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Chapter 10 – Pay-for-Performance: Incentive Rewards
Strategic Reasons for Incentive Plans
Variable paytying pay to some measure of individual, group, or organizational
Incentive rewards that based entirely upon a pay-for-performance philosophy
Incentive plans emphasize a shared focus on organizational objectives by broadening the
opportunities for incentives to employees throughout the organization
Incentive Plans as Links to Organizational Objectives
Specific company goals might be to lower labour costs, improve customer satisfaction,
expand product markets, or maintain high levels of productivity and quality
By meshing compensation and organizational objectives – managers believe that employees
will assume “ownership” of their jobs by improving their effort and overall job
Studies show a measurable relationship between incentive plans and improved
organizational performance
Requirements for a Successful Incentive Plan
Employees must have desire for the plan
Employees must be able to see a clear connection between the incentive payments they
receive and their job performance
These characteristics of a successful incentive plan:
oFinancial incentives are linked to valued behaviour
oThe incentive program seems fair to employees
oProductivity/quality standards are challenging but achievable
oPayout formulas are simple and understandable
Setting Performance Measures
Measurement is key to the success of incentive plans because it communicates the
importance of established organizational goals
What gets measured and rewarded gets attention
Failure can often be traced to the choice of performance measures
Overly quantitative measures are to be avoided
When selecting performance measure, its necessary to evaluate the extent to which the
employees involved can actually influence the measurement
Administering Incentive Plans
Thorough planning combined with “proceed with caution” approach
Three important points related to the effective administration of incentive plans
oOnly effective when managers are willing to grant incentives based on differences in
individual, team, or organizational performance
oAnnual salary budgets must be large enough to reward and reinforce exceptional
oOverhead costs associated with plan implementation and administration must be
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Individual Incentive Plans
Flexibility – describes the design of individual incentive plans
Incentive payments may be determined by the number of units produced, by the
achievement of specific performance goals, or by productivity improvements in the
organization as a whole
Straight piecework – an incentive plan under which employees receive a certain rate for
each unit produced
Differential piece ratea compensation rate under which employees whose production
exceeds the standard amount of output receive a higher rate for all of their work than
the rate paid to those who do not exceed the standard amount
Piecework system is most likely to succeed when units of output can be measured readily,
when quality of the product is less critical and when the job is fairly standardized and
when a constant flow of work can be maintained
Computing the Piece Rate
Incentive rates must be based on hourly wages that would otherwise be paid for the type
of work being performed
Piecework: The Drawbacks
May not always be an effective motivator
Employees may avoid exerting maximum effort because their desire for peer approval
outweighs their desire for more money
Jobs tat are difficult to measure may be unsuited to piecework
Piecework may inappropriate in these situations:
oQuality is more important than quantity
oTechnology changes are frequent
oProductivity standards on which piece must be based on difficult to develop
An organizational culture that promotes workforce cooperation, creativity and problem
solving can work against piecework
Standard Hour Plan
Standard hour plan – an incentive plan that sets rates based on completion of a job in a
predetermined standard time
if the employee finishes the work in less than the expected time, their pay is based on
the standard time for the job multiplied by their hourly rate
popular in service departments in car dealerships
suited to long-cycle operations or jobs or tasks that are nonrepetitive and require a
variety of skills
i.e. car mechanic who has to install an engine – standard time is 5 hours but the mechanic
finishes it in 4 ½, he will get paid for 5 hrs
can motivate employees to produce more
employers must ensure the equipment maintenance and product quality don’t suffer as
employees strive to complete their jobs faster to earn more
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Bonusan incentive payment that is supplemental to the base wage
Frequently given at the end of the year and isn’t part of base pay
Have the advantage of providing employees with more pay for exerting greater effort
while at the same time the employees still have the security of a basic wage
Spot bonus – an unplanned bonus given for employee effort unrelated to an established
performance measure
Spot bonuses are useful retention and motivational tools for overburdened employees
Merit Pay
Merit pay program links an increase in base pay to how successfully an employee performs
his/her job
Normally given on the basis of an employees having achieved some objective performance
Can serve to motivate if employees perceive the raise to be related to the performance
required to earn it
Problems with Merit Raises
May be perpetuated year and year even when performance declines employees expect
the increase and see it as an entitlement
When merit raises are determined by performance, the employees gains may be offset by
inflation and higher income taxes
Money available for merit increases may be inadequate to raise satisfactorily all
employee’s base pay
Managers may have no guidance In how to define and measure performance; there may be
vagueness regarding merit award criteria
Employees may not believe their compensation is tied to effort/performance
The performance appraisal goals of employees and their managers are at odds
Lack of honesty and cooperation between management and employees
Overall merit pay plans do not motivate higher levels of employee performance
Merit guidelines – guidelines for awarding merit raises that are tied to performance
Lump-Sum Merit Pay
Lump-sum merit program – program under which employees receive a year-end merit
payment, which is not added to their base pay
Employees receive a single lump-sum increase at the time of their review
oProvides a clear link between pay and performance
oFreeze base-salaries, maintaining annual salary and benefit costs
Incentive Awards and Recognition
Awards are given out to recognize productivity gains, special contributions or
achievements/service to the organization
Merchandise awards, personalized gifts, theatre tickets, vacations, gift cards
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