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CHAPTERS 11
Rewarding Performance
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Chapter Objectives
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Develop pay-for-performance plans
that are appropriate for different
levels in an organization
Identify the potential benefits and
drawbacks of different pay-forperformance systems and choose the
plan that is most appropriate for a
particular firm
Design an executive compensation
package that motivates executives to
make decisions that are in the firm’s
best interests
Weigh the pros and cons of different
compensation methods for sales
personnel and create an incentive
plan that is consistent with the firm’s
marketing strategy
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Review Key Terms
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Employee stock ownership plans
(ESOPs)
Gainsharing
Incentives
Pay-for-performance
Profit-sharing
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Motivation, Performance, and Pay
 Incentives
 Financial
rewards paid to workers whose production
exceeds a predetermined standard
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Individual Differences
 Law
of Individual Differences
 The
fact that people differ in personality, abilities,
values, and needs.
 Different people react to different incentives in
different ways.
 Managers should be aware of employee needs and
fine-tune the incentives offered to meets their needs.
 Money is not the only motivator.
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Needs and Motivation
 Abraham
 Five
Maslow’s Hierarchy of Needs
increasingly higher-level needs:
 physiological
 security
 social
(food, water, sex)
(a safe environment)
(relationships with others)
 self-esteem
(a sense of personal worth)
 self-actualization
 Lower
(becoming the desired self)
level needs must be satisfied before higher
level needs can be addressed or become of interest to
the individual.
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Needs and Motivation
 Herzberg’s
 Hygienes
Hygiene–Motivator theory
(extrinsic job factors)
 Inadequate
working conditions, salary, and incentive pay
can cause dissatisfaction and prevent satisfaction.
 Motivators
(intrinsic job factors)
 Job
enrichment (challenging job, feedback and recognition)
addresses higher-level (achievement, self-actualization)
needs.
 The
best way to motivate someone is to organize the
job so that doing it helps satisfy the person’s higherlevel needs.
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Instrumentality and Rewards
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Vroom’s Expectancy Theory
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A person’s motivation to exert some level of effort is a function
of three things:
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Expectancy: that effort will lead to performance.
Instrumentality: the connection between performance and the
appropriate reward.
Valence: the value the person places on the reward.
Motivation = E x I x V
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If any factor (E, I, or V) is zero, then there is no motivation to work
toward the reward.
Employee confidence building and training, accurate appraisals, and
knowledge of workers’ desired rewards can increase employee
motivation.
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Pay-for-performance: The Challenges
 The
“do only what you get paid for” syndrome
 Unethical Behaviors
 Negative effects on the spirit of cooperation
 Lack of control
 Difficulties in measuring performance
 Psychological contracts
 The credibility gap
 Job dissatisfaction and stress
 Potential reduction of intrinsic drives
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Meeting the Challenges of Pay-for-performance
Systems
 Link
pay and performance appropriately
 Straight
piecework: A fixed sum is paid for each unit
the worker produces under an established piece rate
standard. An incentive may be paid for exceeding the
piece rate standard.
 Standard
hour plan: The worker gets a premium
equal to the percent by which his or her work
performance exceeds the established standard.
 Use
pay-for-performance as part of a broader
HRM system
 Build employee trust
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Meeting the Challenges of Pay-for-performance
Systems
 Promote
the belief that performance makes a
difference
 Use multiple layers of rewards
 Increase employee involvement
 Stress the Importance of Acting Ethically
 Use motivation and non-financial incentives
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Employee Preferences for Non-cash
Incentives
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Types of Pay-for-performance Plans
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Types of Incentive Plans
 Individual
 Sales
incentive/recognition programs
compensation programs
 Team/group-based
variable pay programs
 Organization-wide
incentive programs
 Executive
incentive compensation programs
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Types of Pay-for-performance Plans
Individual-based plans
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Individual-based plans
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Advantages
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Merit pay
Bonus programs
Lump-sum payments
Rewarded performance is likely to be repeated – expectancy theory
Financial incentives can shape an individual's goals
Help the firm achieve individual equity
Fit in with an individualistic culture
Disadvantages
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May promote single-mindedness
Employees do not believe pay and performance are linked
They may work against achieving quality goals, and they may promote
inflexibility.
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Types of Pay-for-performance Plans
Individual-Based Plans
 Conditions
under which individual-based plans
are most likely to succeed
 When
the contributions of individual employees can
be accurately isolated
 When the job demands autonomy
 When cooperation is less critical to successful
performance or when competition is to be encouraged
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Types of Pay-for-performance Plans
Sales Compensation Programs
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Salary plan
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Straight salaries
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Best for: prospecting (finding new clients), account servicing, training
customer’s sales force, or participating in national and local trade
shows.
Commission plan
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Pay is only a percentage of sales
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Keeps sales costs proportionate to sales revenues.
May cause a neglect of non-selling duties.
Can create wide variation in salesperson’s income.
Likelihood of sales success may linked to external factors rather than to
salesperson’s performance.
Can increase turnover of salespeople.
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Types of Pay-for-performance Plans
Sales Compensation Programs
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Combination plan
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Pay is a combination of salary and commissions, usually with a sizable
salary component.
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Plan gives salespeople a floor (safety net) to their earnings.
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Salary component covers company-specified service activities.
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Plans tend to become complicated, and misunderstandings can result.
Commission-plus-drawing-account plan
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Commissions are paid but a draw on future earnings helps the salesperson to
get through low sales periods.
Commission-plus-bonus plan
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Pay is mostly based on commissions.
Small bonuses are paid for directed activities like selling slow-moving
items.
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Types of Pay-for-performance Plans
Team-based Plans
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Team-based plans attempt to support other efforts to increase the
flexibility of the work force within a firm.
These plans normally reward all team members equally based on
group outcomes.
Advantages
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Foster group cohesiveness
Facilitate performance measurement
Disadvantages
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Possible lack of fit with individualistic cultural values
Free-riding effect
Social pressures to limit performance
Difficulties in identifying meaningful groups
Inter-group competition leading to a decline in overall performance.
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Types of Pay-for-performance Plans
Team-based Plans
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Conditions under which team-based plans are most
likely to succeed
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When work tasks are so intertwined it is difficult to single
out who did what
When the firm’s organization facilitates the implementation
of team-based incentives
When the objective is to foster entrepreneurship in selfmanaged work groups
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Advantages and Disadvantages
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Types of Pay-for-performance Plans
Plant-wide Plans
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Plant-wide plans
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Conditions to be considered
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Generally referred to as gainsharing programs because they return a portion of the
company's cost savings to the workers, usually in the form of a lump-sum bonus.
Firm size
Technology
Historical performance
Corporate culture
Stability of the product market
Three major types:
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Scanlon Plan
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Rucker Plan
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Rewards labor savings, most appropriate for companies that have a "high touch labor"
content
Most appropriate for organizations that want to improve other variables, such as scrap
reduction or energy consumption, in addition to labor.
Improshare
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easiest of the gainsharing plans to understand and install
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Types of Pay-for-performance Plans
Plant-wide Plans
 Advantages
 eliciting
active employee input
 increasing the level of cooperation
 fewer measurement difficulties
 improved quality
 Disadvantages
 protection
of low performers
 problems with the criteria used to trigger rewards
 management-labor conflict
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Types of Pay-for-performance Plans
Corporate-wide Plans
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Corporate-wide Plans
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Differences between Corporate-wide Plan and Gainsharing
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macro type of incentive program and is based on the entire corporation's performance
no attempt is made to reward workers for productivity improvements
they are very mechanistic
they may used to fund retirement programs although there are exceptions
Profit-sharing plans
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Cash plans
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The Lincoln incentive system
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Profits are distributed to employees based on their individual merit rating.
Deferred profit-sharing plans
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Employees receive cash shares of the firm’s profits at regular intervals.
A predetermined portion of profits is placed in each employee’s account under a trustee’s supervision.
Employee stock ownership plans (ESOPs)
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A corporation annually contributes its own stock—or cash (with a limit of 15% of
compensation) to be used to purchase the stock—to a trust established for the employees.
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The trust holds the stock in individual employee accounts and distributes it to employees upon
separation from the firm if the employee has worked long enough to earn ownership of the
stock.
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Types of Pay-for-performance Plans
Corporate-wide Plans
 Advantages
 Financial
flexibility for the firm
 Increased employee commitment
 Tax advantages
 Disadvantages
 Risk
for employees
 Limited effect on productivity
 Long-run financial difficulties.
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Types of Pay-for-performance Plans
Corporate-wide Plans
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Conditions favoring corporate-wide plans
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Firm size
Interdependence of different parts of the
business
Market conditions
The presence of other incentives
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Designing Pay-for-performance Plans
Managers and Executives
 Annual
bonus
 Plans
that are designed to motivate short-term
performance of managers and are tied to company
profitability.
 Eligibility
basis: job level, base salary, and impact on
profitability
 Fund
size basis : nondeductible formula (net income) or
deductible formula (profitability)
 Individual
awards: personal performance/contribution
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Designing Pay-for-performance Plans
Managers and Executives
 Stock
option
 The
right to purchase a specific number of shares of
company stock at a specific price during a specific
period of time.
 Nonqualified
 Indexed
option
 Premium
 Options
stock option
priced option
have no value (go “underwater”) if the price
of the stock drops below the option’s strike price (the
option’s stock purchase price).
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Designing Pay-for-performance Plans
Managers and Executives
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Other plans
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Guaranteed loans to directors
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Golden parachutes
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Loans provided to buy company stock.
A highly risky and now frowned upon practice Key employee program
Payments companies make to departing executives in connection with a
change in ownership or control of a company.
Performance plans
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Plans whose payment or value is contingent on financial performance
measured against objectives set at the start of a multi-year period
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Designing Pay-for-performance Plans
Managers and Executives
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Creating an Executive Compensation Plan
Define the strategic context for the executive compensation
program.
 Shape each component of the package to focus the manager on
achieve the firm’s strategic goals.
 Create a stock option plan to meet the needs of the executives
and the company and its strategy.
 Check the executive compensation plan for compliance with all
legal and regulatory requirements and for tax effectiveness.
 Install a process for reviewing and evaluating the executive
compensation plan whenever a major business change occurs.
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Key Strategic Pay Questions
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Why Incentive Plans Fail
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Performance pay can’t replace good management.
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You get what you pay for.
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“Pay is not a motivator.”
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Rewards punish.
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Rewards rupture relationships.
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Rewards can have unintended consequences.
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Rewards may undermine responsiveness.
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Rewards undermine intrinsic motivation.
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Implementing Effective Incentive Plans
Ask: Is effort clearly instrumental in obtaining the
reward?
 Link the incentive with your strategy.
 Make sure effort and rewards are directly related.
 Make the plan easy for employees to understand.
 Set effective standards.
 View the standard as a contract with your employees.
 Get employees’ support for the plan.
 Use good measurement systems.
 Emphasize long-term as well as short-term success.
 Adopt a comprehensive, commitment-oriented approach.
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HR Activities that Build Commitment
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Clarifying and communicating the goals and mission of
the organization.
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Guaranteeing organizational justice.
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Creating a sense of community by emphasizing
teamwork and encouraging employees to interact.
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Supporting employee development by emphasizing
promotion from within, developmental activities, and
career-enhancing activities.
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Generally committing to “people-first values.”