12-1McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved.

fundamentals of

Human Resource Management 3rd editionby R.A. Noe, J.R. Hollenbeck, B. Gerhart, and P.M. Wright

CHAPTER 12Recognizing Employee Contributions

with Pay

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Incentives

• 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.

• To be effective, incentive pay should encourage the kinds of behaviors 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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Effective incentive pay plans meet the following requirements:1. Performance measures are linked to the

organization’s goals.2. Employees believe they can meet performance

standards.3. The organization gives employees the resources

they need to meet their goals.4. Employees value the rewards given.5. Employees believe the reward system is fair.6. The pay plan takes into account that employees may

ignore any goals that are not rewarded.

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Types of Incentives

• Organizations may recognize individual performance through such incentives as piecework rates, standard hour plans, merit pay, sales commissions, and bonuses for meeting individual performance objectives.

• Common group incentives include gainsharing, bonuses, and team awards.

• Incentives for meeting organizational objectives include profit sharing and stock ownership.

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Pay for Individual Performance

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How Incentives Sometimes “Work”

SOURCE: DILBERT reprinted by permission of United Feature Syndicate, Inc.

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Ratings and Raises – Under-Rewarding the Best

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Many car salespeople earn a straight commission, meaning that 100% of their pay comes from commission instead of salary.

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Test Your Knowledge

• John works twisting pretzels in a pretzel factory. Pablo works on IT systems integration at a credit card company. The best pay plans for these individuals would be ________ and _______, respectively.a) Merit pay, individual bonusb) Sales commissions; merit payc) Piecework, Merit payd) Individual bonus, sales commissions

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Pay for Group Performance

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Organization Conditions Necessary for Gainsharing to Succeed

1. Management commitment.2. Need for change or strong commitment to

continuous improvement.3. Management acceptance and encouragement of

employee input.4. High levels of cooperation and interaction.5. Employment security.6. Information sharing on productivity and costs.7. Goal setting.

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Organization Conditions Necessary for Gainsharing to Succeed (continued)

8. Commitment of all involved parties to the process of change and improvement.

9. Performance standard and calculation that employees understand and consider fair and that is closely related to managerial objectives.

10. Employees who value working in groups.

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Group members that meet a sales goal or a product development team that meets a deadline or successfully launches a product may be rewarded with a bonus for group performance.

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Types of Pay for Organizational Performance

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Pay for Organizational Performance:Profit Sharing

• 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.

• Profit sharing may encourage employees to think like owners.

• Evidence is not clear whether profit sharing helps organizations perform better.

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Pay for Organizational Performance:Stock Ownership

Stock Options• Rights to buy a certain

number of shares of stock at a specified price.

• Traditionally, stock options have been granted to executives.

• Some companies are trying to push eligibility for options further down the organization’s structure.

ESOPs• Employee Stock Ownership

Plan (ESOP) – an arrangement in which the organization distributes shares of stock to all its employees by placing it in a trust.

• This is the most common form of employee ownership.

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Test Your Knowledge

• For each of the following jobs, identify the best type of incentive (e.g., individual, group, organizational). Be prepared to explain your answer.1. Director of Marketing, Pepsi2. Recruiter, Verizon3. Cashier, CVS (drugstore)4. Salesperson, Macy’s

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Incentives

• A balanced scorecard can be used as the basis for awarding incentive pay. It also helps employees to understand and care about the organization’s goals.

• The mix of pay programs is intended to balance the disadvantages of one type of incentive with the advantages of another type.

• Communication and participation in decisions can contribute to employees’ feelings that the organization’s incentive pay plans are fair.

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Balanced Scorecard

• 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.

• The four categories of a balanced scorecard include:– financial– customer– internal– learning and growth

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Sample Balanced Scorecard for a Production Manager

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Balanced Scorecard (continued)

• It combines the advantages of different incentive pay plans.

• It helps employees understand the organization’s goals.

• By communicating the balanced scorecard to employees, the organization shows employees information about what its goals are and what it expects employees to accomplish.

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Processes That Make Incentives Work

Participation in Decisions• Employee participation in

pay-related decisions can be part of a general move toward employee empowerment.

• Employee participation can contribute to the success of an incentive plan.

Communication• Communication

demonstrates to employees that the pay plan is fair.

• When employees understand the requirements of the incentive pay plan, the plan is more likely to influence their behavior as desired.

• Important when the pay plan is being changed.

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Incentive Pay for Executives

Short-Term Incentives• Bonuses based on the year’s

profits, return on investment, or other measures related to the organization’s goals.

• Actual payment of the bonus may be delayed to gain tax advantages.

Long-Term Incentives• Include stock options and

stock purchase plans.• Rationale for these long-

term incentives is that executives will want to do what is best for the organization because that will cause the value of their stock to grow.