PART 

FOUR                                                              COMPENSATION

C H A P T E R T   T w e l v e

12
Pay for Performance 
And Financial
 Incentives

Lecture Outline

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 Strategic Overview
Money and Motivation:  An Introduction
Performance and Pay
Motivation and Incentives 
Behavior Modification / Reinforcement Theory 
      Incentive Pay Terminology 
Individual Employee Incentives and Recognition 
Piecework Plans
In Brief: This chapter gives an
Merit Pay as an Incentive
Merit Pay Options
overview of money and motivation,
Incentives for Professional Employees and then outlines different incentive
Recognition—based Awards programs that are used for different
Supporting Incentives and Recognition Programs  types of employees. It also discusses
with Technology  organization-wide incentive plans.
Incentives for Salespeople
Salary Plan
Interesting Issues: There is tension
Commission Plan
Combination Plan between the concept of providing
Setting Sales Quotas employees with a secure, stable
Strategic Sales Incentives  income (which some feel allows
Team or Group Variable Pay Incentive Plans them the ability to be entrepreneurial
How to Design Team Incentives and take appropriate risks for the
Pros and Cons of Team Incentives
company), and the idea of linking
Organization-Wide Incentive Plans
Profit­Sharing Plans
pay directly to performance.
Employee Stock Ownership Plan (ESOP) Improved employee performance
Scanlon and Other Gainsharing Plans must be linked to improved
At­Risk Variable Pay Plans organizational performance if
Incentives for Managers and Executives incentive pay is to be more than just
Short­Term Incentives: The Annual Bonus  another labor cost.
Long­Term Incentives
Other Executive Incentives
Strategy and Executive Compensation
Designing Effective Incentive Plans
Why Incentive Plans Fail
How to Implement Incentive Plans
 Research Insight
Incentive Plans in Practice

ANNOTATED OUTLINE

I. Money and Motivation: An Introduction

Frederick Taylor made three contributions in the late 1800s: standards of output
defining a fair day’s work, the scientific management approach which emphasized
improvement of work methods, and the use of financial incentives for those whose
output exceeded standards.

A. Performance and Pay – Compensation, shareholder value, and turbulence are

factors that characterize business today, and they have produced a renaissance
for financial incentive/pay-for-performance plans.

B. Motivation and Incentives – The law of individual differences means that people
differ in personality, abilities, values, and needs. They therefore react to different

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 incentives in different ways. Several theorists have contributed relevance to
designing incentive plans.

1. Frederick Herzberg - hygiene—motivator theory divides needs into two

factors. Hygiene factors include such things as working conditions, salary
and incentives. Motivators include those factors that make the job more
intrinsically motivating, like challenge, feedback and recognition.

2. Edward Deci – found that extrinsic rewards could at times actually detract from the
person’s intrinsic motivation

3. Victor Vroom.- says a person’s motivation to exert some level of effort is a function of
three things: the person’s expectancy (in terms of probability) that his or her effort will
lead to performance; instrumentality, or the perceived connection (if any) between
successful performance and actually obtaining the rewards; and valence, which
represents the perceived value the person attaches to the reward.

C. Behavior Modification / Reinforcement Theory – Psychologist B.F. Skinner proposed that to

understand behavior one must understand the consequences of that behavior. Behavior
modification means changing behavior through rewards or punishments that are contingent
upon performance.

D.. Incentive Pay Terminology - Pay for performance plans are those which pay all
employees based on the employees’ performance. Variable pay generally refers
to a group incentive plan that ties pay to some measure of the firm’s (or facility’s)
overall profitability.

Know Your Employment Law: Incentives – the employer must

comply with the overtime provisions of the Fair Labor Standards Act
when designing and administering its incentive plans. Certain
bonuses are excludable from overtime pay calculations. The
problem is that many other types of incentive pay must be included.

Ø NOTES Educational Materials to Use

II. Individual Employee Incentive and Recognition Programs

A. Piecework Plans – Piecework is where you pay the worker a sum (piece rate) for
each unit he/she produces. Straight piecework entails a strict proportionality
between results and rewards regardless of output. With a standard hour plan,
the worker gets a premium equal to the percent by which his/her performance
exceeds the standard.

B. Merit Pay As An Incentive – Merit pay or raise is any salary increase the firm
awards to an employee based on his/her individual performance. It is different
from a bonus in that it usually becomes part of the employee’s base salary,
whereas a bonus is a one-time payment.

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 C. Merit Pay Options – Traditional merit pay plans have two basic characteristics: (1)
merit increases are usually granted to employees at a designated time of the
year in the form of a higher base salary, and (2) the merit raise is usually based
exclusively on individual performance. Two adaptations of merit pay plans are:
(1) one awards merit raises in one lump sum once a year and (2) merit awards
are tied to both individual and organizational performance (see Table 12-2).

D. Incentives for Professional Employees – Professional employees are those

whose work involves the application of learned knowledge to the solution of the
employer’s problems, such as lawyers, doctors, economists, and engineers.
Making incentive pay decisions for professional employees can be challenging
because they’re usually paid well anyway.

E. Recognition-Based Awards – The term “recognition program” usually refers to

formal programs such as employee-of-the-month programs. “Social recognition”
programs are more informal manager-employee exchanges, including praise and
approval. “Performance feedback” is similar, but provides quantitative or
qualitative information on performance in order to change the performance or
maintain it. Most employers combine both financial and non-financial incentives
to motivate employees.

F. Supporting Incentives and Recognition Programs with Technology – There are

many reasons to use internet sites to manage awards programs. The sites can
offer a much broader range of products than most employers could catalog and
offer themselves. And perhaps most importantly, the whole process is expedited
—it’s much easier to bestow and deliver the awards.

Ø NOTES Educational Materials to Use

III. Incentives for Salespeople

A. Salary Plan – offered by some firms. Straight salary makes it simple to switch
territories or to reassign salespeople, and it can foster loyalty among the sales
staff. A disadvantage is that it can constrict sales and de-motivate potentially
high-performing salespeople.

B. Commission Plan – pays salespeople for results, and only for results; thus, they
tend to attract high-performing sales people who see that effort clearly leads to
rewards. But it may cause them to neglect non-selling duties like servicing small
accounts, cultivating dedicated customers, and pushing hard-to-sell items.

C. Combination Plan – Most companies pay salespeople a combination of salary

and commissions, usually with a sizable salary component. Combination plans
give salespeople a floor to their earnings, and still provide an incentive for
superior performance. But they can become complicated, and misunderstandings
can result.

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 D. Setting Sales Quotas – Setting effective quotas is an art. In today’s fast-changing
business scene, sales quotas must become more flexible than they have been in
the past.

1. An Example: Auto Dealers – Compensation for car salespeople ranges from

a high of 100 percent commission to a small base salary with commission
accounting for most of total compensation.

E. Strategic Sales Incentives – Sales commissions remain popular, but employers

increasingly link them to non-volume-based measures.

IV. Team / Group Incentive Plans

A. How to Design Team Incentives – There are three approaches:

1. Members are paid based on one of three formulas – all members receive the
pay (a) earned by the highest producer, (b) earned by the lowest producer, or
(c) equal to the average pay earned by the group.

2. Set a production standard based on the final output of the group as a whole.

3. Tie rewards to goals based on some overall standard of group performance.

B. Pros and Cons of Team Incentives – A lot of our work today is organized around
teams, so team incentives make sense to encourage cooperation and training.
But exceptionally hard working employees do not get paid according to their
efforts, which may reduce motivation.

When You’re On Your Own, HR for Line Managers and

Entrepreneurs: Incentives Supervisors Can Use – Most supervisors
would not want to rely simply on the employer’s incentive plans to
motivate his or her employees. There are a wide variety of things
that a supervisor can do. A few are listed in the textbook.

Ø NOTES Educational Materials to Use

Teaching Tip – Discuss: If college classes were more like business, what kinds of group
incentives could be used to improve student performance in the classroom? What kinds of
measures would be needed to implement such incentives?

V. Organization-Wide Incentive Plans

A. Profit-Sharing Plans involves employees receiving a share of the company’s

annual profits. There are several types of profit-sharing plans: cash plans,
Lincoln Incentive system, and deferred profit-sharing plans.

B. Employee Stock Ownership Plans (ESOP) are company-wide plans in which a

firm contributes shares of its own stock or cash to purchase the stock to a trust
established to purchase shares of the firm’s stock for employees.

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 C. Scanlon and Other Gainsharing Plans

1. Scanlon Plan – is an incentive plan developed in 1937 by Joseph Scanlon.

The basic features of the plan include: philosophy of cooperation, identity,
competence, involvement system, and sharing of benefits formula.

2. Gainsharing Plans are incentive plans that engage many or all employees in
a common effort to achieve a company’s productivity objectives, with any
resulting cost-savings gains shared among employees and the company.

Implementing a Plan – The basic eight steps are: 1) establish general plan
objectives; 2) define specific performance measures; 3) decide on a funding
formula; 4) decide on a method for dividing and distributing the employees’
share of the gains; 5) make the disbursement significant enough to get
participants’ attention and to motivate their behavior; 6) choose the form of
payment; 7) decide how often bonuses are to be paid; and 8) develop the
involvement system.

D. At-Risk Variable Pay Plans - are plans that put some portion of the employee’s
weekly pay at risk, subject to the firm meeting its financial goals.

Ø NOTES Educational Materials to Use

VI. Incentives for Managers and Executives

A. Short-Term Incentives: The Annual Bonus – is aimed at motivating the short-term

performance of managers and executives.

1. Eligibility usually includes both top and lower level managers.

2. Fund Size refers to the total amount of bonus money the firm makes
available. A nondeductible formula is where they use a straight percentage
(usually of the company’s net income) to create the short-term incentive fund.
A deductible formula assumes that the fund should start to accumulate only
after the firm has met a specified level of earnings.

3. Individual Awards – Typically, a target bonus (as well as maximum amount)

is set for each eligible position, and the actual award reflects the person’s
performance.

The HR Scorecard, Strategy and Results: The New Incentive Plan

– The Hotel Paris did not have an incentive pay program at all. Lisa
Cruz set about creating and implementing an incentive plan that
uses many of the concepts listed in this book.

B. Long-Term Incentives - are used to inject a long-term perspective into executives’

decisions.

1. Stock Options - account for over half of executives’ compensation. A stock

option is the right to purchase a specific number of shares of company stock

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 at a specific price during a specific period of time; the executive thus hopes
to profit by exercising his/her option to buy the shares in the future but at
today’s price.

2. Broad-based Stock Options – Many companies have implementing broad-

based stock option plans in which the potential appreciation is relatively
modest, but in which all or most employees can participate. With companies
now having to show options as an expense when awarded, some firms are
now awarding stock rather than options.

3. Other Plans – Stock appreciation rights permit the recipient to exercise the
stock option (by buying the stock) or to take any appreciation in the stock
price in cash, stock, or some combination of these. A performance
achievement plan awards shares of stock for the achievement of
predetermined financial targets. In a restricted stock plan shares are usually
awarded without cost to the executive, but selling the stock is restricted for a
specified time period.

The New Workforce: Long-term Incentives for Overseas Executives

– This segment discusses long term incentives and potential tax
implications. The message is that firms cannot assume that incentive
programs can simply be exported.

C. Other Executive Incentives – Companies provide various incentives to persuade

executives to remain with the firm, such as golden parachutes and loans.

D. Strategy and Executive Compensation – Few HR practices have as profound or

obvious an impact on strategic success as the company’s long-term incentives.
In creating the compensation package you should: 1) define the strategic context
for the executive compensation program, including the internal and external
issues that face the company, and the firm’s business objectives; 2) shape each
component of the executive compensation package based on your strategic
aims, and then group the components into a balanced plan that makes sense in
terms of these aims; 3) create a stock option plan that gives the executive
compensation package the special character it needs to meet the unique needs
of the executives and the company, and its strategy; 4) check the executive
compensation plan for compliance with all legal and regulatory requirements and
for tax effectiveness; and 5) install a process for reviewing and evaluating the
executive compensation plan whenever a major business change occurs.

Ø NOTES Educational Materials to Use

VII. Designing Effective Incentive Plans

A. Why Incentive Plans Fail – Some explanations include: performance pay can’t
replace good management; you get what you pay for; “pay is not a motivator;”
rewards punish; rewards rupture relationships; rewards can unduly restrict
performance; rewards may undermine responsiveness; rewards undermine
intrinsic motivation; and people work for more than money.

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 B. How to Implement Effective Incentive Plans – Some guidelines to follow to make
your plan more effective: use common sense; 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; take
the corporate culture into consideration; and adopt a comprehensive,
commitment-oriented approach.

C. Research Insight: The Impact of Financial and Non-Financial Incentives – In a

study of the fast food industry in the Midwest, researchers compared
performance over time in stores that had financial and non-financial incentives
with those that did not. The results showed that the incentives improved
employee and store performance and that the improvements were sustained
over time.

D. Incentive Plans in Practice – Most companies have several incentive plans.

Nucor, the largest steel producer in the United States has the highest
productivity, highest wages and lowest labor cost per ton of steel in the American
steel industry.

Ø NOTES Educational Materials to Use

DISCUSSION QUESTIONS

1. Compare and contrast six types of incentive plans. Various types of incentive plans were
presented in the text, including piecework plans, straight and guaranteed plans, standard hour plans,
plans for salespersons (commissions and combination plans), and group incentive plans. With the
piecework plans, earnings are tied directly to what the individual worker produces, and are more
appropriate in a manufacturing organization. Commissions are more appropriate for salespeople in
situations where they are largely unsupervised. In-group incentive plans like the Scanlon Plan, all
workers involved in developing and implementing cost savings share in the benefits of the
suggestions.

2. Explain five reasons why incentive plans fail. When incentive plans fail, it can be for a variety of
reasons like: employees do not believe that effort will obtain the reward, bad management overrides
the plan, rewards tied to the wrong measures, plan is complicated and difficult for employees to
understand, or standards are too high or too low.

3. Describe the nature of some important management incentives. Two widely used management
incentive plans are merit pay and profit sharing plans. Merit pay is any salary increase that is
awarded to an employee on his or her individual performance. Advocates argue that only pay tied
directly to performance can motivate improved performance. Profit sharing plans distribute a portion
of the company's profits to employees in the form of a bonus. Research shows that benefits are more
subtle than increased productivity—benefits are possibly in the form of better worker commitment.
There might also include long-term incentives.

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4. When and why would you pay a salesperson a salary and commission combined? Salary plans
work well when your objective is prospecting work or where the salesperson is primarily involved in
account servicing. They are often found in industries that sell technical products. A commission plan
is appropriate when sales costs are proportional to sales. This can reduce the selling investment for
fixed costs. The straight commission also provides salespeople with the greatest possible incentive
and there is a tendency to attract high-performing people. Combination plans are used when the firm
wants to direct its salespeople's activities by detailing what services the salary component is being
paid for while the commission component provides a built-in incentive.

5. What is merit pay? Do you think it's a good idea to award employees merit raises? Why or
why not? Merit pay is a salary increase that is awarded to an employee based on his or her
individual performance. It is a good idea to award merit raises when you have a good performance
appraisal system and employees' individual effort can be fairly and accurately evaluated or measured.

6. In this chapter, we listed a number of reasons experts give for not instituting a pay-for-
performance plan (such as "rewards punish"). Do you think these points (or any of them) are
valid? Why or why not? All of these reasons are, or can be, valid. There will also be
organizational situations where one or more of them will not be valid. Students should describe
situations in which the reason is (or is not) valid.

7. What is a Scanlon plan? Based on what you've read in this book so far, what features of a
commitment-building program does the Scanlon plan include? This is an incentive plan that was
developed in 1937 by Joseph Scanlon. It includes features such as a philosophy of cooperation,
identity, competence, involvement, and sharing of benefits. All these are features of a commitment-
building program. The Scanlon plan is actually an early version of what today is known as a
gainsharing plan.

8. Give four examples of when you would suggest using team or group incentive programs rather
than individual incentive programs. Students should review the sections in the chapter on team or
group incentive programs and individual incentive programs, and think about situations where they
would prefer one incentive plan over the other.

DESSLER COMPANION WEB SITE
We invite you to visit the Dessler homepage (http://www.prenhall.com/dessler) on
the Prentice Hall Web site for the best online business support available. This site
provides professors with a customized course Web site, including new
communication tools, one-click navigation of chapter content, and great resources,
such as Internet Resources, an HRCI Exam Prep Guide, assessment exercises, and
more.

INDIVIDUAL AND GROUP ACTIVITIES

1. Working individually or in groups, develop an incentive plan for the following positions:
chemical engineer, plant manager, used-car salesperson. What factors did you have to
consider in reaching your conclusions? I would give the chemical engineer a merit raise system
because he or she has little perceived control or impact over the production or profitability of the
company. The plant manager should receive an annual bonus tied to the profitability of the plant, as
well as a stock option plan to encourage long-term planning as well. The used-car salesperson would
likely receive a straight commission plan because sales are more directly dependent on his or her
ability to sell those cars to prospective customers.

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2. A state university system in the southeast recently instituted a "Teacher Incentive Program"
(TIP) for its faculty. Basically, faculty committees within each university’s college were told to
award $5,000 raises (not bonuses) to about 40% of their faculty members based on how good
a job they did teaching undergraduates and how many they taught per year. What are the
potential advantages and pitfalls of such an incentive program? How well do you think it was
accepted by the faculty? Do you think it had the desired effect? This program would put a
premium on undergraduate teaching as opposed to research or graduate teaching. If it were to work,
the best teachers would be motivated to teach at the undergraduate level in order to increase their
earnings. The pitfalls are many. Some research or graduate faculty may actually make more through
consulting or other outside means, thus they will not be motivated by this system. If research is
important to this organization, or the graduate programs are vital, this incentive plan could damage
those programs. The awarding of the moneys is likely to be inconsistent because specific guidelines
have not been spelled out. More likely, the rewarding of the raises may become more political as the
committees who have other values determine the awards. It is very likely that the system was met
with great opposition by the faculty.

3. The HRCI “Test Specifications” appendix at the end of this book lists the knowledge someone
studying for the HRCI certification exam needs to have in each area of human resource
management (such as in Strategic Management, Workforce Planning, and Human Resource
Development). In groups of four to five students, do four things: (1) review that appendix now;
(2) identify the material in this chapter that relates to the required knowledge the appendix
lists; (3) write four multiple choice exam questions on this material that you believe would be
suitable for inclusion in the HRCI exam; and (4) if time permits, have someone from your team
post your team’s questions in front of the class, so the students in other teams can take each
others’ exam questions.

4. In March 2004, the pension plan of the Utility Workers Union of America proposed changing
the corporate bylaws of Dominion Resources, Inc., so that in the future, management had to
get shareholder approval of executive pay exceeding $1 million, as well as detailed
information about the firm’s executive incentive plans. Many unions—most of which have
pension funds with huge investments in U.S. companies—are taking similar steps. They point
out that, usually, under Internal Revenue Service regulations, corporations can’t deduct more
than $1 million in pay for any of a company’s top five paid executives. Under the new rules the
unions are pushing, boards of directors will no longer be able to approve executive pay above
$1 million; instead, shareholders would have to vote on it. In terms of effectively running a
company, what do you think are the pros and cons of the unions’ recommendations? Would
you vote for or against the unions’ recommendation? Why or why not? Most students may support
this recommendation, but they need to be able to clearly state rational reasoning as to why.
Hopefully you will have some students who oppose it in order to clearly give both sides to the
argument. You may want to make sure both sides are well represented.

EXPERIENTIAL EXERCISES & CASES
Experiential Exercise: Motivating the Salesforce at Express Auto

This exercise presents a fictional auto dealership and problems that they are experiencing with customer
satisfaction and quality. Students are to analyze the current compensation system to see if it contributes
to the problem.

1. In what ways might your group’s compensation plan contribute to the customer services
problems? Sales force: pay is based almost entirely on commission. The salesperson has no
motivation to assist customers who they do not believe will result in a sale. Finance office: bonuses
for getting customers to use the company financing encourage finance people to coerce people into
making that choice. Detailing: pay is based entirely on the number of cars detailed per day. There is

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 no measure of quality, nor requirement of it regarding pay. Mechanics: pay is based almost entirely
on number of cars serviced as well as servicing them faster than the standard estimated repair time.
There is no measurement of quality or accuracy of repairs. Receptionist/phone service people:
straight hourly rate does not have any performance rewards.

2. What recommendations would you make to improve the compensation system in a way that
would likely improve customer satisfaction? The dealership already has a customer satisfaction
survey in place. They need to link results from quality measures to the incentives that their
employees receive. Examples are: Sales force: one might decrease the commission somewhat and
place that amount in a pool that is distributed based on customer comments about specific sales
personnel. Finance office: bonuses for using company financing should be no more than bonuses
based on customer satisfaction ratings. Detailing: there must be a measure of quality and detailers
should be docked for any problem that results from their lack of attention to detail. Mechanics: re-
works should dock a mechanics pay and mechanics whose work results in no complaints should
receive a significant bonus. Receptionist/phone service people: those who answer the phone should
be able to gain either performance increases in pay, or bonuses based on customer satisfaction
ratings. In general, the approach should be like “teaching to the test.” If you want test scores to
improve, you teach what will be on the test. If you want measures of customer satisfaction to
improve, you reward (or punish) people for those measures.

Case Application: Inserting the Team Concept into Compensation – Or Not

Sandy Caldwell, the new Human Resources Manager for Hathaway manufacturing, wanted to improve
teamwork at every level of the organization. As part of the process of implementing cultural change,
Sandy introduced a new pay for performance system. The reaction to the change was immediate and
“100 % negative”.

1. Does the pay-for-performance plan seem like a good idea? Why or why not? Management
wants to provide incentive for team performance. Their motives are fine. Properly crafted (and with
employee involvement) a pay for performance system may add value at Hathaway.

2. What advice would you give Regina and Sandy as they consider their decision? Most scholars
suggest that pay for performance works best (in the US), when it has both an individual and a team
component. Further, Regina and Sandy need to consider ways of engaging the workforce in the
design/decision process. This involvement will likely provide better ideas, identify potential problem
areas with proposed systems before they are implemented and aid in the implementation process.

3. What mistakes did they make in adopting and communicating the new salary plan? How might
Sandy have approached this major compensation change a little differently? Sandy failed to
involve significant stakeholders in the process. Their input would likely have identified potential
weaknesses in her system. Further, by not involving others, the change in pay came largely as a
surprise. Employees take their pay seriously; surprises are not welcome. Sandy already had
agreement on some issues like the mission and the vision. She could have used that agreement to
begin a dialog on linking compensation more directly to effectively accomplishing the mission.

4. Assuming the new pay plan was eventually accepted, how would you address the fact that in
the new performance evaluation system, employees’ input affects their peers’ pay levels?
Typically, plans have two levels – a team component and an individual component. It is important for
the team to realize that the company does best when the whole team succeeds, and that team
success also requires individual performance.

Continuing Case: Carter Cleaning Company The Incentive Plan

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1. Should this plan in its present form be extended to pressers in the other stores? No, not in its
present form. While the piece-rate plan does make more effective use of Walt’s time and save the
company energy money, the quality control issue is a problem. There needs to be an included incentive
for quality.

2. Should other employees (cleaner-spotters, counter people) be put on a similar plan? Why?
Why not? If so, how, exactly? It makes sense for some positions but not for others. Cleaner-spotters
are production employees who could also benefits from a similar plan. It would have to have a quality
incentive that makes sure they actually get the garments cleaned correctly! An incentive plan that
focuses on customer satisfaction makes more sense for the counter people.

3. Is there another incentive plan you think would work better for the pressers? Some ideas might
include combination plans (salary plus piece-rate), profit-sharing, or merit pay (higher pay for those who
produce more.

4. A store manager’s job is to keep total wages to no more than 30% of sales and to maintain the
fuel bill and the supply bill at about 9% of sales each. Managers can also directly affect sales by
ensuring courteous customer service and by ensuring that the work is done properly. What
suggestions would you make to Jennifer and her father for an incentive plan for store managers?
Profit-sharing, gainsharing, performance plans, annual bonus, recognition, and merit pay are all options.

Translating Strategy into HR Policies and Practice Case: The Hotel Paris
The New Incentive Plan – The continuing case study of Hotel Paris is discussed here. In this segment
HR manager Lisa Cruz must find a way to link pay to performance.

1. Discuss what you think of the measurable criteria Lisa and the CFO set for their new
incentive plan.

Having a large percentage of employees eligible for merit or incentive is good, but will also be
expensive. A 10% difference in reward level will likely motivate improved performance. In order to
justify the expense there should be some proof that the behaviors which will be rewarded are linked
to improved organizational financial performance. Lisa will need to track and communicate these
links. It is also important the Hotel Paris find ways to measure what they plan to reward.

2. Given what you know about the Hotel Paris’ strategic goals, list 3-4 specific behaviors
you would incentivize for each of the following groups of employees: front desk clerks;
hotel managers; valets; housekeepers.

Answers will vary but may include:

Front desk clerks – speed of check-in, number of positive comments by guests, decrease in number
of complaints
Hotel Managers – decrease in absenteeism, process improvements
Valets – time taken to deliver luggage from curb to room, decrease in number of wrong deliveries,
positive feedback received
Housekeepers – decrease in number of complaints, decrease in number of deliveries to room of
forgotten items, increase in number of rooms available for early check-in

3. Lay out a complete incentive plans (including all long and short term incentives) for the Hotel
Paris’ hotel managers.

KEY TERMS

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law of individual The fact that people differ in personality, abilities, values, and needs.
differences

expectancy A person’s expectation that his or her efforts will lead to performance.

instrumentality The perceived relationship between successful performance and

obtaining the reward.

valence The perceived value a person attaches to the reward.

variable pay Any plan that ties pay to productivity or profitability, usually as one-time
lump payments.

piecework A system of pay based on the number of items processed by each

individual worker in a unit of time, such as items per hour or items per
day.

straight piecework An incentive plan in which a person is paid a sum for each item he or she
makes or sells, with a strict proportionality between results and rewards.

standard hour plan A plan by which a worker is paid a basic hourly rate, but is paid an extra
percentage of his or her base rate for production exceeding the standard
per hour or per day. Similar to piecework payment, but based on a
percent premium.

merit pay (merit raise) Any salary increase awarded to an employee based on his or her
individual performance.

team or group incentive A plan in which a production standard is set for a specific work group,
plan and its members are paid incentives if the group exceed the production
standard.

profit-sharing plan A plan whereby most employees share in the company's profits.

employee stock A corporation contributes shares of its own stock to a trust in which
ownership plan (ESOP) additional contributions are made annually. The trust distributes the
stock to employees on retirement or separation from service.

Scanlon plan An incentive plan developed in 1937 by Joseph Scanlon and designed to
encourage cooperation, involvement, and sharing of benefits.

gainsharing plan An incentive plan that engages employees in a common effort to achieve
productivity objectives and share the gains.

at-risk variable pay plans Plans that put some portion of the employees’ weekly pay at risk, subject
to the firm meeting its financial goals.

annual bonus Plans that are designed to motivate short-term performance of managers
and are tied to company profitability.

stock option The right to purchase a stated number of shares of a company stock at
today's price at some time in the future.

golden parachutes Payments companies make in connection with a change in ownership or

control of a company.

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financial incentives financial rewards paid to workers whose production exceeds some
predetermined standard

fair day’s work standards of output which employers should devise for each job based
on careful, scientific analysis

scientific management A management approach that emphasized improving work methods

movement through observation and analysis.

Behavior modification Changing behavior through rewards or punishments that are contingent
upon performance.

Organizationwide Plans in which all or most employees can participate, and which
incentive plans generally tie the reward to some measure of company-wide performance.

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