Incentive Pay
CHAPTER #5
REWARDS FOR ATTAINING A WORK
OBJECTIVE
Three Major Assumptions
 1. Differences in contributions by individuals or
teams.
 2. Firms overall performance depends on
performance of individuals or work teams.
 3. To attract, retain and motivate high
performance.
Contrasting Incentive Pay with Traditional Pay
Traditional Pay
Incentive Pay
 Fixed hourly rate
 Pay based on
 Fixed salary
performance
 Individual plans
 Group plans
 Companywide plans
Individual Incentives
PIECEWORK…TWO
Production
2. individual performance plus subjective
criteria
1.
2.
TYPES
Two economic advantages
More incentive plans
 Management incentives
 For reaching firm’s goals

look www. aflcio.com
 Behavioral encouragement
 For attendance record or safety
 Referral plans
 Recruitment of new clients or ees
Group Incentives #110
 Reward for collective performance
 Team based
 Gain sharing
 Work teams
 Project teams
 Task forces
 Scanlon plans
 Rucker value added plan
Value added formula
 Improshare
 Labor hour formula and buy-back provision #116

Companywide Incnetives
 Profit sharing plans

Use of funding formulas and then plan for distribution
 Equal payments
 Proportional payments based on contribution
 Employee stock options
 Equity segment of ownership
 Company stock
 Stock option
 ESOP’s
Designing Incnetive Pay Programs
 Five key factors
 1. Should it be based on group or individual

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incentives?
2. Should incentive pay replace base salary?
3. Level of risk ees are willing to accept?
4. How shall performance be judged?
5. Time horizon for goals ?
Linking incentive pay with strategy
 Lowest cost strategy?
 Differentiation strategy?
Exercise for class application
 Google firms with both types of strategies low cost
and differentiation and low cost
 What type of incentive plans do they offer their
employees?
 What are the advantages and disadvantages of
both programs????