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Part I: Introduction Managing Human Resources Today Managing Equal Opportunity and Diversity Mergers, Acquisitions, and Strategic Human Resource ManagementPart II: Staffing the OrganizationPersonnel Planning and Recruiting Selecting Employees Training and Developing EmployeesPart III: Appraising and Compensating EmployeesPerformance Management and Appraisal Compensating EmployeesPart IV: Employee and Labor RelationsEthics, Employee Rights, and Fair Treatment at Work Working with Unions and Resolving Disputes Improving Occupational Safety, Health, and SecurityPart V: Special Issues in Human Resource Management Managing Human Resources in Entrepreneurial Firms Managing HR Globally Measuring and Improving HR Management’s Results
Chapter 12 Pay for Performance and Financial Incentives Part Four | Compensation Copyright © 2011 Pearson Education, Inc publishing as Prentice Hall PowerPoint Presentation by Charlie Cook The University of West Alabama WHERE WE ARE NOW… Copyright © 2011 Pearson Education, Inc publishing as Prentice Hall 12–2 LEARNING OUTCOMES Explain how you would apply five motivation theories in formulating an incentive plan Discuss the main incentives for individual employees Discuss the pros and cons of commissions versus straight pay incentives for salespeople Describe the main incentives for managers and executives Name and define the most popular organizationwide variable pay plans Outline the steps in designing effective incentive plans Copyright © 2011 Pearson Education, Inc publishing as Prentice Hall 12–3 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 • Linking Pay and Performance Understanding the motivational bases of incentive plans Copyright © 2011 Pearson Education, Inc publishing as Prentice Hall 12–4 The Hierarchy of Needs • Maslow’s Hierarchy of Needs: Physiological (food, water, warmth) Security (a secure income, knowing one has a job) Social (friendships and camaraderie) Self-esteem (respect) Self-actualization (becoming a whole person) • Maslow’s prepotency process principle: People are motivated first to satisfy each lower-order need and then, in sequence, each of the higher-level needs Copyright © 2011 Pearson Education, Inc publishing as Prentice Hall 12–5 Herzberg’s Hygiene–Motivator Theory • Hygienes (extrinsic job factors) Satisfy lower-level needs Inadequate working conditions, salary, and incentive pay can cause dissatisfaction and prevent satisfaction • Motivators (intrinsic job factors) Satisfy higher-level needs Job enrichment (challenging job, feedback, and recognition) addresses higher-level (achievement, self-actualization) needs • Premise: The best way to motivate someone is to organize the job so that doing it provides feedback and challenge that helps satisfy the person’s higher-level needs Copyright © 2011 Pearson Education, Inc publishing as Prentice Hall 12–6 Demotivators and Edward Deci • Intrinsically motivated behaviors are motivated by the individual’s underlying need for competence and selfdetermination 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 Copyright © 2011 Pearson Education, Inc publishing as Prentice Hall 12–7 Victor Vroom’s Expectancy Theory • Motivation is a function of: Expectancy: the belief that effort will lead to performance Instrumentality: the connection between performance and the appropriate reward Valence: the value the person places on the reward • Motivation = (E x I x V) If any factor (E, I, or V) is zero, then there is no motivation to work toward the reward Employee confidence building and training, accurate appraisals, and knowledge of workers’ desired rewards can increase employee motivation Copyright © 2011 Pearson Education, Inc publishing as Prentice Hall 12–8 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 properly scheduled rewards (or punishments) Copyright © 2011 Pearson Education, Inc publishing as Prentice Hall 12–9 Incentive Pay Terminology • Pay-for-Performance Plan Ties employee’s pay to the employee’s performance • Variable Pay Plan Is an incentive plan that ties a group or team’s pay to some measure of the firm’s (or the facility’s) overall profitability Example: profit-sharing plans May include incentive plans for individual employees Copyright © 2011 Pearson Education, Inc publishing as Prentice Hall 12–10 TABLE 12–2 Multiplier Approach to Determining Annual Bonus Company’s Performance (Based on Sales Targets, Weight = 0.50) Individual Performance (Based on Appraisal, Weight = 50) Excellent Good Fair Poor Excellent 1.00 0.90 0.80 0.70 Good 0.80 0.70 0.60 0.50 Fair 0.00 0.00 0.00 0.00 Poor 0.00 0.00 0.00 0.00 Note: To determine the dollar amount of a manager’s award, multiply the maximum possible (target) bonus by the appropriate factor in the matrix Copyright © 2011 Pearson Education, Inc publishing as Prentice Hall 12–27 Creating an Executive Compensation Plan Define the strategic context for the executive compensation program Shape each component of the package to focus the manager on achieving the firm’s strategic goals Check the executive compensation plan for compliance with all legal and regulatory requirements and for tax effectiveness Install a process for reviewing and evaluating the executive compensation plan whenever a major business change occurs Copyright © 2011 Pearson Education, Inc publishing as Prentice Hall 12–28 Team/Group Incentive Plans • Team (or Group) Incentive Plans Incentives are based on team’s performance • How to Design Team Incentives Set individual work standards Set work standards for each team member and then calculate each member’s output Members are paid based on one of three formulas: All receive the same pay earned by the highest producer All receive the same pay earned by the lowest producer All receive the same pay equal to the average pay earned by the group Copyright © 2011 Pearson Education, Inc publishing as Prentice Hall 12–29 Pros and Cons of Team Incentives • Pros Reinforces team planning and problem solving Helps ensure collaboration Encourages a sense of cooperation Encourages rapid training of new members • Cons Pay is not proportionate to an individual’s effort Rewards “free riders” Copyright © 2011 Pearson Education, Inc publishing as Prentice Hall 12–30 Organizationwide Incentive Plans • Profit-Sharing Plans Current profit-sharing (cash) plans Employees receive cash shares of the firm’s profits at regular intervals Deferred profit-sharing plans A predetermined portion of profits based on the employee’s contribution to the firm’s profits is placed in each employee’s retirement account under a trustee’s supervision Employees’ income taxes on the distributions are deferred, often until the employee retires Copyright © 2011 Pearson Education, Inc publishing as Prentice Hall 12–31 Gainsharing Plans Scanlon Plan Components Philosophy of cooperation Identity Competence Copyright © 2011 Pearson Education, Inc publishing as Prentice Hall Involvement system Benefits sharing formula 12–32 Implementing a Gainsharing Plan Establish general plan objectives Choose specific performance measures Decide on a funding formula Decide on a method for dividing and distributing the employees’ share of the gains Choose the form of payment Decide how often to pay bonuses Develop the involvement system Implement the plan Copyright © 2011 Pearson Education, Inc publishing as Prentice Hall 12–33 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 If they fail to meet their goals, they forego some of the pay they would normally have earned Copyright © 2011 Pearson Education, Inc publishing as Prentice Hall 12–34 Organizationwide Incentive Plans (cont’d) • Employee Stock Ownership Plan (ESOP) A firm annually contributes its own stock—or cash (with a limit of 15% of compensation) to be used to purchase the stock—to a trust established for the employees The trust holds the stock in individual employee accounts and distributes it to employees upon separation from the firm if the employee has worked long enough to earn ownership of the stock Copyright © 2011 Pearson Education, Inc publishing as Prentice Hall 12–35 Advantages of ESOPs • For the Company Can take a tax deduction equal to the fair market value of the shares transferred to the ESOP trustee Gets an income tax deduction for dividends paid on ESOP-owned stock Can borrow against ESOP in trust and then repay the loan in pretax rather than after-tax dollars • For the Employees Develop a sense of ownership in and commitment to the firm Do not pay taxes on ESOP earnings until they receive a distribution • For the Shareholders of Closely-Held Corporations Can place assets into an ESOP trust which will allow them to purchase other marketable securities to diversify their holdings Copyright © 2011 Pearson Education, Inc publishing as Prentice Hall 12–36 Implementing an Effective Incentive Plan Ask: Does it make sense to use an incentive here? Link the incentive with your strategy Make sure the program is motivational Set complete standards Be scientific in analyzing the effects of the plan Copyright © 2011 Pearson Education, Inc publishing as Prentice Hall 12–37 Why Incentive Plans Fail • Performance pay can’t replace good management • You get what you pay for • “Pay is not a motivator.” • Rewards punish • Rewards rupture relationships • Rewards can have unintended consequences • Rewards may undermine responsiveness • Rewards undermine intrinsic motivation Copyright © 2011 Pearson Education, Inc publishing as Prentice Hall 12–38 TABLE 12–3 Express Auto Compensation System Express Auto Team Responsibility of Team Current Compensation Method Sales force Persuade buyer to purchase a car Very small salary (minimum wage) with commissions Commission rate increases with every 20 cars sold per month Finance office Help close the sale; persuade customer to use company finance plan Salary, plus bonus for each $10,000 financed with the company Detailing Inspect cars delivered from factory, clean, and make minor adjustments Piecework paid on the number of cars detailed per day Mechanics Provide factory warranty service, maintenance, and repair Small hourly wage, plus bonus based on (1) number of cars completed per day and (2) finishing each car faster than the standard estimated time to repair Receptionists/ phone service personnel Primary liaison between customer and sales force, finance, and mechanics Minimum wage Copyright © 2011 Pearson Education, Inc publishing as Prentice Hall 12–39 KEY TERMS financial incentives merit pay (merit raise) fair day’s work annual bonus scientific management movement stock option expectancy golden parachutes instrumentality team (or group) incentive plan valence organizationwide incentive plans behavior modification profit-sharing plan variable pay Scanlon plan piecework gainsharing plan straight piecework at-risk variable pay plans standard hour plan employee stock ownership plan (ESOP) Copyright © 2011 Pearson Education, Inc publishing as Prentice Hall 12–40 All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher Printed in the United States of America Copyright © 2011 Pearson Education, Inc publishing as Prentice Hall 12–41 [...]... • Is 10% of the sales force achieving higher performance than previously? • Is 5% to 10% of the sales force achieving below-quota performance and receiving coaching? Copyright © 2011 Pearson Education, Inc publishing as Prentice Hall 12–24 Incentives for Managers and Executives • Executive Total Reward Package Base salary (cash) Short-term incentives (bonuses) Long-term incentives (e.g., stock... Incentive Plans Incentives are based on team’s performance • How to Design Team Incentives Set individual work standards Set work standards for each team member and then calculate each member’s output Members are paid based on one of three formulas: All receive the same pay earned by the highest producer All receive the same pay earned by the lowest producer All receive the same pay equal to... strategic context for the executive compensation program 2 Shape each component of the package to focus the manager on achieving the firm’s strategic goals 3 Check the executive compensation plan for compliance with all legal and regulatory requirements and for tax effectiveness 4 Install a process for reviewing and evaluating the executive compensation plan whenever a major business change occurs Copyright... publishing as Prentice Hall Involvement system Benefits sharing formula 12–32 Implementing a Gainsharing Plan 1 Establish general plan objectives 2 Choose specific performance measures 3 Decide on a funding formula 4 Decide on a method for dividing and distributing the employees’ share of the gains 5 Choose the form of payment 6 Decide how often to pay bonuses 7 Develop the involvement system 8 Implement... executives and the board of directors personally liable for violating their fiduciary responsibilities to their shareholders Requires the CEO and CFO to repay bonuses, incentives, or equity-based compensation received following issuance of a financial statement that the firm must restate Copyright © 2011 Pearson Education, Inc publishing as Prentice Hall 12–25 Short- and Long-Term Incentives • Short-Term Incentives: ... sales force know exactly how its quotas are set? • Do you combine bottom-up information (like account forecasts) with top-down requirements (like the company business plan)? • Do 60% to 70% of the sales force generally hit their quota? • Do high performers hit their targets consistently? • Do low performers show improvement over time? • Are quotas stable through the performance period? • Are returns and. .. Education, Inc publishing as Prentice Hall 12–13 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 • Employee dissatisfaction when incentives either cannot be earned or are withdrawn... deduction for dividends paid on ESOP-owned stock Can borrow against ESOP in trust and then repay the loan in pretax rather than after-tax dollars • For the Employees Develop a sense of ownership in and commitment to the firm Do not pay taxes on ESOP earnings until they receive a distribution • For the Shareholders of Closely-Held Corporations Can place assets into an ESOP trust which will allow... Bigger desk • Encouragement of learning and continuous improvement • Bigger office or cubicle Copyright © 2011 Pearson Education, Inc publishing as Prentice Hall • Special commendation 12–19 Online and IT-Supported Awards • Information Technology and Incentives Enterprise incentive management (EIM) Software that automates planning, calculation, modeling, and management of incentive compensation... Compensation Programs Pay- for- Performance Plans Team/Group-based Variable Pay Programs Organizationwide Incentive Programs Executive Incentive Compensation Programs Copyright © 2011 Pearson Education, Inc publishing as Prentice Hall 12–12 Individual Incentive Plans • Piecework Plans The worker is paid a sum (“piece rate”) for each unit he or she produces Straight piecework Standard hour plan Copyright