What is Incentive?

• Incentives refer to the inducement or supplemental

reward that serves as a motivational device for a
desired action or behaviour.
Incentive Pay
 Incentive Pay

• Incentive is something that motivates an individual

to perform an action.
• It rewards employees for partially or completely
attaining a predetermined work objective.
• One-time rewards given to employees for
completely or partially achieving a predetermined
work objective
 Elements of Incentive Pay

• Incentive Pay provides motivation

• Is offered at regular intervals
• Is progressive, based on performance over a long
period of time.
 Incentive Pay Assumptions

• 1. Individual employees and work teams differ in

how much they contribute to the company
• 2. The company overall performance depends to a
large degree on the performance of individuals and
groups within the company
• 3. A company needs to reward employees on the
basis of their relative performance in order to
attract, retain, and motivate high performers
 Incentive Pay Vs Traditional Pay Systems
Traditional Pay
• Supports command and control
management and traditional job
hierarchies.
• Driven by duties and responsibilities
in job description; focuses on tasks.
• Highly structured design with little
room for flexibility.
• Tightly controlled communication,
"need to know" basis only.
Incentive Pay
• Designed with business objectives
and strategic plan.
• Motivates and rewards critical
behaviors; focuses on contribution.
• Flexible design adapts to changes
in business priorities.
• Openly communicates shared
vision, performance expectations
and success.
 Contrasting Incentive Pay
with Traditional Pay
Traditional Pay
Incentive Pay
• Fixed hourly rate • Pay based on
• Fixed salary performance
• Individual plans
• Group plans
• Companywide plans
 Types of incentives

• Bonus Pay
• Profit sharing
• Stock Incentives
• Vacation incentives
• Prizes
 Classification of Incentive
Plans
• 1. Individual- Incentive Plans
• 2. Group- Incentive Plans
• 3. Company-Incentive Plans
Individual Incentive Plans
 Individual Incentive Plans

• Reward employees whose work is performed

independently, and for meeting work-related
standards
• Piecework plans can be used here to, but typically
are used for their production employees
 Types on Individual Plans

• Piecework Plans
• Management Incentive Plans
• Behavior Encouragement Plans
• Referral Plans
 Piecework Plans

• Reward workers for every item produced over a

designated production standard
- uses objective and subjective criteria
- quantity and/or quality goals
 Piecework Plans Advantages

• Incentive Effect: workers willingness to work hard

to produce more
• Sorting Effect: workers choice to stay versus leave
for another job
Piecework Plans Disadvantages

• Unrealistic standards may hamper employee

motivation
• Factors beyond employees control may affect
outcomes
• May promote undesirable behaviors
 Management Incentive Plans

• Award bonuses to managers when they meet or

exceed objectives based on sales, profit,
production, or other measures for their division ex.)
increasing market share
• Management incentive plans focus on achieving
complex, multiple objectives (MBO)
 Behavior Encouragement Plans

• Employees receive payments for specific

behavioral accomplishments
- safety records
- attendance etc.
 Referral Plans

• Employees receive bonuses for recruitment of

highly qualified employees
Advantages and Disadvantages of
Individual Incentive Plans

• Advantages:
- Promotes link between pay and performance
- Equitable pay enables companies to retain best performers

• Disadvantages:
- Employee may not be able to control factors that affect
performance
- Loses motivational effect when goals are too high or too
low
Group Incentive Plans
 Group Incentive Plans

• Reward employees for their collective

performance, rather than for each employee's
individual performance
• Emphasize importance between and within teams
• Encourage team members to have predetermined
team objects
Group Incentive Performance Measures

• Customer satisfaction
• Labor cost savings
• Materials cost savings
• Reduction in accidents
• Services cost savings
 Types of Group Incentive
Plans
• Team-Based or Small-Group Based incentive
Plans
• Gain Sharing
 Team-Based or Small-Group
Based incentive Plans
• A small group of employees shares a financial
reward when a specific objective is met.
• Rewards allocated 3 ways..
1. Equal Incentive payments to all team members
2. Different payments to team members based on
their contributions to the goal
3. Different payments determined by a ratio of each
team members base pay to the total base pay of the
group
 Gain Sharing

• Group incentive systems that give employees a

financial reward based on improved company
performance in areas such as increased
productivity, lowering costs, and improving safety
Components of Gain Sharing Programs

• 1. Leadership Philosophy: progressive, involving a

cooperative organizational climate
• 2. Employee involvement through suggestions and
problem solving ideas
• 3. Bonuses awarded when productivity exceeds
productivity targets
 Advantages and Disadvantages of Group
Incentives Plans

• Advantages:
- companies can more easily develop performance measures for
group plans than individual plans (fewer groups than individuals)
- greater group cohesion (achieving common goal)
• Disadvantages:
- May lead to higher employee turnover because of the free-rider
effect: some employees may make fewer contributions to the
group because they posses lower ability, skills, or experience than
other group members
- Members may feel uncomfortable with the fact that other
members performance influences their compensation level
Company Wide Incentive Plans
Company-Wide Incentive Plans

• Rewards employees when company meets

performance standards
• Two types: profit sharing plans and employee stock
options
Company-Wide Performance Measures

• company profits
• cost attainment
• market share
• sales revenue
 Types of Companywide
Incentive Plans
• Profit Sharing Plans
• Employee Stock Option Plans
 Profit Sharing Plans

• Current profit-sharing plans

- award cash to employees typically on a quarterly
or annual basis as part of core compensation
• Deferred profit-sharing plans
- place cash awards in trust accounts for employees
retirement
 Profit-Sharing Formulas

• Fixed first-dollar-of profits

- based on specific percentage or pre- or post- tax
annual profits
• Graduated first-dollar-of profits
- percentages increases as pre- or post- tax annual
profits increase
• Profitability threshold formula
- profits must exceed a minimum level
 Advantages and
Disadvantages of Profit-
Sharing Plans
• Advantages
- enable employees to share in companies profits
allow companies greater financial flexibility
• Disadvantages
- can undermine the economic security of employees
- may fail to motivate employees if they do not see a
direct link between their efforts and corporate profits
- may lead to turnover of productive employees, if
rewards are small
Employee Stock Option Plans

• Company grants employees the right to purchase

company stock
- to own the stock, employees must exercise the
stock option rights by purchasing stock at designated
price after a specified period of time 
- incentivizes employees to be more productive, with
expectation that stock value will increase over time
- employees make money by selling stock for more
than purchase price
 Employee Stock Option Plans

• Company Stock
• Represents total equity of a company
• Company Stock Shares
• Represents equity segments of equal value
- equity interest increases positively with the number of stock shares
• Employee Stock Ownership Plans (ESOPs)
• Place company stock in trust account for employees
- similar to deferred profit sharing
• Stock Compensation Plans
• Represent an important type of deferred compensation for executives
 Deferred Compensation is suppose to...

• - Create a sense of ownership

- Align the interest of the executive with the
interest of the owners or shareholders of the
company long term
Think and Respond….
 Incentive Pay Considerations

• - Based on individual or group performance?

• - Acceptable level of risk employees willing to
accept?
• - Complementing or Replace traditional pay?
• - Performance criteria evaluated should be
quantifiable and accessible?
• - Appropriate time horizon?
Thank You