HRM303 Chapter Notes - Chapter 5: Employee Stock Option, Motivation, Profit Sharing

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Chapter 5: performance pay choices
Individual performance pay
Piece rates
Pay system under which individuals receive a specified sum of money for
each unit of output they produce or process
Objective is to maximize individual productivity by linking output to reward
Straight piece rate: same specified sum of money is paid for each piece
produced or processed, regardless of how many pieces are produced or
processed
Differential piece rate: lower sum of money per piece is paid if employee
production does not meet the production standard, and then a higher sum
per piece is paid once the production standard is met
Advantages
1. Highly motivational in producing task behaviour because they tie valued
rewards to clearly specified performance outcomes
a. In line with two of key conditions for motivation identified by
expectancy theory: valence and instrumentality
2. Reduce need for external control of employees through supervision
3. Link compensation to output, thereby linking compensation to employer
ability to pay which reduces employer risk
4. Provide specific info about standard level of output expected so that both
supervisors and workers know what is expected from a days work
Disadvantages
1. Can only be applied in limited number of circumstances (jobs with high
degree of interdependence)
2. Jobs for which tasks are continually changing or for which tools, materials,
and technologies are rapidly changing are also not amendable to piece rates
3. Setting piece rate is not nearly as scientific a process as it seems
4. Often do not motivate maximum effort because of social forces within the
work group
5. If management laid off workers whenever productivity has increased, work
groups will not look favourably on high production
6. Can create conflict among workers
7. Can create other problems: product or service quality
8. Problems may develop with equipment and material use
9. May cause workers to be more concerned about production than safety
Applicability of piece rates
Jobs where individual workers control their own production,
interdependence between workers is low
Each unit of production can be easily measured and priced
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Individuals perform limited number of tasks
Service sector rather than manufacturing sector
Sales commission
Pay that is geared to the dollar volume of sales or transactions conducted
Straight commission: pay that is geared only to the volume of sales or
transactions, with no base pay component
Advantages
1. Relatively easy to set and measure
2. Less interdependence among sales employees than among production
workers, which mans that their work output is more distinct
3. Almost unlimited number of sales can be made without creating need to
reduce sales force
4. Reduce need for other control mechanisms, such as supervision or
internalized commitment
5. Serve as a source of feedback and as self correcting mechanism (can easily
see whether their performance is adequate and will tend to leave
organization if unsuccessful)
6. Commissions reduce employer risk since worker pay is linked directly to
sales revenue
7. Sales commissions increase sales
Disadvantages
1. Income to salesperson may be highly variable, making personal financial
planning difficult
2. To attract and retain top performers, firms that use individual commissions
often end up providing higher total pay than would be necessary if a different
compensation mix were used
3. During recession, commission income may drop precipitously through no
fault of salesperson
4. When learning the business and developing customers contacts, new
salespeople receive little income
5. Salesperson may resist doing work that does not directly contribute to new
sales
6. Straight commission may encourage salespeople to be overly aggressive to
make misleading claims
7. Commission systems often produce intense competition among salespeople
8. Customers may be sold by one salesperson but after taking few days to think
it over, they may place order with any salesperson who happens to be there
Salespeople resistant to changes in system since they will need to learn it all
over again and may be suspicious of management’s motives and see changes
as disguise to attempt to reduce earnings
Focuses on gross revenue generation and not profitability of sales
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Applicability of commissions
1. Degree of independence
2. Degree of persuasive skills required
3. Length of sales cycle
Maintenance selling: selling established products to existing customers
Conversion selling: selling established products to new customers
Leverage selling: selling new products to existing customers
New market selling: selling new products to new customers
Commissions are seldom used for:
1. Sales jobs that are highly programmable
2. Jobs that involve working inside office
3. Jobs that include important nonselling tasks of that require cooperation in
closing sales
4. Jobs in large organizations
Merit pay
Merit raises: increase to an employee’s base pay in recognition of good job
performance
Based on employee performance during previous years
Offer way for employees to advance their pay within their pay ranges
What motivation is there or the employee to continue to improve performance or
even to maintain high performance level that has earned merit raises?
Answer is carrot and stick
Carrot of promotion to a higher paying job and stick of dismissal
Because usually based on judgment by superior, may cause antagonism
between superior and other employees
Merit bonuses: cash payment, provided to recognize good employee performance
that does not increase base pay
Granted only for period in which good performance occurs
Have advantage of not being fixed amount
Still depend on reliable and accepted performance appraisal measure which
may not exist
Promotions as rewards
They expect a promotion from within policy to be a key factor in motivating
good employee performance
Depending on promotions as main source of rewards for good employee
performance can cause problems
oMeaningless reward system if few upper level vacancies
oPromotion may not be seen as reward worth seeking (longer
hours/more stressful work)
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