%.
How much to pay out (fund Size)
Some companies use a nondeductible formula. Here a straight percentage (usually of the company's net income) is
used to create the short-term incentive fund.
Others use a deductible formula on the assumption that the short term incentive fund should begin to accumulate only
after the firm has met specified level of earnings.
Determining Individual Awards
In some cases the amount is determined on a discretionary basis, but typically a target bonus is set for each eligible
position and adjustments are then made for greater or less than targeted performance.
Higher up the chain of command, corporate profits become a less accurate gauge of a manager's contribution.
Some argue a split-award method, which breaks the bonus into two parts. The manager actually gets a individual
effort based, and a organization based bonus.
intended to motivate and reward top management for the firm's long term growth and prosperity, and to inject a long-
term perspective into executive decisions.
Capital accumulation programs, long term incentives most often reserved for senior executives. Si, popular plans
include stock options, book value plans, stock appreciation rights, performance achievement plans, restricted stock
plans, and phantom stock plans. There is a couple ways of doing this
– stock options
– book value plans
– stock appreciation rights
– performance achievement plans
– restricted stock plans
– phantom stock plans
the most popular, but decreasing.
However demotivating in a declining market however stock price is affected relative to the overall stock market by the
firm's profitability and growth, and to the extent that the executive can affect thee factors, and stock options can be an
Book Value Plans
they have the privilege of buying stock from the company at the current book value. When they leave the company
they can sell the shares back to the company at the new book value.
stock appreciation, permit the recipient either to exercise the regular stock option.
Aperformance achievement plan awards shares of stock for the achievements of predetermined financial targets, such
as profits or growth in earnings per share.
performance plans are plans whose payment or value is contingent or financial performance measured agaist
objectives set at the start of multi-year period.
“Dear diary, i did ch12, ate goldfish, and listened to Miley Cyrus all day.....maybe masturbate later tonight” Relating Strategy to Executive Compensating
1. define the internal and external issues that face the company and its business objectives – boosting sales abroad,
downsizing, and so on.
2. Based on the strategic aims, shape each component of the executive compensation package and then group the
components into a balanced whole.
3. Check the executive compensation plan of compliance with all legal and regulatory requirements and for tax
4. Install a process for reviewing and evaluating the executive compensation plan whenever a major business change
Incentives For Salespeople
best when involved in finding new clients or when the salesperson is mostly involved in account servicing, such as
developing and executing product training programs for a distributor. Salaries are often tied to seniority rather than to
performance, which can be demotivating to potential high performing salespeople.
very easy to understand and compute. However salespeople may focus on easy high volume items, neglecting the hard-