Chapter-2 (Compensation Management) MBA

Chapter 2
Pay for Performance and Financial

Incentives
Copyright © 2017, 2015, 2013 Pearson Education, Inc. All Rights Reserved
Incentive Pay Terminology
• Pay-for Performance
• Variable Pay
• Profit Sharing
Individual Employee Incentive and
Recognition Programs
• Piecework 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.
– 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.
– Standard hour plans: 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.
Similar to piecework payment but based on a percent
premium.
Advantages and Disadvantages of
Piecework Plans
• Advantages:
– Simple to calculate and easily understood by employees
– Equitable in principle
– incentive value can be powerful since they tie pay directly to
performance.
• Disadvantages:
– Focus on quantity not quality
– Employer’s tendency to increase the standard
– Equipment maintenance tends to decline as employees
focus on maximizing quantity.
Merit Pay as an Incentive
• Merit pay: Any salary increase awarded to an
employee based on his or her individual
performance.
– Differential pay increases
– Merit pay options:
– One time payment
– Cumulative Salary Increase
Incentive for Professional Employees
• Professional employees are those whose work involves
the application of learned knowledge to the solution of the
employer’s problems, such as lawyers and engineers.
– Intrinsic Rewards: The Internal satisfaction by

accomplishing any projects.
– Extrinsic Rewards: Higher payment or by offering duel-

career.
Non-financial and Recognition-Base
Awards
• Social Recognition- e.g. Employee of the month or
year
• Performance Feedback- providing quantitative or
qualitative information on task performance so as
to change or maintain performance; showing
workers a graph of how their performance is
trending is an example
List of Recognition
FIGURE 12-1 Social Recognition and Related Positive Reinforcement Managers Can Use
• Challenging work assignments • Being provided with ample
• Freedom to choose own work encouragement
activity • Being allowed to set own goals
• Having fun built into work • Compliments
• More of preferred task • Expression of appreciation in front of
• Role as boss’s stand-in when he or others
she is away • Note of thanks
• Role in presentations to top • Employee-of-the-month award
management • Special commendation
• Job rotation • Bigger desk
• Encouragement of learning and • Bigger office or cubicle
continuous improvement
Source: Based on Bob Nelson, 1001 Ways to Reward Employees (New York: Workman Pub, 1994), p.
19; Sunny C. L. Fong and Margaret A. Shaffer, "The Dimensionality and Determinants of Pay
Satisfaction: A Cross-Cultural Investigation of a Group Incentive Plan," International Journal of Human
Resource Management 14, no. 4 (June 2003), p. 559 (22).
III.
Discuss the pros and cons of
commissions versus straight
pay for salespeople.
Types of Sales Incentive Plans
1. Salary plan
2. Commission plan
3. Combination plan
– Salary-plus-commission plan
– Commission-plus-drawing account
– Commission-plus-bonus
Maximizing Sales Force Results
• Set Effective Quotas
• Distinguish Among Performers
IV.
Describe the main incentives
for managers and executives.
Incentives for Managers and
Executives
• Short-term Incentives
• Long-term incentives
Strategy and the Executive’s Long-
Term and Total Rewards Package
• Short-term incentives
and the Annual bonus
– Eligibility
– Fund size
– Individual awards
– Stock options
– Ethics
Some Other Executive Incentives
• Golden parachute
• Personal loan
V.
Name and describe the most
popular organization-wide
incentive plans.
Team and Organization-Wide
Incentive Plans (2 of 2)
• Profit-sharing plans
• Scanlon plans
• Other gain-sharing plans
• At-risk pay plans
• Employee stock ownership plans
V.
Explain how to use incentives
to improve employee
engagement.
Employee Engagement Guide for
Managers
• Incentives and Engagement
– Measure the extent to which supervisors are
encouraging their subordinates to be engaged
– Use incentives to reward supervisors for
improving employee engagement
Thank You

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Chapter 2

Pay for Performance and Financial

– Intrinsic Rewards: The Internal satisfaction by

– Extrinsic Rewards: Higher payment or by offering duel-

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