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Need to Know
1. Connection between incentive pay and employee
performance.
2. How organizations recognize individual
performance.
3. Ways to recognize group performance.
4. How organizations link pay to overall performance.
5. How organizations combine incentive plans in a
balanced scorecard.
6. Processes that contribute to successful incentive
programs.
7. Issues related to performance-based pay for
executives.
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Incentive Pay
Incentive pay forms of pay linked to an
employees performance as an individual,
group member, or organization member.
Incentive pay is influential because the amount
paid is linked to certain predefined behaviors or
outcomes.
For incentive pay to motivate employees to
contribute to the organizations success, pay
plans must be well designed.

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Effective Incentive Pay

Requirements:
1. Performance measures are linked to the
organizations goals.
2. Employees believe they can meet
performance standards.
3. Organization gives employees the resources
they need to meet their goals.
4. Employees value the rewards given.
5. Employees believe the reward system is fair.
6. Pay plan takes into account that employees
may ignore any goals that are not rewarded.
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Employers Stress Merit Pay

to Retain Workers

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Pay for Individual Performance

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Pay for Individual Performance:

Piecework Rates

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Figure 13.1

How Incentives Sometimes

Work

SOURCE: DILBERT (c) 1995 Scott Adams. Used by permission of UNIVERSAL UCLICK. All rights reserved.

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13-8

Pay for Individual Performance:

Standard Hour Plans and Merit Pay
Standard Hour Plan

Merit Pay

An incentive plan
that pays workers
extra for work done
in less than a
preset standard
time

A system of linking
pay increases to
ratings on a
performance
scale.
They make use of
a merit increase
grid.

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13-9

Table 13.1

Sample Merit Increase Grid

Recommended Salary Increase

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13-10

Figure 13.2

Ratings and Raises

Under-rewarding the Best

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13-11

Pay for Individual Performance:

Performance Bonuses
Performance bonuses are not rolled into
base pay.
The employee must re-earn them during
each performance period.
Sometimes the bonus is a one-time
reward.
Bonuses may also be linked to objective
performance measures, rather than
subjective ratings.
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13-12

Pay for Individual Performance:

Sales Commissions
Commissions incentive pay calculated as a
percentage of sales.
Some earn a commission in addition to a base
salary.

Straight commission plan some earn only

commissions.
Some earn no commissions at all, but a
straight salary.

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13-13

Real estate agents typically earn a straight

commission, meaning that 100% of their pay
comes from commission instead of salary.
What type of individual might enjoy a job like
this?
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Test Your Knowledge

John works twisting pretzels in a pretzel
factory. Pablo works on IT systems
integration at a credit card company. The
best pay plans for these individuals would
be ________ and _______, respectively.
a)
b)
c)
d)

Merit pay, individual bonus

Sales commissions; merit pay
Piecework, Merit pay
Individual bonus, sales commissions

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13-15

Pay for Group Performance

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13-16

Gainsharing
Gainsharing group
incentive program
that measures
improvements in
productivity and
effectiveness and
distributes a portion
of each to
employees.

Addresses
challenge of
identifying
appropriate
performance
measures for
complex jobs.
Frees employees to
determine how to
improve their own
and their groups
performance.

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13-17

10 Conditions for Effective Gainsharing

1.
2.

Management commitment
Need for change or commitment to
continuous improvement
3. Management acceptance and
encouragement of employee input
4. High levels of cooperation and interaction
5. Employment security

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13-18

Conditions for Effective Gainsharing,

cont.
7. Information sharing on productivity and
costs.
Goal setting.
8. Commitment of all involved parties to the
process of change and improvement.
9. Performance standard and calculation that
employees understand and consider fair
and that is closely related to managerial
objectives.
10. Employees who value working in groups.
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13-19

Figure 13.3

Finding the Gain in

a Scanlon Plan

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Pay for Group Performance:

Group Bonuses and Team Awards
Group Bonuses

Team Awards

Bonuses for group

performance tend to
be for smaller work
groups.
These bonuses
reward the members
of a group for
attaining a specific
goal, usually
measured in terms of
physical output.

Similar to group
bonuses, but more
likely to use a broad
range of performance
measures:

Cost savings
Successful completion
of a project
Meeting deadlines

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13-21

Group members that meet a sales goal or a product

development team that meets a deadline or successfully
launches a product may be rewarded with a bonus for
group performance.
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Figure 13.4

Types of Pay for Organizational

Performance

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Pay for Organizational

Performance:
Profit
Sharing
Profit sharing incentive pay in which
payments are a percentage of the
organizations profits and do not become
part of the employees base salary.
Profit sharing may encourage employees to
think like owners.
Evidence is not clear whether profit sharing
helps organizations perform better.

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Considerations for Setting Up a

Profit-Sharing Plan
1. Get supervisors on board with the plan.
2. Make sure employees understand how
the plan works.
3. Identify behaviors and results that
contribute to greater profits.
4. Make sure managers understand that
they contribute to profit-sharing goals by
encouraging their employees and keeping
them focused on their goals.
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13-25

Considerations for Setting Up a

Profit-Sharing Plan
5. Consider linking rewards to the
departments or divisions performance, if
profits can be assigned to the group.
6. Make rewards big enough to matter.
7. Time the profit-sharing payments for
maximum effect.

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13-26

Pay for Organizational Performance:

Stock Ownership
Stock Options

ESOPs

Rights to buy a
certain number of
shares of stock at
a specified price.
Traditionally, stock
options have been
granted to
executives.

(ESOP) an
arrangement in which
the organization
distributes shares of
stock to all its
employees by placing
it in a trust.
Most common form of
employee ownership.

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13-27

Figure 13.5

Number of ESOPs

SOURCE: National Center for Employee Ownership, A Statistical Profile of Employee Ownership,
NCEO website,
updated February 2012, www.nceo.org .
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13-28

Test Your Knowledge

For each of the following jobs, identify the
best type of incentive (e.g., individual,
group, organizational). Be prepared to
explain your answer.
1.
2.
3.
4.

Director of Marketing, Pepsi

Recruiter, Verizon
Cashier, CVS (drugstore)
Salesperson, Macys
a) Individual
b) Group
c) Organizational
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13-29

Balanced Scorecard
Balanced scorecard
a combination of
performance
measures directed
toward the
companys long- and
short-term goals and
used as the basis for
awarding incentive
pay.

Four categories of a
balanced scorecard
include:
1.
2.
3.
4.

financial
customer
internal
learning and
growth

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13-30

Tellabs uses a balanced scorecard.

-Conducts quarterly meetings at which employees
learn how their performance will be evaluated
according to the scorecard.
-Makes this information available on the their
intranet.

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13-31

Table 13.2

Sample Balanced Scorecard for an

Electric Cooperative

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13-32

Processes That Make Incentives

Work
Participation in Decisions

Communication

Employee participation
in pay-related
decisions can be part
of a general move
toward employee
empowerment.
Employee participation
can contribute to the
incentive plans
success.

Communication
demonstrates that
the pay plan is fair.
When employees
understand the
incentive pay plans
requirements, the
plan is more likely
to influence their
behavior as desired.
Important when
changing the pay plan.

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13-33

Incentive Pay for Executives

Short-Term Incentives

Long-Term Incentives

Bonuses based on
ROI, years profits,
or other measures
related to the
organizations
goals.
Actual payment of
bonus may be
delayed to gain tax
advantages.

Include stock options

and stock purchase
plans.
Rationale is that
executives will want
to do what is best
for the organization
because that will
cause the value of
their stock to grow.

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13-34

Table 13.3

Balanced Scorecard for Merck

Executives

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13-35

Summary
Organizations may recognize individual
performance through such incentives as
piecework rates, standard hour plans, merit
pay, sales commissions, and bonuses for
meeting individual performance objectives.
Group incentives include gainsharing,
bonuses, and team awards.
Incentives for meeting organizational
objectives include profit sharing and stock
ownership.
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13-36

Summary
Communication is especially important
when the organization is changing its pay
plan.
Because executives have such a strong
influence over the organizations
performance, incentive pay for them
receives special attention.
Performance measures should encourage
behavior that is in the organizations best
interests, including ethical behavior.
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13-37

Summary
A balanced scorecard can be used as the
basis for awarding incentive pay. It helps
employees to understand and care about
the organizations goals.
It includes financial goals to satisfy
stockholders, quality- and price-related
goals for customer satisfaction, efficiency
goals for improved operations, and goals
related to acquiring skills and knowledge
for the future.
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13-38

Summary
Incentives for meeting organizational objectives
include profit sharing and stock ownership.
Profit-sharing plans pay workers a percentage of
the organizations profits; these payments do
not
become part of the employees base salary.
Stock ownership incentives may take the form of
stock options or employee stock ownership
plans.

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for sale or distribution in any manner. This document may not be copied, scanned, duplicated, forwarded,

13-39