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Human Resource Management

Part 4: Compensating Human Resources

Chapter 10
Recognizing
Employee
Contributions
with Pay
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Chapter’s Objectives
• Discuss the connection between incentive pay and employee performance.

• Describe how organizations recognize individual performance.

• Identify ways to recognize group performance.

• Explain how organizations link pay to their overall performance.

• Describe how organizations combine incentive plans in a “balanced scorecard.”

• Summarize processes that can contribute to the success of incentive programs.

• Discuss issues related to performance-based pay for executives.

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1. Incentive Pay
Discuss the connection between incentive pay and employee performance.

• Incentive Pay Forms of pay linked to an employee’s performance as an individual,

group member, or organization member.

• For incentive pay to motivate employees to contribute to the organization’s success, the
pay plans must be well designed. In particular, effective plans meet the following
requirements:

 Performance measures are linked to the organization’s goals.

 Employees believe they can meet performance standards.

 The organization gives employees the resources they need to meet their goals.
Employees value the rewards given.

 Employees believe the reward system is fair.

 The pay plan takes into account that employees may ignore any goals that are not
rewarded.

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2. Pay for Individual Performance

Describe how organizations recognize individual performance.

• Organizations may reward individual performance with a variety of incentives:

• Piecework rates

• Merit pay

• Sales commissions

• Standard hour plans

• Individual bonuses
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2. Pay for Individual Performance

Describe how organizations recognize individual performance.

• Piecework Rate A wage based on the amount workers produce.

• Straight Piecework Plan Incentive pay in which the employer pays the same rate per
piece, no matter how much the worker produces.

• Differential Piece Rates Incentive pay in which the piece rate is higher when a greater
amount is produced.

• Standard Hour Plan An incentive plan that pays workers extra for work done in less
than a preset “standard time.
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2. Pay for Individual Performance

Describe how organizations recognize individual performance.

• Merit pay programs link performance-appraisal ratings to annual pay increases.

• A merit increase grid combines an employee’s performance rating with the employee’s
position in a pay range to determine the size and frequency of his or her pay increases.

• Some organizations provide guidelines regarding the percentage of employees who

should fall into each performance category.

• Deming, who is a critic of merit pay, argues that it is unfair to rate individual performance
because "apparent differences between people arise almost entirely from the system
that they work in, not the people themselves.”

• Criticisms of merit pay include:

• the focus on merit pay discourages teamwork.
• The measurement of performance is done unfairly and inaccurately.
• Merit pay may not really exist.
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2. Pay for Individual Performance

Describe how organizations recognize individual performance.

• Like merit pay, performance bonuses reward individual performance, but bonuses are
not rolled into base pay. The employee must re-earn them during each performance
period. In some cases, the bonus is a one-time reward. Bonuses may also be linked to
objective performance measures, rather than subjective ratings.

• Commissions Incentive pay calculated as a percentage of sales.

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3. Pay for Group Performance

Identify ways to recognize group performance.

• Gainsharing Group incentive program that measures improvements in productivity and

effectiveness and distributes a portion of each gain to employees.

• Scanlon Plan A gainsharing program in which employees receive a bonus if the ratio of
labor costs to the sales value of production is below a set standard.

• Group Bonuses and Team Awards

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3. Pay for Group Performance

Identify ways to recognize group performance.

• Gainsharing Group incentive program that measures improvements in productivity and

effectiveness and distributes a portion of each gain to employees.
• Conditions that should be in place for gainsharing to be effective include:
• management commitment
• the need to change or a process of continuous improvement
• management's acceptance and encouragement of employee input
• high levels of cooperation and interaction
• employment security
• information sharing on productivity and costs
• goal setting
• commitment and agreement of all parties
• standards that are understandable, fair, and related to objectives.
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3. Pay for Group Performance

Identify ways to recognize group performance.

• Group incentives tend to measure performace in terms of physical output

• Team award plans may use a broader range of performance measures.

• Drawbacks are that individual competition may be replaced by competition between

teams.
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4. Pay for Organizational Performance

Explain how organizations link pay to their overall performance.

• Profit Sharing Incentive pay in which payments are a percentage of the organization’s
profits and do not become part of the employees’ base salary.
• Under profit sharing, payments are based on a measure of organization
performance (profits), and payments do not become a part of base pay.
• An advantage is that profit sharing may encourage employees to think more
like owners.
• The drawback is that workers may perceive their performance has little to do
with profit but is more related to top management decisions over which they
have little control.
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4. Pay for Organizational Performance

Explain how organizations link pay to their overall performance.
• Ownership encourages employees to focus on the success of the organization as a
whole, but, like profit sharing, may not result in motivation for high individual
performance.

• One method to achieve employee ownership is through stock options, which give
employees the opportunity to buy company stock at a fixed price.

• Employee stock ownership plans (ESOPs) are employee ownership plans that give
employers certain tax and financial advantages when stock is granted to employees.
• ESOPs can carry significant risk for employees.
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4. Pay for Organizational Performance

Explain how organizations link pay to their overall performance.
• Balanced Scorecard A combination of performance measures directed toward the
company’s long- and short-term goals and used as the basis for awarding incentive pay.

• Some companies design plans that combine various elements of the above programs
that are appropriate to the situation.

• The four categories of a balanced scorecard include:

• financial
• customer
• internal
• learning and growth
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4. Pay for Organizational Performance

Managerial and Executive Pay

• Top managers and executives are a strategically important group whose compensation
warrants special attention.

• In some companies rewards for executives are high regardless of organizational

performance.

• Executive pay can be linked to organizational performance (from agency theory).

• There has been increased attention to executive pay from regulators.

• The Securities and Exchange Commission (SEC)
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5. Processes That Make Incentives Work

Summarize processes that can contribute to the success of incentive programs.

• Participation in Decisions

• Communication
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Further summary
Recognizing Employee Contributions with Pay: Discuss the connection between
incentive pay and employee performance.

• Incentive pay is pay tied to individual performance, profits, or other measures of success.

• Organizations select forms of incentive pay to energize, direct, or control employees’ behavior.

• It is influential because the amount paid is linked to predefined behaviors or outcomes.

• To be effective, incentive pay should encourage the kinds of behavior that are most needed, and
employees must believe they have the ability to meet the performance standards.

• Employees must value the rewards, have the resources they need to meet the standards, and
believe the pay plan is fair.
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Further reading: Providing Employee Benefits

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Further reading: Providing Employee Benefits

Describe how organizations use other benefits to match employees’ wants and needs.

• Employers have responded to work-family role conflicts by offering family-friendly benefits,

including paid family leave, child care services or referrals, college savings plans, and elder
care information and support.

• Other employee benefits have traditionally included subsidized cafeterias, on-site health
clinics, and reimbursement of moving expenses.

• Stores and manufacturers may offer discounts on their products.

• Tuition reimbursement encourages employees to continue learning.

• Recreational services and employee outings provide social interaction as well as stress relief.
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