HRM501

Mohan Thapa
 COMPENSATIONS
(Pay for Performance &
Financial Incentives)
Main purpose of this chapter
How to use performance based incentives to motivate
employees.
Incentives for individual employees, and for managers
and executives, salespeople, and professionals as well as
organization wide incentive plans
Why Incentive fails?
Creating an effective incentive plan
 Motivation, Performance, and Pay
• Financial Incentives
- Financial rewards paid to workers whose production exceeds some
predetermined standard
• Frederick Taylor
- Popularized scientific management and the use of financial incentives
in the late 1800s
○ Systematic soldiering- The tendency of employees to work at the
slowest pace possible and to produce at the minimum acceptable
level
○ Fair day’s work-Output standards devised based on careful,
scientific analysis
○ Scientific management-Management approach based on
improving work methods through observation and analysis
○ Incentive Pay
4
4
FIGURE 11-4 Employee Preference for Non-Cash Incentives

5
 Motivation & Incentives
Frederick Herzberg:
The best way to motivate someone is to organize the job so that
doing it provides the feedback and challenge that helps satisfy the
person's "higher-level” needs for things like accomplishment and
recognition.
These needs are relatively insatiable. So, recognition and
challenging work provide a sort of built-in motivation generator.
Satisfying lower level needs for things like better pay and
working conditions just keep the person from becoming
dissatisfied.
Self-motivated workforce should emphasize job content or
motivator factors
6
6
 Motivation & Incentives
Edward Deci
His work highlights another potential downside to relying too
heavily on extrinsic rewards. They may backfire.
Ex: A Samaritan who risks danger by rushing to an accident
victim’s aid might be insulted if the victim said, “Thanks, here’s
some money for your trouble.”

7
7
 Motivation & Incentives
Victor Vroom
He says a person’s motivation to exert some level of effort depends on
three things.
Expectancy-A person’s expectation that his or her effort will lead to
performance
Instrumentality-The perceived relationships between successful performance
and obtaining the reward.
Valence-The perceived value a person attached to the reward
Thus Motivation is thus a product of three things:
Motivation=(E*V*I) where E represents Expectancy, I Instrumentality,
and V Valence.

8
8
 Motivation & Incentives
Victor Vroom Contd..
Vroom’s theory has three implications for how managers
design incentive plan
First, if employees don’t expect that effort will produce performance, no
motivation will occur. Training, JDs, and confidence building and support to
develop the skills of the employees.
Second, The employees must believe that successful performance will in fact
lead to getting the reward. Ex: Creating easy to understand the incentive plans
Third, the reward itself must be of value to the employee. Endeavor to use
extrinsic and intrinsic rewards that make sense in terms of the specific
behaviors you want to encourage

9
9
 Motivation & Incentives
Behavior Modification/Reinforcement Theory
BF Skinners principles mention that to use incentives one most understand
behavior and consequences of that behavior.
Managers apply Skinner’s principle by using behavior modification. Which
means changing behavior through rewards or punishments that are contingent
on performance.
1. That behavior to lead to a positive consequence (rewards) tends to be
repeated while behavior that appears to lead to a negative
consequence (punishment) tends not to be repeated.
2. Therefore, managers can get someone to change his/her behavior by
providing the properly scheduled rewards (or punishment).

10
10
 Individual Employee Incentive and
Recognition Programs

Individual Employee
Incentive

Piecework Straight Standard Merit Pay as

Plans Piecework Hour Plan an Incentive

11
11
12
 Incentives for Professional Employees
Professional Employees are those whose work involves the application of
learned knowledge to the solution of the employer’s problems.

They include Lawyer, Doctors, Economists and Engineers

It can be challenging to make incentive pay decisions to them

It would be unrealistic to assume that people like system analysts and

programmers at Google and Microsoft only work for gratification.

Several firms like IBM and Motorola award bonuses to employees whose
work wins patents for the firms.

Texas Instruments began offering stock options grants to about a third of

it’s engineers when it discovered it was losing about 15% of them to the
competition
13
13
 Recognition-Based Awards
Recognition
It is one of several types of non-financial incentives. The term recognition
program usually refers to formal programs, such as employee-of-the-month
programs

Social recognition program

It refers to more informal manager-employee exchange such as praise,
approval or expressions of appreciation for a job well done.
Performance Feedback
It is similar to social recognition, but means providing quantitative or qualities
information on task performance for the purpose of changing or maintaining
performance and specific ways.
Performance Based Recognition Program: Texas Instrument, for instance, offers,
bonuses as well as non-financial recognition, including personalized plaques,
parties, movie tickets, golf lessons, and team shirts and jackets
14
Combining Financial and Non-Financial
Incentives
Employee Recognition
Gift Certificates
Special Events
Cash Rewards
Merchandise Incentives
Email/Print Communications
Training Programs
Work/Life Benefits
Variable Pay
Group Travel
Individual Travel
Sweepstakes

15
Incentives for Sales People
Sales Compensation plans typically rely heavily on incentives in
the form of sales commissions, However, most sales people get
straight salaries, and most receive a combination of salary and
commissions.

Incentives for Sales People

Commission Combination Sales

Salary Plan
Plan Plan Awards

16
 Team/Group Incentive Plans

• Team (or Group) Incentive Plans

- A plan in which a production standard is set for a
specific work group, and its members are paid
incentives if the group exceeds the production
standard.

• How to Design Team Incentives

- Tie rewards to an overall standard of team
performance. Such as total labor hours per car.

17
17
 Pros and Cons of Team Incentives
Pros
It reinforce team planning and problem solving, and help ensure
collaboration
It helps in reducing of jealousy, making group members indebted to
each other.
It encourages a sense of cooperation
It facilitates training, since each member has an interest in getting
new members trained as fast as possible
Cons
Worker’s pay may not be proportionate to his/her personal efforts.
It may demotivates the top workers
Worker’s who share in the team’s pay but don’t put their hearts into
the effort are a related problem

18
Organization-Wide Incentive Plans
• Organization-Wide Incentive Plans
- Incentive plans in which all or most employees can
participate, which generally the reward to some measure
of company wide performance.

Organization-Wide Incentive
Plans

Employee
Profit- Stock Gain sharing
Scanlon Plan
sharing plan Ownership Plans
Plan
19
 Incentives for Managers and Executives
Managers plays a crucial roles in divisional and companywide
profitability, and most of the firms therefore put considerable
thought into how to reward them.;

Incentives for Managers and

Executives

Long-term
Long-term Long-term
Short-term Incentive
Incentive Incentive
Incentive-An Stock
nual Bonus Stock Phantom
Appreciation
Options Stock
Rights

20
 Designing Effective Incentive Programs
Why Incentive Plans Fail
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 have unintended consequences
Rewards may undermine responsiveness
Rewards undermine intrinsic motivation

21
 Designing Effective Incentive Programs
How to implement effective incentive programs
1.Ask: Are Performance levels inadequate due to motivation?
2.Link the incentive with your strategy.
3.Make sure that the program is motivational-There should be link between effort
and performance, and between performance and rewards
4.Make the plan easy for employees to understand-Should be easy to calculate the
rewards for various efforts
5.Set effective standards- High but reasonable standards
6.View the standard as a contract with employees-Use caution before decreasing
size of incentive
7.Get employee’s support for the plan
8.Use good measurements systems-Process should be clear and fair
9.Use a complete set of standards-Quality, Quantity, work improvement suggestion
10.Make the incentive plan part of a comprehensive, commitment-oriented
approach.-Employees competence, commitment, employees interaction, career
enhancing activities, supporting employee devt.
22
 The Benefits Picture Today
► They are indirect financial and non-financial payments employees receive for
continuing their employment.
► They include things like health and life insurance, pensions, time off with pay,
and child-care assistance.
► Employers need to design benefits packages with care.
► There are many benefits and various ways to classify them:
- Pay for time not worked (e.g. sick leave, supplemental unemployment
benefits, severance pay)
- Insurance benefits (e.g. injury, medical coverage, illness)
- Retirement benefits (e.g. Social Security, pension plans)
- Services (e.g. personal, employee assistance, family benefits)
- Other (educational subsidies)

23
 Pay for time not worked
► Supplemental Pay Benefits- Benefits for time not worked such as
unemployment insurance, vacation and holiday pay and sick pay
► Common time off with pay periods include holidays, vacations, funeral leave,
sick leave, sabbatical leave, maternity leave, and unemployment insurance
payment for laid-off or terminated employees.
► Unemployment Insurance-Provides benefits if a person is unable to work
through some fault other than his or her own
► Sick Leave-Provides pay to an employee when he or she is out of work
because of illness.
► Severance Pay-A one-time payment some employers provide when
terminating an employee.
► Supplemental Unemployment benefits-Provide for a guaranteed annual
income in certain industries where employers must shut down to change
machinery ir due to reduced work. These benefits are paid by the company and
supplement unemployment benefits.
24
 Insurance Benefits
► Worker’s compensation-Provides income and medical benefits to work
related accident victims or their dependents regardless of fault.
► Group Life Insurance-Provides lowers rates for the employer or employee
and includes all employees, including new employees, regardless of health or
physical conditions
► Accidental death and dismemberment coverage- it provides a lump-sum
benefit in addition to life insurance benefits when death is accidental. It also
provides in case of accidental loss of limbs or sight.
► Hospitalization, Health Insurance-it provides basic hospitalization and
surgical and medical insurances for all eligible employees at group rates. It is
available to all including non –probationary employees. Regardless of health or
physical condition.
► Disability Insurance- it provides income protection for salary loss due to
illness or accident. Payments usually start when normal sick leave payments
end and may continue until age of 65 or beyond.
25
 Retirement Benefits
► Social Security
Most of people usually assume that social security provides income only when
they are over 60, but actually provides
1. Health benefits
2. Maternity benefits
3. Accidental Security Plan
4. Dependent Family Security
5. Old Age Retirement Security

► Pension Plans
Plans that provide a fixed sum when employees reach a predetermined
retirement age or when they can no longer work due to disability.

26
 SCHEMEs UNDER NEPAL
SOCIAL
SECURITY ACT 2074

Employer contribution : - 20% Employee contribution: - 11%

27
 Personal Services and Family-Friendly
Benefits/Other Subsidies
► Personal Services-Many companies provides the sorts of personal
services that most employees need at one time or another like credit
unions, legal services, counseling, and social and recreational
opportunities.
► Some Employers use the term voluntary benefits that range from things
like pet insurance to automobile insurance
► Employee Assistance Program-A formal employer program for
providing employees with counseling and/or treatment programs for
problems such as alcoholism, gambling or stress
► Family-Friendly Benefits-Benefits such as child care and fitness
facilities that make it easier for employees to balance their work and
family responsibilities

► Educational Subsidies-Such as tuition refunds benefits for employees

seeking to continue their educations.
28
Other Compensation Trends

► Broadbanding
► Consolidating salary grades and ranges into just a few wide
levels or “bands,” each of which contains a relatively wide range
of jobs and salary levels.
► Pro and Cons
► More flexibility in assigning workers to different job grades.
► Provides support for flatter hierarchies and teams.
► Promotes skills learning and mobility.
► Lack of permanence in job responsibilities can be unsettling to new
employees.
Group Formation and Exercises