Chapter 12

Reward
Chapter Highlights
ahst is Reward, Types of Rewards, Qualities of Effective Rewards,
Criteria On Which
Rewards Can Be Distributed. Questions to Answer, Indicate True or False.

12.1What is Reward
Payoff for efficient and effective performance may be regarded as reward.
The most obvious reward employees get from work is pay, and we will spend Pay off for
efficient and
the major part of this chapter addressing pay as a reward. However, rewards effective
performance may
also include promotions, desirable work as assignments, and a host of other be regarded as
less obvious payoffsa smile, acceptance by a peer, a covert or overt reward.

implication that you are doing a good job, or a kind word of recognition.
Rewards are quite related to expectancy theory, of motivation : since
people behave in ways that they believe are in their best interests, they
constantly look for payoffs for their efforts. They expect good job
performance to lead to organizational rewards, and they further seek rewards
that will satisfy their individual goals or needs.
Organizations use
Organizations, then, use rewards to motivate people. They rely on rewards to rewards to
motivate job candidates to join the organiization. They certainly rely on rewards motivate people.
to get employees to come towork and perform effectively once they are hired.

12.2 Types of Rewards

There are a number of ways to classify rewards. Three of the more The satisfactions
one gets from the
typical dichotomies are: intrinsic versus extrinsic rewards, financial versus job itself are its
nonfinancial rewards, and performance-based versus membership-based intrinsic rewards.
rewards. These categories are far from being mutually exclusive.
1. Intrinsic yersus Extrinsic Rewards : The satisfactions one gets from
the job itself are its intrinsic rewards. These satisfactions are self-initiated.
Tewards, such as having pride in one's work, having a feeling of
accomplishment, or being part of a team. The techniques of flex time, job
enrichment, shorter work-weeks, and job rotation, can offer intrinsic rewards
by providing interesting and challenging jobs and allowing the employee
Jeater freedom. Extrinsic rewards
On the other hand extrinsic rewards include money, promotions, and are external to the
Iringe benefits. Their common thread is that extrinsic rewards are external to job and come from
an outside source.
the job and come from an outside source, mainly, management.
208 Human Resource Management

Thus, if an empioyee experiences feelings of achievement of

persnal
growth from ajob. we would label such rewards as intrinsic. If the emplo,
receives a salary increase or a write-up in the company magazine, we wuile
label those rewards as extrinsic.
While we have stressed the role of extrinsic rewards in motivation, he
shoukd point out that intrinsic and extrinsic rewards may be closely linked
2.Financial versus Nonfinancial Rewards : Rewards may or may nc
enhance the employee's financial well-being. If they do, they can do th
directlythrough wages, bonuses. profit sharing. and the like; or indirecthy
through supportive benefits such as pension plans, paid vacations, paid sick
leaves, and purchase discounts.
Nomfinancia Nonfinancial rewards are potentially at the disposal of the organization.
rewards emphasie They do not increase the employee's financial position. Instead of making
mating le on the
job more the employee's life better off the job, nonfinancial rewards emphasize
attractie making life on the job more attractive.
The old saying "one man's food is another man's poison" applies tothe
entire subject of rewards, but specifically to the area of nonfinancial
rewards. What one employee views as "something Ive always wanted."
another finds superfiuous. Therefore care must be taken in providing the
"right" nonfinancial reward for each person; yet where selection has been
done assiduously, the benefits to the organization should be impressive.
Some workers are very status conscious. An attractive office, a carpeted
floor, a large executive desk, or a private bathroom may be just the office
furnishing that stimulates an employee toward top performance: Similarly.
status-oriented employees may value an impressive job title, their own
business cards, their own secretary, or a well-located parking space with
their name clearly painted underneath the "Reserved" sign.
3.Performance-Based versus - Membership-Based Rewards: The
rewards that the organization allocates can be said to be based on either
The dominant performance criteria or membership criteria. While the managers in most
basis for reward organizations will vigorously argue that their reward system pays off tor
allocations in
organization is performance, you should recognize that this is almost invariably not the
membership. case. Few organizations actually reward employees based on performance.
However, without question, the dominant basis for reward allocations n
organization is membership.
Performance-based rewards are exemplified by the use of commissio
piecework pay plans, incentive systems, group bonuse_, or other forms of
merit pay plans. On the other hand,
membership-based
 209
Reward

rewards include cost-of-living increases, profit sharing, benefits, and salary

increases attributable to labor-market conditions, seniority or time in rank,
credentials (such as a college degree or a graduate diploma), or future
potential (the recent M.B.A. from a prestigious university). The demarcation
hetween the two 1s not always obvious. For instance, company.;paid
membership in a country club or use of company-owned automobiles by
executives may be given for membership or performance. If they are available
they are membership
to, say, all middle and upper-level executives, then
certain managers
based. However, if they are made available selectively to
"entitlement," which, of course,
hased on their performance rather than their
treat them as performance
implies they can also be taken away, we should
based rewards for those who might deem them attractive.
membership-based rewards into
For practical purposes, we need to break go to all
Because benefits
up of benefits and services that
and services are
two groups. One group is made
explicitly
level. All nurses at a certain
employees regardless of their performance acknowledged to be
instance, get ten days' sick leave, taka 2,00,000.00 worth of life allocated on the
hospital, for
and a host of other benefits and basis of
insurance, paid hospitalization coverage, barely membership, we
outstanding job or a
services regardless of whether they do an explicitly acknowledged to willcall them
explicit
and services are
acceptable one. Because benefits
basis of. membership, we will call them explicit membership-based
be allocated on the rewards will be rewards.
other membership-based
membership-based rewards. All the
the second group which we will call implied. You may wonder
thrown into
why the need to differentiate two groups?
membership-based rewards into two groups to
We have separated the treat benefits " Most
in practice. Most organizations
clarify what is often confusing other rewards are
organizations
rewards. All
and services as the only membership-based
treat benefis and

as performance based. This, of course, is both incorrect services as the

traditionally treated only
performance is only a minor
and misleading labeling. In practice, theories holding that
membership-based
determinant of rewards. This is true despite academic
rewards. All other
rewards are
motivation depends on performance-based rewards. In practice, a lot of
high traditionally
ip service is given to the value of good
job performance, but the treated as
performance. performance
Organization's rewards do not closely parallel employee based.
there are performance-based
In summary, you should recognize that
call benefits
rewards; there are explicit membership-based rewards, which we
rewards. Practicing
d services; and there are implied membership-based
lanagers often call the latter group "performance based," but they are not.
212
Human Resource Management
organizational pay policies and
considers
The "system" category It considers organization
procedures, and the administration
of this system. precedents in terms of
wide, implied and explicit, pay policies. Organization
major
determinant inthis category.
allocation of pay would be a
input-outcome ratios unique to the
The "self" category refers to current input-outcome ratio.
Thie
from the individual's
individual that differs jobs or commitments that must
such criteria as past,
category is influenced by
be met in terms of family role. information
choice of a particular set of referents is related to the
The perceived relevance. Based on equity
available about referents as well as their
suggest that when employees envision an inequity, they may
theory, we might
:
choose one or mnore of five alternatives
a. Distort either their own or
other's inputs or outcomes
outcomes
Behave in some way so as to induce others to change their inputs or
b.
Behave in some way as to change their own inputs or outcomes
C.
d. Choose a different comparison referent
e. Leave the organization
concerned not only with the
Equity theory Equity theory recognizes that individuals are
their efforts but also with the
recognizes that
absolute amount of money they are paid for
judgments as
relationship of this amount to what others are paid. They make
individuals are
Concerned not
the inputs and
only with the to the relationship between their inputs and outcomes and
education and
absolute amount
outcomes of others. Based on their own inputs, such as effort,
of money they are raises, and other
paid for their competence, they compare outcomes such as salary levels,
efforts bt also factors. When people perceive an imbalance in their input-outcome ratio
with the relative to others, tension is created. This tension provides the basis for
relationship of motivation as people strive for what they perceive as equity and fairness.
this amOuntto
what others are
Perceptions of overreward seem to be easily reduced by individuals and,
paid. therefore, are infrequent. SuYveys often show that about 5 percent of an
employee group feel overpaid. When people feel over-rewarded, they usualy
bring about equity by changing their perceptions of the situation. For
example, they increase their perceptions of their worth or their perception of
the amount of pay deserved. Perceptions of under-reward are less eas1ly
Where employees corrected. These are likely to result in reducing effort, fighting the system,
perceive inequity, it engaging in increased absenteeism, or performing other undesirable behaviors.
can result in lower
productivity, more The implications of equity theory for managers should be clear. The absoluie
absenteeism, or an rewards that employees receive are not the sole influence on motivatio
increase in relative rewards are also critical. Where employees perceive inequity, it can
resignations. result in lower productivity, more absenteeism, or an increase in resignations.
However, managers can only have control over the "system" referent, not
referents outside of the workplace, such as "what the neighbors have."
 Reward 213

A truly visible
n Visibility : A reward that is not visible to the employee may fail to reward gets the
the desired motivating effect from the employee. On the other hand, a attention not only
get
yvisible reward gets the attention not only of individual employees but of individual
employees but also
leo of their peers. This latter quality means visible rewards can contribute
of their peers.
0 satisfying an employee's esteem and recognition needs.
In what ways can managers increase the visibility of rewards?
Possibilities include well-publicized bonuses, allocating annual salary
increases in a lump sum rather than spreading them out over the entire year,
and eliminating the secrecy surrounding pay by openly communicating
everyone's compensation.
rewards
Some organizations have successfully maximized the value of
impressive in size and highly visible. It has been
by making them both successful device for
Suggested that lump-sum salary increases can be a
employees
increasing areward's visibility. Use of this approach means that An increase
a single lumnp
are given the option of having their annual raises presented in
oresented as a lump
sum is obviously
rather than parceled out in
sum as soon as the increases are granted, more visible than
a lump sum is
paychecks through th» year. An increase presented as one divided up into
small amounts and buried small amounts and
obviously more visible than one divided up into burried in, say,
deductions for taxes, even the
in, say, twenty-six-regular payhecks. After twenty-siK-regular
very little change in an
most generous salary increase usually means
d pay checks.
sum tends to ensure
employee's regular take home pay, so the lump
d
come
large raise tends to
maximum impact for the raise. Of course, while å
a small raise tends to come
across clearly as a large amount of money,
lump-sum option is reported
across as just what it is-a small increase. The
globe.
to have been introduced at several organizations across the
1 controversial approach to
Probably the most widely discussed and
traditional secrecy
increasing the visibility of rewards is to eliminate the Traditional
pay secrecy actually
or Surrounding pay. The proponents of openness argue that secrecy surronding
the disadvantage of
5f demotivates employees. Secrecy may tend to work to pay is to be
most carefully derived eliminated.
USing money to motivate managers because even the
1, pay schedule and
differentials may be seen as potentially less rewarding than
dissatisfaction with
they actually are. The misperception of pay contributes to
ay, and secrecy regarding pay contributes to this misperception::
vary
4. Flexibility : An effective reward is one that has the flexibility to
With changes in performance. If an employee's job performance declines in
S 009, the rewards he received in 2008 should ideally have downside
adjustment capability.
 214 Human Resource Management

An effective reward would be flexible in terms of the amount given and

An efective reward whether it is given to everyone in the organization. The annual performance
would be flexible bonus, for instance, offers high flexibility. It can be adjusted upward or
in terms of the
amount given. downward, or eliminated, each year depending on some measure of
performance. Additionally, it can be given selectively to those employes
who have done a superior job.
Another attribute of a flexible reward is that it be given frequently
without losing importance. Giving rewards frequently is often helpful for
sustaining extrinsic motivation, yet some' rewards diminish in importance
when used over tim. As a case in point, praise is a flexible reward in that its
amount can be varied in allocations to and among individuals. However, it
suffers from diminishing returns. Continued use of praise results in the
reward losing its importance.
All other factors
equal, the
5. Low Cost : The final quality of an effective reward is low cost.
lowest-cost reward Rewards are not free goods, and the organization must consider the costs
should be along with the benefits from any reward. A high-cost reward simply cannot
preferable to be given out as often, and whein it is, it reduces organizational effectiveness
managemeni. as a result of its cost. All other factors equal, the lowest-cost reward should
be preferable to management.
12.4 Criteria On Which Rewards Can Be Distributed
Let us now consider the realities of reward distribution. So far, we have
Most
organizations presumed that management allocates rewards based soleBy on employee
believe their performance, though we noted in our discussion of performance-based rewards
rewards system is that this is a fallacy. Most organizations believe their rewards system is
designed to pay off designed to pay off for merit. The problem is that we find differing definitions
for merit.
of merit. Deserving rewards may take into consideration such factors as
intelligence, effort, or seniority. The problem is that what is deserving may
differ from what is excellent. A major contributor to the problem is
undoubtedly the difficulty of defining excellence. If excellence is performance,
we concede how unsatisfactory our efforts have been at trying to measure
performance. Creation of quantifiable and appropriate performance measures
of almost all white-collar and service jobs, and many blue-collar jobs, has
eluded us. While few will disagree with the viewpoint that the merit concept
for distributing rewards is desirable, what constitutes merit is highly debatable.
Our position that performance and rewards must be closely linked has
What constitutes evolved from the importance attached to this relationship in expectancy
merit is highly
debatable. theory. Now first, we will assess the role of perfornance as a prerequisite tor
reward, then discuss other popular criteria by which rewards are distributed.
 Reward 215

1. Performance : The principle of paying for performance is so logical The priniple of

and so deeply instilled in our value system that few attack it. Like apple ple, paying for
performance is so
motherhood. and the flag, the allocation of rewards on the basis of logical and so
performance is arevered concept in organizations. But, as described above, deepty instilled in
there 'are major difficulties in measuring performance. our value system
that few attack it.
Performance is concerned with results. Performance measurement asks
the question, Did youget the job donc? To reward people in the organization As long as rewards
are allocated based
based on performance, therefore, requires some agreed-upon criterion for on job
defining performance. Whether this criterion is valid or not in representing roductivity, we are
performance is not relevant to our definition; as long as rewards are allocated using performance
based on job productivity, we are using performance as the determinant. as the determinant.

Another difficulty in measuring performance is differentiating between

quantity and quality. For example, an individual may generate a high output, Another difficulty
in measuring
but his or her performance standards may be quite low. Hence, where performance is
controls are not instituted to protect against such abuses, we often find differentiating
quantity replacing quality. A case in point is reflected by the senior between quantity
university faculty member who takes the junior faculty member aside and and quality.
cautions him against maintaining such high standards in his publications.
"You won't survive around here by generating only two articles a year. No
one cares about quality, it's numbers that matter. Remember, deans can't
read, but they can count!".
2. Effort : It is not uncommon for a report card in a factory to include
effort as one of the categories used in grading workers. Organizations,
however, rarely make their rewarding of cffort that explicit, yet it is certainly
a major determinant in the reward distribution.
The rewarding of effort represents the classical example of rewarding
means rather than ends. In organizations where performance is generally of a
low caliber, rewarding of effort may be the only criterion by which to The rewarding of
differentiate rewards. For exmple, a university was attempting to increase effort represents
its research efforts and had designated the objective of obtaining grants or the classical
funded research as a critical benchmark toward that end. Upon selection of example of
this objective, all faculty members were informed that rewards for the rewarding means
rather than ends.
coming year were going to be based on performance in obtaining grants.
Unfortunately,
20
after the first year of the program, even though approximately
percent of the faculty had made grant applications, none were
When the time came for performance appraisal and the approved.
fewards, the dean chose to give the majority of the funds distribution
of
Taises to those faculty members who had applied for available for pay
Where performance defined in terms of obtaining funded grants. Here is a case
Zero, so the dean chose to allocate rewards research grants was
based on effort.
 216 Human Resource Management

The above example is much less rare than one might think. On the
On the assumption assumption that those who try should be encouraged, in many cases, efforts
that those who t can count more than actual performancc. Employees who are
should be clearly
encouraged, in perceived by their superiors to be working at less than their optimum can
many cases, efforts often expect to be rewarded less than other employees who, while producing
can coMnt more
than actual less, are giving out a greater effort. Even where it is clearly stated that
performance. performance is what will be rewarded, people who make appraisals and
distribute rewards are only human. Therefore, they are not immune to
showing compassion for those who try hard, but with mjnimal success, and
allowing this to influence their appraisal and reward decisions.
3. Seniority : Seniority, job rights, and tenure dominate most civil
service systems and while they do not play as important a role in business
Length of time on
the job isa major organizations, there is evidence that length of time on the job is a major
factor in
determining the
factor in determining the allocation of rewards. Seniority's greatest virtueis
allocation of that, relative to other criteria, it is easy to determine. We may disagree as to
rewards.
whether the quality of Rajib's work is higher or lower than Adib's, but we
would probably lot have much debate over who has been with the
organization longer. So seniority represents an easily quantifiable criterion
that can be substituted for performance.
4. Skills Held : Another practice that is not uncommon in organizations
is to allocate rewards based on the skills of the employee. Regardless of
Regardless of
whether the skills whether the skills are used, those' individuals who possess the highest skills
are used, those or talents will be rewarded commensurately. Where such practices are used,
individuals who
posses the highest it is not unusual to see individuals become "çredential crazy."" The
requirement that an individual needs a college degree in order to attain a
skills or talents
will be rewarded
commensurately. certain level within the organization is utilizing skills as a determinant ol
rewards. Similarly, the requirement that an individual has to pass certain skill
tasks by demonstrating an acceptable score in order to maintain a particular
position in the organization is again using skills as a reward criterion. If it b
necessary for asecretary to demonstrate that she can take shorthand at 8U
words per minute to be eligible for consideration as a secretary to
department head, and if department heads do all their dictating into a dictatily
Cxample ofs
machine rather than giving it directly to the secretary, we see an
skill being utilized as a reward criterion when, in effect, it is irrelevant.
 217
Reward

The relationship of
When individuals enter an organization, their skill level is usually a demand and supply
major determinant of the COmpensation they will receive. In this case, the for particular skills
in the community
marketplace or competition has acted to make skills a major element in the can significantly
reward package. These externally imposed standards can evolve from the influence the
ewards to be given.
community or from occupational categories themselves. In other words, the
relationship of demand and supply for particular skills in the community can
significantly influence the rewards the organization must expend to acquire
particular skills. Also, the demand-supply relationship for an entire
occupational category can affect rewards.
by which Jobs that are highly
5. Job Difficulty : The complexity of the job can be a criterion repetitive and canbe
highly repetitive and
rewards aredistributed. For example, those jobs that are learned quickly may
deserving in rewards than be viewed as less
can be learned quickly may be viewed as less deseving in rewards
sophisticated. Jobs that are difficult to
those that are more complex and
than those that are
due to stress or more complex and
perform, require working odd hours, or are undesirable sophisticated
them rewards that are
unpleasant working conditions, may have to carry with
higher in order to attract workers to these activities.
discretion called for on
6. Requirement of Judgement:The greater the As greater
impact of mistakes and the
ajob, all other things being equal, the greater the judgmental
has been completely
greater the need for good judgment. In a job that is no
abilities are
needed, rewards
and there
programmedthat is, where each step has been procedurized must
is little discretionary
room for decision making by the incumbentthere commensuratety
rewards can be offered to be expanded.
time. Such jobs require less judgement, and lower
judgmental abilities are
attract people to take these positions. As greater
nceded, rewards must commensurately be expanded.
time is
Aderivative of rewarding employees based on discretionary
fair and
Elliot Jaques's theory of equitable payment. This theory argues that
which the People should be
cquitable compensation should reflect the maximum time during rewarded for the
reviewed. It says
eriployee exercises discretion without the results being weight of
people should be rewarded for the weight of responsibility they assume. responsibility they
Probabiy the most important evidence in support of Jaques's theory is the
assume.

Tinding that in jobs where the level of responsibility is measured in terms of

Iime span of discretion, employees at the same level state a very similar wage
andsalary bracket to be fair for the work they do. ln other words, employees
e the use of the time-span concept as the fairest way to differentiate pay
difference.
 Human Resource Management

Case Study:
Attracting and retaining talent through reward segmentation at Microsoft
In order to better align rewards with the goals of its One Microsoft strategy and talent
management process, Microsoft, made dramatic changes to its reward strategy. This began by
identifying the core employee group most relevant to enhancing and sustaining its competitive
advantages (i.e. Engineering and Rescarch, which constitutes about one-third of the company's
workforce). Next, efforts were made to strengthen the performance culture of this employee
group by enhancing merit pay (i.e. the highest compensation is provided to the highest.
performing employees) and taking a lead reward strategy relative to the external labour market to
ensure that employces are rewarded at levels of remuneration closer to the top of the market.
Source: Rettenmyer, 2014

Questions:
1. What is your opinion regarding Microsoft's strategy to reward employees?
2. How can reward segmentation be useful for other organisations?
3. Why is merit pay important for both employees and organisations?

QUESTIONS T0 ANSWER

1. Define reward. Discuss the different types of rewards you know of.
2. Efective rewards should have certain qualities- What are they? Discuss each of them with suitable
example.
3. Critically discuss the criteria on which rewards should be distributed.
4 Write short notes on :
a. Intrinsicreward
b. Non-financial reward
c. Membership-based reward
d. Visibility of reward
e. Flexibility of reward
f. Skil!s held as a criteria for reward distribution.
O Indicate True or False.
a. Having pride in one's job is an extrinsic reward.
b. Money, promotions etc. are intrinsic rewards from a job.
c. Piecework pay plan ensures performance based reward.
d. Preferred work assignment is a non-financialextrinsic reward.
e. Inequity in reward may result in employee resignation.
 Chapter 13
Employee Incentive Plans
Chapter Highlights
Introduction, The Purpose of Incentives as Nontraditional Compensation, Eligibility and
Coverage, Administration, Incentive Systems, Need for Fringe Benefits, Objectives of Fringe
Benefits, Types of Fringe Benefits, Trends in Benefits and Services, Conclusion, Questions
to Answer, Indicate True or False.

13.1 Introduction
Anorganization's success requires an effective strategy that is atained by Incentive systems
link
achieving the underlying goals and objectives. Managers and HR compensation and
departments can use incentives as tools to motivate employees to attain performance by
organizational goals and objectives because these are compensation rewarding
approaches that reward specified outcomes. Incentive systems link performance
instead of
compensation and performance by rewarding performance instead of seniority or hours
seniority or hours worked. Although incentives may be given to a group, they worked.
often reward individual behavior.
Employee incentives supplement the more traditional wage and salary Incentives are the
approaches, which account for the majority of compensation costs. Incentives fastest-growing
trends in
are the fastest-growing trends in compensation management. Though
compensation
companies still give traditional annual merit increases for good overall management.
performance, rewards increasingly are being tied directly to performance in
the form of one-time bonuses.

13.2 The Purpose of Incentives as Nontraditional Compensation

Employees who work under a financial incentive system find that their Employees who
work under a
performance determines their pay in whole or in part. As a result, incentives financial incentive
reinforce performance on a regular basis. Unlike raises and promotions, the system find that
reinforcement is generally quick and frequent- usually with each paycheck. their performance
determines their
Since the worker sees the results of the desired behavior quickly, that
pay in whole or in
behavior is more Jikely to continue. Employers benefit because payouts are in part. As aresult,
proportion to productivity. And if the system motivates employees to expand "incentives
their output, recruiting expenses for additional employees and capital outlays reinforce
performance
for new work stations are minimized.
The higher productivity growth rates of the Japanese, for example, may
De due to their incentive system that cncourages labor to take a direct interest
in raising productivity.
 220 Human Resource Management

More than Many experts believe that incentives contribute to Japan's success More
one-fourth of an than one-fourth of an industrial worker's pay in Japan may arrive as an
industrial worker's
annual bonus, tied to company profits. Some economists think that this for
pay in Japan may
arriw as an annual of payment helps explain why Japan's savings rate is triple compared to th
bonus, tied to of the United States. And since companies can adjust labor costs by adjusting
comany profits. their bonuses, layoffs may not be necessary. This may help explain wty
unemployment levels in Japan seldom rise above 3 percent.

13.3 Eligibility and Coverage

Who is cligible for incentives, and other forms of nontraditional
compensation? The extent of coverage iscrucial because it affects teamwork
motivation and perceptions of equity. Eligibility may differ for different
Eligibility may
differ for different programs even within the same firm. As is the case at many Japanese and
programs even
wwithin the same
U.S. enterprises, workers paid by the hour get individual incentives (piee
firm.
rates) while managers and workers share in the profits. Individual incentives
such as sales commissions work best when cooperation and teamwork are
less important to success. When success requires cooperation and
coordination among those doing the work, group incentives work best
Coverage must be defined broadly enough to facilitate equity and teamwork
but narrowly enough to include only those who affect the results
13.4 Administration
The administration of an incentive system can be complex. As with any
control system, standards have to be established and results must be
The administration measured. For many jobs, the standards and measures are too imprecise or
of an incentive
system can be costly to.develop. This means that the incenive system may result in
complex. inequities. For example, sometimes workers make more money than do their
supervisors, who are on salary, or employees may not achieve the standard
because of uncontrollable forces such as machine breakdowns and othet
work delays.
Unions ofien Unions often resist incentive systems because they prefer seniority-based
resist incentive
systems because rewards and fear that increased productivity may mean layoffs among their
they prefer members. They also worry that management will later raise the standard, and
seniority-based employees will have to work harder in the future for the same pay. This tear
rewards and fear
that increased of aspeedup often leads to peer pressure against anyone who exceeds ths
productivity may group's output norms. The advantages of the incentive system are essentiall
mean layoffs. lost when peer pressure restricts output.
 221
Employee Incentive Plans

Who should compute the payout? Should the payout be included with the
paycheck, or should it be a separate payment? Should payments be
gular
an
made or should payouts be
frequently to quickly relate performance, to pay. answered in
largerand less frequent? These and other questions must be
purpose,
designing nontraditional plans. The answers depend on the
form of nonstandard
ligibility. coverage, and payout standards for enchadditional income from
ompensation. When employees can estimate the
when a real estate agent can
heir work effort or results-for example,
confidence cxists that the payout is Payouts should
ostimate a sales commission--greater follow performance
Including the cxtra income in the regular paycheck may dilute its as is
correct. or salaries and is as quickly
from regular wages administratively
impact because it is not separated
al
taxes. Payouts should follow feasible. Here the
diminished by payroll deductions such as the goal is quick goal is quick
administratively feasible. Here
performance as quickly as is may be so small that they
reinforcement.
nd
reinforcement. However, daily or weekly payouts
provide little incentive for extra effort.
C
es
development of performance standards and measures, the tracking of
re
The administrative and clerical support
performance measures, and the related
nd
costs and complexity of compensation management. If
often add to the
St.
technological, or other changes lead to a redesign of the firm's
competive,
rk expenses are incurred. And if
nontraditional compensation, additional
changes as cutting their payouts, trust, morale, and
employees see these
productivity can suffer.

ny
13.5 Incentive Systems
be
type of job from manual labor to
Incentive systems exist for almost every
managerial, and executive work. The more common incentives
professional,
eir are discussed in the following pages.
system that compensates the
rd 1. Piecework : Piecework is an incentive
weekly pay is determined by
er worker for each unit of output. Daily or Piecework is an
the output in units times the rate per unit. For example, in incentive system
multiplying
amount per bushel of
ed agricultural labor, workers-are often paid a specific that compensates
productivity, the worker for
e produce picked. Piecework does not always mean higher each unit of
a more
however. As the Hawthorne studies showed, group norms may have output.
productivity. And it
-a
Significant impact if peer pressure works against higher
example, a
may be difficult to measure a person's contribution (for
Teceptionist), or an employee may not be able to control the output (as with
an assembly-line worker).
 Human Resource Management

2. Production Bonuses : Production bonuses are incentives paid tr

workers for exceeding output goals. Often employees receive a base pay rate
Then, through extra effort that results in output above the standard, they zet :
Production bonuses suppiemental bonus, which is usuaily figured at a given rate for each unit of
are incentives paid production over the standard. One variation rewards the esmployee for saving
to workers for
exceeding outpu time. For example. if the standard time for replacing an automobile
goals transmission is four hours and the mechanic does it in three, the mechanj
may be paid for four hours. A third method c¡mbines production bonuses
with piecework by compensating workers on an hourly basis, plus z
incentive payment for each unit produced.
In sales jobs, the 3. Commissions : In sales jobs. the seller may be paid a percentage of
seller may be paid a the selling price or a flat amount for each unit sold. When no base
percentage af the compensation is paid, total earnings come from commissions. Real estate
elling price or aflat
Tmownt for each unit agents and automobile sellers are often on this form of "straight
sold commission," as are a growing number of retail clerks.
4. Pa-for-Knowledgel Pay-for-Skils Compensation : Pay-for
knowledge and pay-for-skill compensation systems reward employees wih
higher pay as an incentive for the increased knowiedge or skills they acquire
Most organizations have traditionally designed their
compensaticn
systems around specific jobs. The wage and salary structure of these systems
has typically been based on job analyses and
evaluations; this procass
determines a job's worth and salary range. In recent years, however, a new
alternative to this job-based approach has been developed; this new systen
pays employees for the skills and knowiedge they possess, rather than
for the
job they do or a particular job category.
Whether the compensation system is called knowledge-based pay, skil
based pay, or pay for knowiedge, pay levels are based not on
The HR department what
employee does but on the range of jobs the employee can do.
reates a continuOus
rewarded for each new knowledge or skill. These Employees art
learning
organization where evaluate the employee's worth to the employer.learning-based pay systems
Increased skills and jot
continued growth is mastery give management greater staffing flexibility. The
valued by
employees and the employee knowiedge also may reduce the total number of workersincrease neede
company. In shorn, and may ead to higher quality results. The
employees are paid of work may mean higher levels of higher pay and greater diversf)
satisfaction and
absenteeism and turnover. At the same time, the HR therefore lower
more because they
are wornh more.
continuous learning organization where continued growth department creates
is valued
employees and the company. in short, employees are paid
more
are worth more. because th
 223
Employee Incentive Plans
Profit sharing is a
6, Profit Sharing and Stock Option Plans (PSsOP) : Profit sharing is scheme whereby
s
Scheme whereby employers undertake to pay a particular portion of net employers
profits
9/
totheir employees on compliance with certain service conditions and undertake to pay u
aalifications. The purpose of introducing profit sharing schemes has been particular portion
ofnet profits to
aainly to strengthen the loyalty of employees to the firm by offering them an their employees
annual bonus (over and above normal wages) provided they are on the on compliance
avice rolls of the firm for a definite period. The share of profit of the with certain
service conditions
worker may be given in cash or in the form of shares in the company. These and qualifications.
shares are called bonus shares.
O Merits of PSSOP
for
1. It is likely to induce motivation in the workers and other staff
in turn
auicker and better work so that profits of the firm are increased which
increases the share of workers therein.
workers and enables
2. It helps in supplementing the remuneration of
them to lead a rich life.
the
tor.
3. The idea of sharing the profits inspires the management and
workers to be sincere, devoted and loyal to the firm.
vit of a firm with a view to
ire.
4. It attracts talented people to join the ranks
share the profits.
tion 5. Workers do not require close supervision, as they are self-motivated to
ems
put in extra labour for the prosperity of the firm.
cess
Demerits of PSSOP
D
discounting their loyalty
new
1. Workers tend to develop loyalty toward firm unions.
tem
toward trade unions, thus impairing the solidarity of trade
plan. Workers may
the 2. Profit sharing scheme is, in practice, a fair-weather
get nothing if the business does not succeed.
and deprive the workers of
kil! 3. Management may dress up profit figures
their legitimate share in profits.
prove to be a
4. Fixation of worker's share in the profits of firm may
tems bone of contention in the long run.
usual wages, a
jot 6. Co-partnership : In this system, the worker gets his
management of the In this system,
aseShare in the profits of the company and a share in the the worker gets
well as profits. When
eded Gompany as well. Thus, employees share the capital as allÏwed to
his usual wages, a
rsitO-partnership operates with profit sharing the employees are share in the
system is
weeave their bonus with the company as shares (bonus shares). This
profits of the
company and a
tes an Improvement over all other systems of wage payment
in that it implies share in the
both profit sharing and control sharing. It also offers recognition of the claim management of
the o the dignity of labour as the worker is
viewed âs partner in the business. This the company as
ould, in turn, create a sense of belongingness among workers and stimulate
well.

em to contribute their best for the continued prosperity of the company.

 24 Human Resource Management

7he em fringe 7. Fringe Benefits : The term fringe benefits refers to the extra
the rtre hene'rs
benefits provided to employees in addition to the normal compensation
paid in the forn of wage or salary. Many years ago, benefits and services
were labeled 'fringe' benefits because thcy were relatively insignificant or
additioR 0 The
normal
fringe components of compensation. However, the situation now is
Ompensarion different, as these have, more or less, become important part of a
pait in vheform of comprehensive compensation package offercd by employers to employees.
The main features of fringe benefits, as they stand today, may be stated
as under:
a. They are paid to all employees (unlike incentives which are paid to
specific employees whose work is above standard) based on their
membership in the organisation.
b. They are supplementary forms of compensation.
c. They help raise the living conditions of employees.
d. They are indirect compensation because they are usually extended as
a condition of employment and are not directly related to
performance.
e. They may be statutory or voluntary. Provident fund is a statutory
benefit whereas transport is a voluntary benefit.
D Need for Fringe Benefits
Most of the organizations pay fringe benefits to their
after year, due to the following reasons : employees, year
a Trade union demands : Trade
unions compete with each other for
getting more and a new variety of fringe benefits to their
union succeeds in getting one benefit, the members. If one
other union persuades
management to provide ånew one. Thus, the competition among trade
unions within an organisation results in more and
varied benefits.
b. Employee demands :
fringe benefits rather than payEmployees demand more and varied
hike because of reduction in tax types of
the part of employees and in view of the burden on
living. galloping price index and cost of
c. To improve human
the employees are satisfiedrelations:Human relations are maintained when
economically, socially and psychologically.
Fringe benefits satisfy the worker'
needs. Consumer stores, credit s economic, social and psychologica
etc., satisfy the workers' social facilities, canteen, recreational facil1tieS,
some of the needs, whereas retirement
psychological problems benefits satisy
However, most of the about the
employee. post-retirement
benefits minimise economic problems of the
 225

Employee Incentive Plans

to
prefer fringe benefits
Employer's preference : Employers also to give their best tothe
d motivate the employeeseffective advertisement.
pay-hike, as fringe benefits an
organisation. It improves morale and works as security that society
is a
As a social security : Social security certain risks to which its
e.
appropriate organization against accidents
furnishes through are contingencies of life like
These risks various benefits like
members are exposed. to provide
occupational diseases. Employer has involvement of workers
in
and compensation in case of
provide security to his
safety measures, view to
facilities, etc. with a
accidents, medical contingencies.
employees against various
OObjectives of Fringe Benefits
important objectives of fringe benefits are: and satisfying their
The employees. by identifying
a. To motivate the
unsatisfied needs. relations.
improve sound industrial to the
b. To create and employees and to provide safety
health of the
c. To protect the
employees against accidents.
employees against social risks like old age
d. Toprovide
security to the
benefits. and to retain
benefits and maternity among employees
of belongingness handcuffs.
e. To create a sense
benefits are called golden
them.Hence, fringe
employees' welfare fringe
f. To promote requirements of various legislations relating to
g. Tomeet the
benefits.

OTypes of FringeBenefits organisations may be broadly

by various
The fringe benefits offered
into five categories. These are discussed below :
classified of
for time not worked : Thiscategory includes:(a) hours
a. Payment pay and (e) paid
premium, (d) holiday
work, (b) paid holidays, (c) shift
vacation.
Hours of work: The Factories Act specifies that no adult worker
i.
more than 48 hours in any week.
shall be required to work in a factory for
on any day. In some
The Act also restricts the working hours to 9
the legal
organisations, the numbers of working hours are less than
requirements.
 226 Human Resource Management

i. Paid holidays : According to the Factories Act. an adult worker shalu

have weekly paid holidays, preferably Friday.. When a worker is deprived ot
weekly holidays, he is eligible for compensatory holidays of the same
number in the same month. Some organisations allow the workers to have
two days' holidays in a week.
ii.Shift premium : Companies operating second and third shifts, pay a
premium to the workers who are required to work during the odd hour's shit
iv. Holiday pay : Generally organisations offer double the normal rate of
the salary to those workers, who work during holidays.
v. Paid vacation : Workers in manufacturing, mining and plantations who
worked for 240 days during a calendar year are eligible for paid vacation at the
rate of one day for every 20 days worked in case of adult workers and at the
rate of one day for every 15 days worked in case of child workers.
b. Employee security : Physical and job security to the employee should
also be provided with a view to ensure security to the employee and his
family members. When the employee's services get confirmed, his job
becomes secure. Further minimum and continuous wage or salary gives a
sense of security to the life.
i Retrenchment compensation : The Industrial Disputes Act provides for
the payment of compensation in case of lay off and retrenchment.
iü. Lay offcompensation : In case of lay off, employees are entitled to lay
off compensation at the rate equal to 50% of the total of the basic wage and
dearness allowance for the period of their lay off except for weekly holidays.
c. Safety and health : Employee's safety and health should be taken care
of in order to protect the worker's productive capacity. The Factories Act
The Factories Act
stipulates certain requirememts regarding working conditions with a view to
stipulates certain
requirements provide safe working environment. These provisions relate to cleanliness,
regarding working disposal of waste and effluents, ventilation and temiperature, dust ánd fume,
conditions with a
view to provide
artificial humidification, over-crowding, lighting, drinking water, latrine,
safe working urinals and spittoons. Provisions relating to safety measures include fencing
environment. of machinery, work on or near machinery in motion,employment of young
persons on dangerous machines, striking gear and devices for cutting off
power, self-acting machines, casing of new machinery, prohibition of
employment of women and children near cotton openers, hoists and lifts,
lifting machines, chains ropes and lifting tackles, revolving machinery
pressure plant, floors, excessive weight, protection of eyes, precautions
against dangerousfumes, explosive or inflammable dust, gas, el
Precautions in case of fire, power to require specifications of defective pars
or test of stability, safety of buildings and machinery, etc.
 Employee Incentive Plans 22)

A Workmen's compensation : ln addition to safety and health

oeASures, provision for the payment of compensation are also made under
Workmen's Compensation Act.The Act is intended to meet the contingency
of invalidity and death of a worker due to an employment injury or an
ccupational disease specified under the Act at the sole responsibility of the
employer.
e. Health benefits: Today various medical services like hospital,
clinical and dispensary facilities are provided by organisations not only to
employees but also to their family members. Such benefits usually include:
i Sickness benefits : Insured employees are entitled to get cash benefit
under this system.
ii. Maternity beneft : Insured women employees are entitled to
maternity leave.
i. Disablement benefit : Insured employees, who are disabled
temporarily or permanently (partialor total) due to employment injury and /
or occupational diseases are entitled to get the cash, benefit under this head.
iv. Dependants benefits : 1f an insured person dies as a result of an
employment injury sustained as an employee, his dependants who are,
entitled to compensation under the Act, shall be entitled to periodical
payments referred to as dependant's benefit.
V. Medical benefits : This benefit .shall be provided to an insured.
employee or to a member of his family where the benefit is extended to his
family. This benefit is provided in the following forms :
out-patient treatment or attendance in hospital, dispensary, clinic or
other institutions; or.
byvisits to the home of the insured person, or
* treatment as in-patient in a hospital or other institution.
An insured person shall.be entitled to medical benefits during any week
for which contributions are payable, or in which he is eligible- to claim
sickness or maternity benefit or eligible for disablemnt benefit.
Howeyer, mny of the large organisations provide health services over
and aboye the
legal requirements to their employees free of cost by setting
hospitals, clinics, dispensaris and homeopathic dispensaries. Company's
up service programmes include:
elaborate health
i. Providing health maintenance service, emergency care, on the job
treatment, care for minor complaints, health counselling, medical '
Supervision in rehabilitation. accident and sickness prevention, health
education programmes,treatment in employee colonies, etc.
 Human Resource Management

family members and to the

ii. Medical benefits are extended to employee
retired employees and their family members.
or large
ii. Small organisations which cannot set up hospitals because of
places where hospitals cannot be set up
organisations (in those
local hospitals and
various reasons) provide the medical services through
reimbursement of medical
doctors. Sometimes they provide the facility of
expenses borne by the employees.
recreational benefits
f Welfare and recreational facilities : Welfare and
housing.
include: (a) canteens, (b) consumer societies, (c) credit societies, (d)
(h) holiday
(e) legal aid, (f) employee counselling, (g) welfare organisations,
homes,(i) educational facilities, (j) transportation,(k) parties and picnics and
()miscellaneous.
i. Canteens : Perhaps no employee benefit has received as much attention
in recent years as that of canteens. Some organisations have statutory
obligation to provide such facilities as the Factories Açt imposes a statutory
obligation to employers to provide çanteens in factories employing more than
250workers. Others have provided such facilities voluntarily. Foodstuffs are
supplied at subsidised prices in these canteens. Some companies provide
lunchrooms when canteen facilities are not available.
iü Consumer stores : Most of the large organisations located far from the
towns and which provide housing facilities near the organisation set up the
consumer stores. in the employees colonies and supply all the necessary goods
at fair prices.
ii. Credit societies : The objective of setting up of these societies is to
encourage thrift and provide loan facilities at reasonable terms and conditions
primarily to employees. Some organisations encourage employees to form
cooperative credit societies with a view to fostering self-help rather
depending upon money lenders, whereas some organisations provide loans to
employees directly.
iv. Housing : Of all the requirements of the workers, decent and cheap
housing accommodation is of great significance. The problem of housing is
one of the main causes for fatigue and worry among
employees and this
comes in the way of discharging their duties effectively. Most of the
organisations are located very far from towns where housing facilities are not
available. Hence most of the organisations build quarters nearer to
and provide cheap anddecent housing facilities to their factory
few organisations provide and / or arrange for employees, whilst a
and encourage them to housing loans to employees
 Employee Incentive Plans 229

V.
Legal aid : Organisations also
provide assistance or aid regarding
matters to employees as and when necessary through company lawyers
egal
srotherlawyers.
Employee counselling : Organisations provide counselling service to
vi.
employees regarding their personal problems through professional
aunselors. Employee counselling reduces absenteeism, turnover, tardiness,
etc.
v. Welfare organisations, welfare officers : Some large organisations
t up welfare organisations with a view to provide all types of welfare
welfare
acilities at one centre and appoint welfare officers to provide the
enefits continuously and effectively to allemployees fairly.
facilities
ix. Educational facilities : Organisations provide educational
members. Educational
Inot only to the employees but also to their family
acilities include reimbursement of fee, setting up of schools, colleges,
where a considerable
bostels, providing grants-in-aid to the other schools
employees. Further, the
number of students are from the children of
employees.
organisations provide rooms and libraries for the benefit of
Transportation : Companies provide conveyance facilities to their
x. industries are located outside
residence to the place of work as most of the
town and all employees may not get
quarter facility.
Parties and picnics : Companjes provide these facilities with a view
xi.
inculcating a sense of association, belongingness, openness and freedom
to
employees. These activities help employees to understand others
among
better.
provide other benefits like organising
xii. Miscellaneous : Organisations
picnics, setting up of clubs, community service activities.
games, sports with
birthday gifts, marriage gifts, leave. travel concession,
Christmas gifts,
productivity Iperformance awards, etc.
annual awards,
Old age
and retirement benefits : Industrial life generally breaks
system. The saving capacity of the employees is very low due to
joint family
high living cost and increasing aspirations of the employees
lower wages, members. As such, employers provide some benefits to the
and his family retirement and
employees, after about the old age.
during old age, with a view to create a
security These benefits are called old age and
feeling of
retirement benefits. These benefits include (i) provident fund, (ii) pension,
eeurance, (iv) gratuity and (v) medical benefit.
 230 Human Resource Management

i Providen fund : This benefit is meant for economic welfare of the

employees. Legal provisions are there for the institution of Provident Fund
Provident Fund for employees in factories and establishments. Provident Fund Scheme
Scheme provides for
mOnetany assistance provides for monetary assistance to the employees and or their
to the emplovees dependants during post retirement life. Thus, this facility provides security
and /or their against social risks and this benefit enables the industrial worker to have
dependants during better retired life. Employees in all factories under Factories Act, are
post retinement life.
covered by the Act. Generally both the employee and employer contribute
to the fund. The employees on attaining 15 years of membership are
eligible for 100% of the contributions with interest. Generally the
organisations pay the Provident Fund amount with interest to the employee
on retirement or to the dependants of the employee, in case of death.
iü Pension Programs : The single largest source of income for retired
workers in the past was Social Security Benefits. Most workers in the
public sector today, however, rely on some form of pension plan to cover
their financial needs in retirement. Many workers in the private sector also
have their special private pension plans, which are operated through their
employers.
A pension represents a fixed payment, other than wages, made
A pension regularly to former employees or their surviving dependents. To qualify,
represents a fxed employees are required to fulfill certain conditions of employment for a
payment, other
than wages, made
specific length of time. The most popular method for determining the
regularly to former amount of an employee's pension is to base payment on a percentage of the
employees or their employee's earnings, usually computed on an average over several years.
surviving
dependents. multiplied by the number of years he or she has been employed by the
organisation. The next most popular method is one in which payment is
based on some percentage of the employee's income, usually for a
particular period of time:
Pensions are expensive benefits for organisations to provide but are
Pensions are
necessary if organizations are to attract and keep valuable employees
expensive benefius However, there is little evidence to indicate that employees are motivated
for organisations by pension plans. The reasons are that pension plans are only remotely tied
to provide but are
necessary if
to an individual's performance, and the payoff, especially for the worker
organiations are under forty-five years of age, is far into the future. Pensions must theretore
lo attract and keep be viewed as membership-based rewards that are
valuable provided to deveioy
employees. loyalty, especially where vesting is withheld for the full ten years. Group
insurance, gratuity and medical benefits are to be ensured appropriately.
 Employee Incentive Plans 231

the 13.6 Trends in Benefits and Services

und Benefits have become something other than the once thought of "fringe". Employees expect
eme Employees expect certain extras to be the norn rather than the exception. certain extras to be
neir the normn rather
Cognizant of these requirements and competition from other business, than the
ity management has had to develop cost-effective methods to offer and service exception.
AVe these benefits.
are
ite The most widely used prescription has been the cafeteria style of
re benefits. The cafeteria approach allows employees to pick andchoose those
he benefits that are desirable. The use of the cafeteria style approach to benefits
willundoubtedly continue, with the most popular offering being some core
benefits that are required for allemployees, and the remainder of the monies People do have
d to be spent on benefits left to the decision of each employee. The advantages different needs
according to their
e of the cafeteria approach to benefits has been supported by many research age. financial and
studies, as we can show that people do have diferent needs according to family position,
attiudes, and life
their age, financial and family position, attitudes, and life style. Younger style.
employees tend to favor benefits that can be of frequent or immediate use,
Such as vacation days, holidays, and flexible working hours. Older
employees are usually security conscious, preferring life insurance and
retirement related benefits.
As for the other trends, we can expect the burden of paying for these
benefits to shift to one that is more equitably shared between the employee
and the employer. Health care is a primary example. While it may cost more
to subscribe to health coverage, the cost is still minimal compared with the
costs of a disastrous illness.
Finally, we must realize that employees may be paying more for or The paternalistic
perception of an
getting less of the benefits that employers offer. Economic hardships are a organization must
reality, and cost-cutting measures are mandated. Employees must be willing be changed, and
to accept less if they are to progress in the future. The paternalistic employees must be
willing to share
perception of an organization must be changed, and employees must be more responsibility
willing to share more responsibility for their wellbeing. for their welbeing.
 232 Human Resource Management

Case Study: A'special blend' of incentives at Starbucks Hong Kong

The power of incentives is said to be governed by two laws, contingent reinforcement a.
immediate reinforcement, the former asserting that for areward to have maximum reinfor.
value, it must be contingent upon the demonstration of desired behaviour and the b
asserting that the more immediate the delivery ofa reward after the occurrence of a desiraki
behaviour., the greater the incentive and reinforcing value of the reward (Schermerhorn, 2010
The Starbucks incentive program in Hong Kong reflects such principles and attempts
strengthen the reward-performance link. Unlike the traditional practice in Hong Kong
provide an annual thirteenth month bonus (i.e. an additional month's salary), Starbuck
adopted a more frequent approach to incentives. That is, its performance evaluation an
incentive pay distribution takes place quarterly, instead of on an annual basis. Store manager
are evaluated on three key performance dimensions, namely, employee retention, sales targe
achievement, and customer satisfaction using a point scale (with a maximum of 500 points
Managers who score below 100 points are not entitled to any incentive pay while those wh
score between 100 and S00 points are eligible to receive a 10 to 35 per cent bonus based o
their basic salary.
Discussion question: The timeliness of an incentive is believed to be important
motivating desirable behaviour. What are the advantages and disadvantages of rewardin
employees more frequently?

QUESTIONS TO ANSWER
1. (a) What is being understood by employee incentive plan?
(b) Discuss the purpose of incentives as
non-traditional compensation.
2. Discuss in brief the common incentives that are
being used by HRM now-a-days.
3. Write Short Notes :

Piecework, production bonus, pay-for knowledge, profit sharing and stock option plans, fringe
old-age / retirement benefits, pension program. benel
O Indicate True or False.
a. Incentives provide non-traditional means of employee
b. In Japan the employees are allowed share in the compensation.
profits.
C
Piecework ensures a fixed pay every month.
d. Production bonus is paid even if the
production target is not fulfilled.
e. Fringe benefits are not
extra-benefits to employees.