Rewarding Performance
Principles of Human Resource
Management
16 e
Bohlander | Snell
© 2013
2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as
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1–1
Chapter Objectives
After studying this chapter, you should be able to
LEARNING OUTCOME 1
Know how to implement incentive programs.
LEARNING OUTCOME 2
Identify the different types of incentive programs and why they
work.
LEARNING OUTCOME 3
Explain why merit raises may fail to motivate employees and
discuss ways to increase their motivational value.
LEARNING OUTCOME 4
Indicate to specific ways to compensate salespeople.
LEARNING OUTCOME 5
Differentiate how gains may be shared with employees under the
Scanlon and Improshare gainsharing systems.
LEARNING OUTCOME 6
Differentiate between profit sharing plans and explain advantages
and disadvantages of these programs.
LEARNING OUTCOME 7
Describe the main types of ESOP plans and discuss the
advantages of ESOPs to employers and employees.
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36
Strategic Reasons for Incentive Plans
• Variable Pay

Tying pay to some measure of individual, group,
or organizational performance.
• Incentive Pay Programs



Establish a performance “threshold” to qualify for
incentive payments.
Emphasize a shared focus on organizational
objectives.
Create shared commitment in that every individual
contributes to organizational performance and
success.
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36
Incentive Plans as Links to
Organizational Objectives
• Contemporary arguments for incentive plans focus on
linking compensation rewards, both individual and group,
to organizational goals.
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36
Incentive Plans as Links to
Organizational Objectives
• Incentive Plan Purposes

Encourage employees to assume “ownership” of their jobs,
thereby improving effort and job performance.

Motivate employees to expend more effort than under hourly
and/or seniority-based compensation systems.

Support a compensation strategy to attract and retain
top-performing employees.
• Incentive Plan Effectiveness

There is evidence of a relationship between incentive plans
and improved organizational performance.
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Advantages of Incentive Pay Programs
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36
Do Incentive Plans Work?
• Requirements for a Successful Plans




Identify important organizational metrics that
encourage employee behavior.
Involve employees. Incentive programs should
seem fair to employees.
Find the right incentive payout. Payout formulas
should be simple and understandable.
Establish a clear link between performance and
payout.
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Do Incentive Plans Work?
• Why Incentive Plans Fail:

They fail to meet employee expectations for pay gains.

There is confusion about incentive payment
calculations due to poor design and implementation of
the plan.

Employees do not have the capability to change their
performance levels.

The organization environment does not support plan.
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36
Problems with Merit Raises
1. Money for merit increases may be inadequate to satisfactorily
raise all employees’ base pay.
2. Managers may have no guidance in how to define and
measure performance; there may be vagueness regarding
merit award criteria.
3. Employees may not believe that their compensation is tied to
effort and performance; they may be unable to differentiate
between merit pay and other types of pay increases.
4. Employees and their managers may hold different views of
the factors that contribute to job success.
5. Merit pay plans may create feelings of pay inequity.
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Measurement DOs and DON”Ts
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36
Administering Incentive Plans
• Incentive systems are effective:

When incentives are based on actual differences in
individual, team, or organizational performance and
not seen as entitlements.

When annual incentive budgets are large enough to
reward and reinforce exceptional performance.

When overhead costs associated with plan
implementation and administration are properly
considered beforehand and are controllable.
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36
Successful Incentive Plans
• Employees have a desire for an incentive plan.
• Employees are encouraged to participate.
• Employees see a clear connection between the incentive
payments they receive and their job performance.
• Employees are committed to meeting the standards.
• Standards are challenging but achievable.
• Payout formulas are simple and understandable.
• Payouts are a separate, distinct part of compensation.
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Effective Incentive Plan Administration
• Grant incentives based on individual
performance differences.
• Have the financial resources to reward performance.
• Set clearly defined, accepted, and challenging yet
achievable performance standards.
• Use an easily understood payout formula
• Keep administrative costs reasonable.
• Do not “ratchet up” performance standards.
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Individual Incentive Plans
• Straight Piecework

An incentive plan under which employees receive a
certain rate for each unit produced.
• Differential Piece Rate

A 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.
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Computing the Piece Rate
60 minutes (per hour)
12 minutes(standard time per unit)
$12.75 (hourly rate)
= 5 units per hour
= $2.55 per unit
5 units (per hour)
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Piecework: The Drawbacks
• Problems with piecework systems:

Is not always an effective motivator

Piecework standards can be difficult to develop.

Individual contributions can be difficult measure.

Not easily applied to work that is highly mechanized
with little employee control over output.

Piecework may conflict with organizational culture
(teamwork) and/or group norms (“rate busting”).

When quality is more important than quantity.

When technology changes are frequent.
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Individual Incentive Plans (cont.)
• Standard Hour Plan

An incentive plan that sets pay rates based on the
completion of a job in a predetermined “standard
time.”

If employees finish the work in less than the expected
time, their pay is still based on the standard time for
the job multiplied by their hourly rate.
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Individual Incentive Plans (cont.)
• Bonus

Incentive payment that is supplemental to the base
wage for cost reduction, quality improvement, or
other performance criteria.
• Spot bonus

Unplanned bonus given for employee effort
unrelated to an established performance measure.
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Merit Pay
• Merit Pay Program (Merit Raise)

Links an increase in base pay to how successfully
an employee achieved some objective
performance standard.
• Merit Guidelines

Guidelines for awarding merit raises that are tied to
performance objectives.
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Problems with Merit Raises
1. Money for merit increases may be inadequate to satisfactorily
raise all employees’ base pay.
2. Managers may have no guidance in how to define and
measure performance; there may be vagueness regarding
merit award criteria.
3. Employees may not believe that their compensation is tied to
effort and performance; they may be unable to differentiate
between merit pay and other types of pay increases.
4. Employees and their managers may hold different views of
the factors that contribute to job success.
5. Merit pay plans may create feelings of pay inequity.
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Incentive Awards and Recognition
• Awards

Often used to recognize productivity gains, special
contributions or achievements, and service to the
organization.

Employees feel appreciated when employers tie
awards to performance and deliver awards in a timely,
sincere and specific way.
• Noncash Incentive Awards

Are most effective as motivators when the award is
combined with a meaningful employee recognition
program.
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Sales Incentives
Sales Incentive Plans
Straight Salary
Straight Commission
Salary and Commission
Combinations
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Incentive Plans for Salespersons
• Straight Salary Plan

Compensation plan that permits salespeople to be
paid for performing various duties that are not
reflected immediately in their sales volume.

Advantages:
– Encourages building customer relationships.
– Provides compensation during periods of poor sales.

Disadvantage:
– May not provide sufficient motivation for maximizing
sales volume.
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Incentive Plans for Salespersons (cont.)
• Straight Commission Plan

Compensation plan based upon a percentage of sales.
– Draw is a cash advance that must be paid back as
commissions are earned.

Disadvantages:
– Salespeople will stress high-priced products.
– Customer service after the sale is likely to be neglected.
– Earnings tend to fluctuate widely between good and
poor periods of business, an turnover of trained sales
employees tends to increase in poor periods.
– Salespeople are tempted to grant price concessions.
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Incentive Plans for Salespersons (cont.)
• Combined Salary and Commission Plan

A compensation plan that includes a straight salary
and a commission component (“leverage”).

Advantages:
– Combines the advantages of straight salary and straight
commission forms of compensation.
– Offers greater design flexibility
– Can be used to develop the most favorable ratio of
selling expense to sales.
– Motivates sales force to achieve specific company
marketing objectives in addition to sales volume.
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Customize Your Noncash Incentive Awards
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Group Incentive Plans
• Team Incentive Plans

Compensation plans where all team members
receive an incentive bonus payment when production
or service standards are met or exceeded.
• Establishing Team Incentive Payments



Set performance measures upon which incentive
payments are based
Determine the size of the incentive bonus.
Create a payout formula and fully explain to
employees how payouts will be distributed.
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Team Incentive Plans
• Advantages

Team incentives support group planning and problem
solving, thereby building a team culture.

The contributions of individual employees depend on group
cooperation.

Team incentives can broaden the scope of the contribution
that employees are motivated to make.

Team bonuses tend to reduce employee jealousies and
complaints over “tight” or “loose” individual standards.

Team incentives encourage cross-training and the acquiring
of new interpersonal competencies.
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Team Incentive Plans (cont.)
• Disadvantages

Individual team members may perceive that “their”
efforts contribute little to team success or to the
attainment of the incentive bonus.

Intergroup social problems—pressure to limit
performance and the “free-ride” effect may arise.

Complex payout formulas can be difficult for team
members to understand.
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Team Incentive Plans (cont.)
• Gainsharing Plans

Programs under which both employees and the
organization share the financial gains according to a
predetermined formula that reflects improved
productivity and profitability.
• Increase in productivity is gained when:


Greater output is obtained with less or equal input.
Equal production output is obtained with less input.
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Gainsharing Incentive Plans
Scanlon Plan
Improshare
Rewards come from employee participation in
improving productivity and reducing costs.
Gainsharing based on increases in productivity of
the standard hour output of work teams.
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Scanlon Plan Suggestion Process
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Types of Long-Term Incentive Plans
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Enterprise Incentive Plans
• Profit Sharing

Any procedure by which an employer pays, or makes
available to all regular employees, in addition to their
base pay, current or deferred sums based upon the
profits of the enterprise.

Challenges:
– Agreement over the percentages of shared of profits and the
forms of distribution (cash or deferred) of profits between
company and employees
– Annual variations and possibility of no payout due to financial
condition of company
– Maintaining motivational connection of profit-sharing to
performance of employees
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Enterprise Incentive Plans (cont.)
• Stock Options

Granting employees the right to purchase a specific
number of shares of the company’s stock at a
guaranteed price (the option price) during a
designated time period.

The value of an option is subject to stock market
conditions at the time that option is exercised.
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Enterprise Incentive Plans (cont.)
• Employee Stock Ownership Plans (ESOPs)

Stock plans in which an organization contributes
shares of its stock to an established trust for the
purpose of stock purchases by its employees.
– The employer establishes an ESOP trust that qualifies
as a tax-exempt employee trust under Section 401(a) of
the Internal Revenue Code
– Stock bonus plans are funded by direct employer
contributions of its stock or cash to purchase its stock.
– Leveraged plans are funded by employer borrowing to
purchase its stock for the ESOP.
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Enterprise Incentive Plans (cont.)
Rewards and Risks of ESOPS
Advantages
Disadvantages
Retirement benefits
Liquidity and value
Pride of ownership
Single funding basis
Deferred taxes
Not insured
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Incentives for Professional Employees
• When it comes to individual, team, and
enterprise incentives, professional employees—
engineers, scientists, and attorneys, for
example—are no different than anyone else.





Move into management positions
Administrative assignment
Extend the salary range
“Up or out”
Compensation beyond base pay
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Incentives for Professional Employees (cont.)
• Rules for maintaining motivation among
professionals
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
Provide clear goals
Give prompt feedback
Reward performance quickly
Involve in decision making
Seek their opinions often
Provide autonomy in work
Hold accountable for results
Tolerate impatience
Provide varied work opportunities
Keep them aware of upcoming challenging goals
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Incentives for Executives
• The Executive Pay Package





Base salary
Short-term incentives or bonuses
Long-term incentives or stock plans
Benefits
Perquisites (perks)
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Incentives for Executives (cont.)
• Justifications

Large financial incentives reward superior performance.

Business competition is pressure-filled and demanding.

Good executive talent is in great demand.

Effective executives create shareholder value.
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The “Sweetness” of Executive Perks
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Executive Compensation Reform
• Current Reform Measures

The Internal Revenue Service (IRS) is looking for taxcode violations in executive pay packages and will
make executive pay a part of corporate audits.

The Securities and Exchange Commission issued pay
disclosure rules which require companies listed on the
New York Stock Exchange and NASDAQ to disclose
the true size of their top executive pay packages.

The Financial Accounting Standards Board (FASB)
now requires that stock options be recognized as an
expense on income statements.
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Executive Compensation Reform (cont.)
• Other Reform Measures:

The adoption of performance formulas that peg
executive compensation to organizational benchmarks
other than stock price

Shareholder resolutions that allow shareholders the
right to vote on executive pay packages

Greater accountability by compensation committees to
justify large executive pay awards or severance or
retirement packages
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Key Terms
bonus
combined salary and
commission plan
differential piece rate
employee stock ownership
plans
(ESOPs)
gainsharing plans
Improshare
merit guidelines
Perquisites
profit sharing
salary plus bonus plan
Scanlon Plan
spot bonus
standard hour plan
straight commission plan
straight piecework
straight salary plan
team incentive plan
variable pay
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Chapter 10 - Learning Outcomes
Learning Outcome Statements
Related Outcomes from Body of the Text
1
Know how to implement incentive programs.
As a direct competitor of Lincoln Electric, Illinois Tool Works Inc. has decided to develop more
performance based incentives. As an HR manager for Illinois Tool Works, how would you
successfully implement an incentive program similar to Lincoln Electric’s?
2
Identify the different types of incentive
programs and why they work.
If Google paid its programmers based on how many programs they wrote per day, what do you think
would happen? If Lincoln Electric paid people only a standard hourly rate, would their productivity
stay the same? If enlisted soldiers received an additional bonus if they reenlisted in the military, how
much more likely would they be to reenlist?
3
Explain why merit raises may fail to motivate
employees and discuss ways to increase their
motivational value.
4
Indicate specific ways to compensate
salespeople.
5
Differentiate how gains may be shared with
employees under the Scanlon and
Improshare gainsharing systems.
6
Differentiate between profit sharing plans and
explain advantages and disadvantages of
these programs.
7
Describe the main types of ESOP plans and
discuss the advantages of ESOPs to
employers and employees.
If you perform well, you most likely want to be rewarded for this. But what is the best model for
rewarding employees who do well? Is it better to offer merit bonuses, merit pay raises, or just
recognize them for their work? Whatever reward you choose, how do you make sure it motivates
your employees?
Siemens is one of the largest electronics and engineering companies in the world. While they
produce many consumer products such as cell phones and household electronics, many of their
products are sold to other companies. As a result, Siemens is very dependent upon their
salespeople. What are the different payment methods you would use to increase sales at Siemens?
With the new economic realities and globalization, are gainsharing plans such as Scanlon and
Improshare an expensive thing of the past? Do the benefits of these team incentives outweigh the
costs?
Competitors like Facebook and Twitter have been hiring your best employees away from you. As a
result, you have decided to share some of the profits with your employees. Discuss the advantages of
profit sharing and identify specific characteristics that will ensure success for your plan.
Consider your favorite grocery store. Is it owned by its employees? Why would your local grocery
store implement such a plan? What potential problems might be involved?
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