Performance Based Pay

Motivation, Performance, and Pay

• Incentives
• Financial rewards paid to workers
whose production exceeds a
predetermined standard.
• Frederick Taylor
• Popularized scientific management and
the use of financial incentives in the late
1800s.
• Systematic soldiering
• Fair day’s work (Improve work
Methods & Incentive Pay)
 Consulting Survey Reports

• Mercer Human Resource

• 2600 US workers Surveyed
• 28% personally motivated by Incentive
plans
• 29% felt rewarded because of good
performance
• Hewitt Associates
• 95% of the company tie performance with
incentive
• 83% say programs are successful /
somewhat successful.
Employee Preferences for Noncash Incentives
 Motivation and Incentives
• Herzberg’s Hygiene–Motivator theory
• Hygienes (extrinsic job factors)
• Inadequate working conditions, salary, and
incentive pay can cause dissatisfaction and
prevent satisfaction.
• Motivators (intrinsic job factors)
• Job enrichment (challenging job, feedback,
and recognition) addresses higher-level
(achievement, self-actualization) needs.
• The best way to motivate someone is to organize
the job so that doing it helps satisfy the person’s
higher-level needs.
12–5
 Motivation and Incentives
• Edward Deci
• Intrinsically motivated behaviors are motivated by
the underlying need for competence and self-
determination.
• Offering an extrinsic reward for an intrinsically-
motivated act can conflict with the acting individual’s
internal sense of responsibility.
• Some behaviors are best motivated by job
challenge and recognition, others by financial
rewards.

12–6
 Motivation and Incentives (cont’d)
• Behavior Modification/Reinforcement Theory
• B. F. Skinner’s Principles
• To understand behavior one must understand the
consequences of that behavior.
• Behavior that leads to a positive consequence
(reward) tends to be repeated, while behavior that
leads to a negative consequence (punishment)
tends not to be repeated.
• Behavior can be changed by providing the
properly scheduled rewards (or punishments).
 Employee Incentive Plans

Individual Employee Incentive

and Recognition Programs

Sales Compensation
Programs

Pay-for-Performance Team/Group-based Variable

Pay Programs
Plans
Organization wide Incentive
Programs

Executive Incentive
Compensation Programs

12–8
 Individual Incentive Plans
• Piecework Plans
• The worker is paid a sum (called a
piece rate) for each unit he or she
produces. Eg. Leads Generated
• Straight piecework - Slabs
• Standard hour plan %age

12–9
 Individual Incentive Plans (cont’d)

• Pros and Cons of Piecework

• Easily understandable, equitable, and
powerful incentives
• Employee resistance to changes in
standards or work processes affecting
output
• Quality problems caused by an overriding
output focus
• Possibility of violating minimum wage
standards (Private shirt manufacturers)
• Employee dissatisfaction when incentives
either cannot be earned or are withdrawn
12–10
Individual Incentive Plans (cont’d)
• Merit Pay
• A permanent cumulative salary
increase the firm awards to an
individual employee based on his or her
individual performance.
• Merit Pay Options
• Annual lump-sum merit raises that do
not make the raise part of an
employee’s base salary.
• Merit awards tied to both individual and
organizational performance.
 Lump-Sum Award Determination Matrix (an Example)

The Company’s Performance (Weight =

0.50)
The Employee’s Performance
Rating (Weight = . Outstandin Margin Unaccepta
50) g Excellent Good al ble
Outstanding 1.0 0.9 0.8 0.7 0.0
Excellent 0.9 0.8 0.7 0.6 0.0
Good 0.8 0.7 0.6 0.5 0.0
Marginal — — — — —
Unacceptable — — — — —

12–12
• Variable pay
• Incentives applicable to managers & executives
• Motive behind long term incentives to managers
• Difference in compensation structure for mature
& growing companies
• Concepts of annual bonus (short term incentive)
and criteria to decide annual bonus
• Individual performance linkage to company
 Pay Plans for Managers

Base Short Long Benefits

Term Term
Mature 60% 15% 15% 10%
Growing 40% 45% 25% 10%
 At-Risk Variable Pay Plans
• Put some portion of the employee’s weekly pay
at risk.
• If employees meet or exceed their goals,
they earn incentives. Eg. DuPont
• If they fail to meet their goals, they forgo
some of the pay they would normally have
earned. Eg. TCS – Rs. 830 Mn
Incentives for Managers and
Executives

• Short-Term Incentives: The Annual

Bonus
• Plans that are designed to motivate
short-term performance of managers
and are tied to company profitability.
• Issues in Awarding Bonuses
• Eligibility basis 45%, 25%, 12%
• Fund size basis (10% Share holders,
20% Bonus)
• Individual awards & Split Awards