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ADM 2337 Chapter Notes -Employee Stock Ownership Plan, Employee Stock Purchase Plan, Executive Compensation

Course Code
ADM 2337

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Chapter 10, 11, 12 textbook notes
Chapter 10: Pay for Performance: Incentive
Rewards: Chapter Overview
Aligning the interests of the employees with the interests of the company. One of the
best ways to do this is to reward people for their performance. But this is no small task.
The process of (1) choosing the right incentive plans based on organizational
objectives, (2) setting up performance measures, and (3) administering those incentive
plans may seem a bit daunting, especially because so much can go wrong if not done
Incentive plans into three broad categories: individual incentive plans, group incentive plans,
and enterprise incentive plans.
Strategic Reasons for Incentive Plans
variable pay : Incentive rewards are based entirely on a pay-for-performance philosophy. pay
programs establish a performance “threshold” (a baseline performance level) that an employee
or group of employees must reach to qualify for incentive payments.
Incentive Plans as Links to Organizational Objectives: linking compensation rewards, both
individual and group, to organizational goals and strategy. Specific company goals or objectives
might be to lower labour costs, improve customer satisfaction, expand product markets, or
maintain high levels of productivity and quality, which in turn improve the market for the
company's goods and services in a global economy.
Individual Group Enterprise/Organization
Piecework Team
Profit sharing
Standard hour plan Scanlon Plan Stock options
Bonuses Improshare Employee stock ownership plans
Merit pay
Lump-sum merit pay
Incentive awards
Sales incentives
Incentives for professional
Executive incentives

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Advantages of Incentive Pay Programs
Incentives focus employee efforts on specific performance targets. They provide real
motivation that produces important employee and organizational gains.
Incentive payouts are variable costs linked to the achievement of results. Base salaries are
fixed costs largely unrelated to output.
Incentive compensation is directly related to operating performance. If performance
objectives (quantity and/or quality) are met, incentives are paid. If objectives are not
achieved, incentives are withheld.
Incentives foster teamwork and unit cohesiveness when payments to individuals are
based on team results.
Incentives are a way to distribute success among those responsible for producing that
Incentives are a means to reward or attract top performers when salary budgets are low.
Do incentives work? Yes and no. the degree of success obtained depends on several factors,
including (1) identifying important organizational metrics by which to measure employee
performance and (2) a customized incentive plan that effectively measures employee output
and rewards exceptional employee performance.5 For example, at one hospital, health care
employees are eligible for up to a 10 percent merit raise depending on whether they meet or
exceed important hospital performance expectations. Importantly, in a survey designed to
assess the hospital's incentive pay program, employee responses showed a high relationship
between hospital goals and the linkage between pay and performance.6 At an insurance
company, salespeople who achieve sales targets receive significant bonuses, merchandise
awards, and recognition through the company's website and in-house publications.7
studies also show that variable pay plans may not achieve their proposed objectives or lead to
organizational improvements.8 First, incentive plans sometimes fail to satisfy employee
expectations for pay gains. Second, management may have failed to give adequate attention to
the design and implementation of the plan, leaving employees confused about how incentive
payments are calculated. Third, employees may have little ability to affect performance
standards. Furthermore, the success of an incentive plan will depend on the environment that
exists within an organization. A plan is more likely to work in an organization where morale is
high, employees believe they are being treated fairly, and there is harmony between employees
and management.
Requirements for a Successful Incentive Plan
Setting Performance Measures
Administering Incentive Plans
For an incentive plan to succeed, employees must have some desire for the plan. This desire can
be influenced in part by how successful management is in introducing the plan and convincing
employees of its benefits. Encouraging employees to participate in developing and administering
the plan is likely to increase their willingness to accept it.
Employees must be able to see a clear connection between the incentive payments they receive
and their job performance. This connection is more visible if there are objective quality or

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quantity standards by which they can judge their performance. Commitment by employees to
meet these standards is also essential for incentive plans to succeed. This requires mutual trust
and understanding between employees and their supervisors, which can be achieved only
through open, two-way channels of communication. Management should never allow incentive
payments to be seen as an entitlement. Instead, these payments should be viewed as a reward that
must be earned through effort. This perception can be strengthened if the incentive money is
distributed to employees in a separate cheque.
Furthermore, the best managed incentive pay programs are clearly and continuously
communicated to employees. This is true during both good and bad economic periods. Proactive
organizations find it advisable to continually evaluate the operation and administration of their
variable pay programs.
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. Therefore, measures that are quantitative, simple, and structured to show
a clear relationship to improved performance are best. it is necessary to evaluate the extent to
which the employees involved can actually influence the measurement. Finally, employers must
guard against
“ratcheting up” performance goals by continually trying to exceed previous results. This
eventually leads to employee frustration and employee perception that the standards are
unattainable. The result will be a mistrust of management and a backlash against the entire
incentive program.
Administering Incentive Plans: productivity reduce labour costs. A cardinal rule is that
thorough planning must be combined with a “proceed with caution” approach.
1. Incentive systems are effective only when managers are willing to grant incentives based
on differences in individual, team, or organizational performance. Allowing incentive
payments to become pay guarantees defeats the motivational intent of the incentive. The
primary purpose of an incentive compensation plan is not to pay off under almost all
circumstances but rather to motivate performance. Thus, if the plan is to succeed, poor
performance must go unrewarded.
2. Annual salary budgets must be large enough to reward and reinforce exceptional
performance. When compensation budgets are set to ensure that pay increases do not
exceed certain limits (often established as a percentage of payroll or sales), these
constraints may prohibit rewarding outstanding individual or group performance.
3. The overhead costs associated with plan implementation and administration must be
determined. These may include the cost of establishing performance standards and the
added cost of record keeping. The time consumed in communicating the plan to
employees, answering questions, and resolving any complaints about it must also be
included in these costs.
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