Human Resource Management

Sixteenth Edition, Global Edition

Chapter 12

Pay for Performance and

Financial Incentives

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Learning Objectives (1 of 2)
12.1 Explain how you would apply four motivation theories
in formulating an incentive plan.
12.2 Discuss the main incentives for individual employees.
12.3 Discuss the pros and cons of commissions versus
straight pay for salespeople.

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Learning Objectives (2 of 2)
12.4 Describe the main incentives for managers and
executives.
12.5 Name and describe the most popular organization-wide
incentive plans.
12.6 Explain how to use incentives to improve employee
engagement.

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Learning Objective 12.1: Explain How You
Would Apply Four Motivation Theories in
Formulating an Incentive Plan

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Money’s Role in Motivation
• Frederick Taylor
• Popularized financial incentives
• Need for formulating a “fair day’s work”
• Spearheaded the scientific management movement
• Popularized using incentive pay

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Incentive Pay Terminology
• Pay-for Performance
– Tie employees’ pay to the employees’ performance
• Variable Pay
– Performance-based incentive plan

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Linking Strategy, Performance, and
Incentive Pay
• Incentive pay
• Tying worker pay to performance
• Easier said than done
• Sketchy research
• Many plans incentivize the wrong behavior
• Don’t motivate everyone

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Motivation and Incentives
Theories that have relevance to designing incentive plans
• Motivators and Fredrick Herzberg
• Demotivators and Edward Deci
• Expectancy Theory and Victor Vroom
• Behavior Modification / Reinforcement and B.F. Skinner

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Know Your Employment Law

Employee Incentives and the Law

Let’s take a look…

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Learning Objective 12.2: Discuss the Main
Incentives for Individual Employees

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Individual Employee Incentive and
Recognition Programs
• Piecework
– Earnings tied directly to what the worker produces
– Straight piecework
– Standard hour plan
– Advantages and disadvantages

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Merit Pay as an Incentive
• Merit pay as an incentive
– Based on performance
– Evidence is mixed
• Merit pay options
– Lump-sum merit increases
– Tied to individual and organizational performance

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Incentive for Professional Employees
• Making incentive pay decisions for professional
employees is challenging
• Dual-career ladders
– One path for managers and another for technical
experts

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Non-Financial and Recognition-Base
Awards
• Recognition program
• Social recognition program
• Performance feedback
– Qualitative information
– Quantitative information

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Trends Shaping HR: Digital and Social
Media

Recognition Programs

Let’s take a look…

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Improving Performance: HR Tools for
Line Managers and Small Businesses

Financial Incentives for Motivation

Let’s talk about it…

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List of Recognition
Figure 12-1 Social Recognition and Related Positive Reinforcement Managers
Can Use
• Challenging work assignments • Being provided with ample
• Freedom to choose own work activity encouragement
• Having fun built into work • Being allowed to set own goals
• More of preferred task • Compliments
• Role as boss’s stand-in when he or • Expression of appreciation in front of
she is away others
• Role in presentations to top • Note of thanks
management • Employee-of-the-month award
• Job rotation • Special commendation
• Encouragement of learning and • Bigger desk
continuous improvement • Bigger office or cubicle

Source: Based on Bob Nelson, 1001 Ways to Reward Employees (New York: Workman Pub, 1994), p age

19; Sunny C. L. Fong and Margaret A. Shaffer, "The Dimensionality and Determinants of Pay
Satisfaction: A Cross-Cultural Investigation of a Group Incentive Plan," International Journal of Human
Resource Management 14, no. 4 (June 2003), p 559 (22).
age

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Job Design
• Can significantly impact employee motivation and retention
• Primary driver of employee engagement
• Useful part of an employer’s total rewards program

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Improving Performance: The Strategic
Context

The Fast-Food Chain

Let’s talk about it…

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Learning Objective 12.3: Discuss the Pros
and Cons of Commissions Versus Straight
Pay for Salespeople

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Incentives for Salespeople
• Align:
– how they measure and reward their salespeople
– with their firms’ strategic goals.

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Types of Sales Incentive Plans
• Salary plan
– When the main task involves prospecting or account
serving
• Commission plan
– Pays only for results
• Combination plan
– 60-70% base salary with 30-40% incentive

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Maximizing Sales Force Results
• In setting sales quotas and commission rates, the goal is to
motivate sales activity but avoid excessive commissions
– Set Effective Quotas
– Distinguish Among Performers
• Enterprise Incentive Management (EIM)

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Sales Incentives in Action

A car salesperson’s commission

Let’s take a look . . .

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Learning Objective 12.4: Describe the
Main Incentives for Managers and
Executives

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Incentives for Managers and Executives
• Managers play a crucial role in divisional and company-
wide profitability, and employers therefore put
considerable thought into how to reward them. Most
managers get short-term and long-term incentives in
addition to salary.
– Short-term Incentives
– Long-term Incentives

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Strategy and the Executive’s Long-Term
and Total Rewards Package (1 of 4)
• Sarbanes-Oxley Act
– Affects how employers formulate their executive
incentive programs
– Personal liability

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Strategy and the Executive’s Long-Term
and Total Rewards Package (2 of 4)
• Short-term incentives and the annual bonus
– Eligibility
– Fund size
– Individual awards

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Strategy and the Executive’s Long-Term
and Total Rewards Package (3 of 4)
• Long-term incentives
– Stock options
▪ right to purchase a specific number of shares of
company stock at a specific price during a specific
period

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Strategy and the Executive’s Long-Term
and Total Rewards Package (4 of 4)
• Potential Problems
– Short termism
– Lack of range
• Ethics
– “People put their efforts where they know they’ll be
rewarded.”

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Improving Performance: HR Practices
Around the Globe

International HR – Stock options

Let’s talk about it…

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Learning Objective 12.5: Name and
Describe the Most Popular
Organization-Wide Incentive Plans

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Team and Organization-Wide Incentive
Plans
• How to Design Team Incentives
– Pay incentives to the team based on the team’s
performance
• Evidence-Based HR: Inequities That Undercut Team
Incentives
– Often counterproductive

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Organization-Wide Incentive Plans
• Profit-sharing plans
• Scanlon plans
• Other gainsharing plans
• At-Risk pay plans
• Employee Stock Ownership Plans (ESOPs)
• Broad-based stock options

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Incentive Plans in Practice: Nucor
• Employees can earn bonuses of 100% or more of base
salary, and
• All Nucor employees participate in one of four
performance-based incentive plans.

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Learning Objective 12.6: Explain How to
Use Incentives to Improve Employee
Engagement

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Employee Engagement Guide for
Managers
• Make improving employee engagement a formal target of
your compensation plan
• Appraise and incentivize your supervisors partly based on
whether they take steps to improve their subordinates’
engagement
• Let employees participate in devising the compensation
plan

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Chapter 12 Review

What you should now know….

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