Establishing

Strategic Pay
Plans
E STA BLI SH I N G S TR AT EG I C PAY P LA N S , FR I N G E
BE N E FI TS , PAY F O R P E RFO RM A N CE, EM P LO Y EE
BE N E FI TS A N D S E RV I CE S: C H A L LE N G E S O F
RE M U N E RATI O N , D E V E LO PI N G H R N E ED A N D S CO P E
O F H RD , H RD P RA CTI CES I N RE A L O R G A N I Z ATI O N S
Introduction
Once employees have done their jobs and
been appraised, they expect to be paid. Each
employee's pay should make sense in ters of
the company's overall pay plan. The main
purpose of this chapter is to show you how
to establish a pay plan.
Money & Motivation
1. Fredrick Taylor popularized using financial incentives/rewards to
workers whose production exceeds some predetermined standards - in
the late 1800s
2. Taylor was concerned with what he called " Systematic Soldiering"
3. "Systematic Soldering" - is the tendency of employees to work at the
slowest pace possible and to produce at the minimum acceptable level.
4. Three contribution of Taylor:
1. Fair day's work : He saw the need for setting output standards devised
based on careful, scientific analysis
2. Scientific Management movement : He spearheaded the SMM approach
that emphasized improving work methods through observation & analysis
3. Incentive Pay : He popularized the use of incentive Pay
Performance & Pay
1. Performance and Pay or Pay for performance is " Transfer of money
or material goods conditional on taking a measurable action or
achieving a predetermined performance target."

2. However, not every one reacts to a reward in the same way, and not
all rewards are suited to all situations.

3. Managers should be aware of the motivational bases of incentive

plans.
Motivation & Incentives
1. The manager devising an incentive plan should first remember that
different peoples react to different incentives in different ways.
2. A research showed,
1. high "positive affective" (PA) individual are energetic, active and alert
2. Low PA's individual are lethargic, listless and apathetic.
3. The low PA actually responded much more favorably to merit raises then
did the high PAs.
Individual differences
Employee Compensation
Basic Factors in Determining
Pay Rates
Basic Factors in Determining
Pay Rates
Establishing Pay Rates
Establishing Pay Rates
Establishing Pay Rates
Establishing Pay Rates
Compensating Executives and
Managers
Compensating Professional
Employees
Competency Based Pay
Types of Incentive Plans
Pay for Performance plans

1. Individual incentive/recognition program

2. Sales compensation programs
3. Team/group-based variable pay programs
4. Organization wide incentive programs
5. Executive incentive compensation program
Individual Incentive Plans
Piece works Plans
A system of pay based on the number of items processed by each
individual worker in a unit of time, such as items per hour or items per
day.

1. Straight piecework : An incentive plan in which a person is paid a

sum for each item he or she makes or sells, with a strict
proportionality between results and rewards.
2. Standard hour plan : A plan by which a worker is paid a basic hourly
rate but is paid an extra percentage of his or her rate for production
exceeding the standard per hour or per day.
Individuals Incentive Plan
Merit Pay as an Incentive

Merit Pay:
1. Any salary increase awarded to an employee based on his or her
individual performance
2. Awarding Pay raises across the board may actually detract from
performance, by showing employees they'll be rewarded regardless
of how they perform.
3. But consideration has to be taken on having a proper performance
evaluation system to separate performers and non performers to
avoid dissatisfaction of other employees.
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

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 lawyers, doctors, economists, and engineer.

1. Since they are paid well and has the drive to produce high caliber
work, offering financial rewards to people like these may actually
diminish their intrinsic motivation.
2. Possible incentives include:
1. Bonuses
2. Better Vacation
3. Improved pension plans
Recognition based awards
Recognition is one of several types of non-financial incentives.
◦ The term recognition program refers to formal program such as
employee of the month
◦ The term social recognition program refers to more informal
manager-employee exchanges such as praise, or expressions of
appreciation for a job well-done.
◦ Combining financial rewards with the nonfinancial once produced
performance in service firms almost twice the effect of using each
reward alone
Information technology and
incentives
Enterprise Incentive Management (EIM)

Software that automates the planning, calculation, modeling and

management of incentive compensation plans, enabling companies to
align their employees with corporate strategy and goals.
 Incentives for salespeople
Salary Plan :
1. A straight salary is paid to the sales person.
2. When the main task involves finding new clients, executing product training
programs or participating in trade shows.
Commission Plan
3. Commission plan pays salespeople for results, and only for results.
4. Companies fixed sales cost are lower.
5. Salespeople tend to focus on making the sale and may neglect duties like servicing
small accounts, cultivating dedicated customers etc.
6. Salesperson pay me be excessive in boom times and low in recessions.
7. High Turnover
 Incentives for salespeople
Combination Plan
1. Pay is in combination of Salary and commission
2. An incentive mix of about 70% base salary and 30% incentive seems
typical.
3. Gives salesperson peace of mind or safety net
4. Tends to become complicated and misunderstanding can result
Types of Special Combination plans
1. Commission plus drawing account plan : A sales person is paid on commissions but
can draw on future earnings to get through low period
2. Commission plus bonus : the firm pays its salespeople mostly based on
commissions, However, they also get a small bonus for directed activities.
Setting Sales Quota
In setting sales quotas and commission rates, the employer wants to
motivate sales activity but avoid having commissions become excessive
Team/Group based variable
pay incentives plan
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.
Set Individual work standards:
1. Set work standards for each member and then calculate the output
2. Members are paid based on one of three formulas:
1. All members receives the same pay as the highest producer
2. All members receives the same pay as the lowest produces
3. All members receives the same pay equal to the average pay
earned by the group
How to design Team incentive
Engineer Production Standard:
1. All members receive the same pay, based on the piece rate for the
groups job
◦ This group incentive can use the piece rate or standard hour plan , but
the latter is more prevalent.

2. Tie reward to goals based on an overall standard of group

performance

◦ If the firm reaches its goal, the employee share in a percentage of the
improvement (if firm reached 100% goal employee receive 5% of the
improvement, if firm reached lower than 100% , they will receive lower
than 5%)
Organization wide incentive
Plan
Organization wide incentive plans are plans in which all or most
employees can participate, and which generally tie the reward to some
measure of companywide performance. Also called variable pay plans,
they include :

1. Profit Sharing
2. Employee Stock Ownership (ESOP)
3. Scanlon/gainsharing plans.
Profit Sharing Plans
A Plan whereby employee shares the profit. Types of profit sharing plans
are:

1. Cash plans : The firm simply distributes a percentage of profits.

2. Lincoln incentive system : Introduced by Lincoln Electric company,
profits are distributed to employees based on their individual merit
rating. The Lincoln plan also include a suggestion system that pays
individual workers rewards for savings resulting from their
suggestions.
3. Deferred profit-sharing plans : The firm places a predetermined
portion of profits in each employee's account under a trustee's
supervision.
 Employee Stock Ownership
(ESOP)
A corporation contributes shares of its own stock to a trust in which additional
contributions are made annually. The trust distributes the stock to employees
on retirement or separation from service.
Advantage of ESOP to Employees
1. Develops sense of ownership and commitment to the firm
2. No taxes until the stock is claimed
Advantage of ESOP to the Company
3. A tax deduction to the market price of the share transferred
4. An income tax deduction for dividends paid on ESOP - owned stock
5. Firms offering ESOP had higher shareholder returns than those not offering.
Scanlon Plan (Joseph Scanlon,
1937)
Scanlon plan is an incentive plan developed in 1937 by Joseph Scanlon and
designed to encourage cooperation, involvement, and sharing of benefits.
Scanlon Plan has five basic features:
1. Philosophy of cooperation - No us and Them
2. Identity - Understanding of business mission and how it operates in terms of
customers, prices and costs.
3. Competence : The plan depends in a high level of competence from all the levels
4. Involvement system : Employees present improvement suggestions to the
appropriate departmental-level committees which transmits the valuable ones to the
executive level committee.
5. Sharing the benefits : Employee share the benefits received from that system.
(75% of the savings.)
At Risk variable Pay Plan
Plans that put some portion of employees weekly pay at risk, subject to
the firms meeting its financial goal.
1. If employee meets or exceed their goal, they earn incentives.
2. If they fail to meet their goals , they forgo some of the pay they
would normally have earned.
Short Term incentives for
managers and executives
Annual Bonus:
1. Plans that are designed to motivate short - term performance of
managers and are tied to company profitability.
2. Three basic issues to consider when awarding short - term
incentives:
1. Eligibility : job level, base salary, and impact on profitability
2. Fund Size : non deductable formula (net income) or deductable
formula (profitability)
3. Individual awards: Personal performance / Organizational
Performance
Long Term incentives for
managers and executives
Stock Options
The right to purchase a stated number of shares of a company stock at
today's price at some time in future.

1. The options have no value if the price of the stock drops below the
options strike price (the options stock purchase price)
Other Executive incentives
Golden Parachute:
Payment companies make to departing executives in connection with a
change in ownership or control of a company

Guaranteed loans to directors

1. Loans provided to buy company stock
2. A highly risk and now obsolete practice in most of the courtiers. \
Creating an executive
compensation plan
1. Define the strategic context : What are our organizations long term
goal and how can the compensation structure support them ?
2. Shape each component of the package to focus the manager on
achieving the firms strategic goals
3. Create a stock option plan to meet the needs of the executives and
the company and its strategy
4. Check the compensation plan for legal compliance
5. install a process of reviewing and evaluating the plan in regular
interval
 Why incentive plan fails ?
1. Performance pay can't replace good management
2. You get what you pay for : may lead to rushed production and lower quality
3. Pay is not a motivator : basic needs has to be fulfilled.
4. Rewards Punish: "Do this and you will get that" is not very different from " Do this or
you won't get that"
5. Rewards Rupture relationships
6. Rewards can have unintended consequences: Focus on just working for things which
will reward them.
7. Rewards may undermine responsiveness: Any change or distraction which make
achieving goals harder may be resisted.
8. Reward undermine intrinsic motivation : The financial reward undermine the feeling
that the person is doing a good job voluntarily.
Implementing effective
incentives plan
1. Ask: Are performance levels inadequate due to motivation ?
2. Link the incentive with your strategy.
3. Make sure the program is motivational
4. Make the plan easy for employees to understand.
5. Set effective standards
6. View the standards as a contract with employees.
7. Get employees support the plan
8. Use good measurement systems
9. Use a complete set of standards (both quantity and quality)
10. Make the incentive plan part of a comprehensive, commitment - oriented
approach.
HR Activities that build
commitment