Chapter #12
Pay For Performance and
Financial Incentives
Performance and Pay
Not all rewards are equal
70 % of all ee surveyed believed that
their pay plans were ineffective
Trends are for more variable rate pay

Shifts business risk to employees
Psychological insight
Individual differences

Personality
#2 Needs theory (Maslow)
Intrinsic v. extrinsic
5 step hierarchy
Look page #439
Employee
preferences for
non cash incentives
Frederick Herzberg &
Edward Deci
Hygiene factors v. motivators
Both say that relying too much on
extrinsic motivators is risky
Intrinsic motivators are motivated by
drive for competence and self
determination
#3 Instrumentality and Rewards
Expectancy Theory
Expectancy
Instrumentality
Valence
Frederick Taylor: Scientific Management
“One Best Way”
Fair Day’s Work



Quotas
Standards
Inspection and observation
Today’s Emphasis… Pay For
Performance Again
Studies, Fortune 500
firms and Dupont
More business risk
on employees
More mngt pay for
performance
More sales
incentives
Less base pay
Types of Incentive Plans
Variable pay based on performance.

Base pay + one lump sum bonus
 Gift certificates.com
 Time off
Incentives for operations
people (actually do work)
Piecework plans



Oldest incentive
Guaranteed base = increased pay for each
piece over a standard (base)
Rate busters
Short term incentives
Annual bonus
Three basic issues to
consider

Eligibility
 Higher up you get more


Fund size
Individual Rewards
 IDEAAs program
 Mary Kay
 Recogiition

EE of the month
Long Term Incentives
Stock options




Right to purchase shares
Idea is that stock value will go up
Not working today
Overseas execs get taxed twice on options
 140,00$ bonus + 40,000$ in taxes
Incentive for Sales People
Fixed Salary Plan

+ Security – not results oriented
Commission Plans

+ more incentive- neglect other duties


-insecurity, - no sick pay – no vacation pay
- higher turnover
Combination Plans


80% base 20% commission
Best of both worlds
 Set Sales Quotas
 Give sales incentives
Merit Pay
Salary increase based upon great
performance
Becomes part of base pay
Lump sum merit pay (one time $)
Profit Sharing Plans
A plan that allow ees to share in firms
profits

Cash plans
 % of profits

Lincoln incentive plans
 $ based upon merit rating of individuals

Deferred profit sharing plans
 $ placed in trustee account, $ is there until
retirement nd then taxed at lower amount
Employee Stock Ownership
Plan ESOP
A firm contributes shares of its own
stock to a trust. The trust distributes
fund to ees upon retirement
Problem too much delay

Firm gets tax deduction
 Can also claim income tax deduction
 Develops sense of ownership in employees
Scanlon Plans
Developed by Joe Scanlon l937
Philosophy of cooperation
“WE” attitude ee must understand
company profits and losses
Competence from ees
Involvement
Sharing of benefits

As workers reduce costs that are rewarded
Proceeds are shared
Gainsharing
An incentive that engages employees in
a common effort to achieve productivity
objectives and share the gains
Same as Scanlon just today’s version