fundamentals ofHuman Resource Management

Unit 08COMPENSATION - RecognizingEmployee Contributions with Pay

What Do I Need to Know?

1. Discuss the connection between incentivepay and employee performance.

2. Describe how organizations recognizeindividual performance.

2. Describe how organizations recognizeindividual performance.

3. Identify ways to recognize group performance.

4. Explain how organizations link pay to theiroverall performance.

5. Describe how organizations combine incentiveplans in a “balanced scorecard.”

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COMPENSATION

Financial Non-financial

Performance-based

Membership-based

Jobs Workingenvironment

• Multiple skills

• Greater jobfreedom anddiscretion

• Meaningfuljob

• Feedback

• Consistent

• Piecework

• Commission

• Incentiveplans

• Performancebonuses

• Merit payplans

• Multiple skills

• Greater jobfreedom anddiscretion

• Meaningfuljob

• Feedback

• Consistent

• Protection programs• Pay for time notworked• Services andperquisites

• Good colleagues• Preferred offices• Flexible workinghour• Working from adistance• Impressive titles

Incentive Pay

• Incentive pay - forms of pay linked to anemployee’s performance as an individual,group member, or organization member.

• Incentive pay is influential because the• Incentive pay is influential because theamount paid is linked to certain predefinedbehaviors or outcomes.

• For incentive pay to motivate employees tocontribute to the organization’s success, thepay plans must be well designed.

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Pay for Individual Performance

Piecework rates

Standard hour plans

Merit pay

Standard hour plans

Merit pay

Individual bonuses

Sales commissions

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Pay for Individual Performance:Piecework Rates

Piecework Rate

• A wage basedon theamountworkersproduce.

StraightPiecework Plan

• Incentive payin which theemployer paysthe same rateper piece, nomatter howmuch the

DifferentialPiece Rates

• Incentive payin which thepiece rate ishigher when agreater

• A wage basedon theamountworkersproduce.

• Incentive payin which theemployer paysthe same rateper piece, nomatter howmuch theworkerproduces

• Incentive payin which thepiece rate ishigher when agreateramount isproduced.

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Pay for Individual Performance:Standard Hour Plans and Merit Pay

Standard Hour Plan• An incentive plan that pays

workers extra for work donein less than a preset“standard time.”

Merit Pay• A system of linking pay

increases to ratings on aperformance scale.

• They make use of a meritincrease grid

in less than a preset“standard time.”

• These plans are much likepiecework plans.

• They encourage employeesto work as fast as they can,but not necessarily to careabout quality or service

• They make use of a meritincrease grid

• The system gives bestperformers thebiggest pay increases.

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Test Your Knowledge

• John works twisting pretzels in a pretzelfactory. Pablo works on IT systems integrationat a credit card company. The best pay plansfor these individuals would be ________ and_______, respectively.

factory. Pablo works on IT systems integrationat a credit card company. The best pay plansfor these individuals would be ________ and_______, respectively.a) Merit pay, individual bonus

b) Sales commissions; merit payc) Piecework, Merit payd) Individual bonus, sales commissions

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Pay for Individual Performance:Sales Commissions

• Commissions - incentive pay calculated as apercentage of sales.

• Some salespeople earn a commission inaddition to a base salary.• Some salespeople earn a commission inaddition to a base salary.

• Straight commission plan - some salespeopleearn only commissions.• Some salespeople earn no commissions at all,but a straight salary.

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Pay for Group Performance

Gainsharing

BonusesBonuses

Team Awards

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Pay for Group Performance:Gainsharing

• Gainsharing - groupincentive program thatmeasures improvementsin productivity andeffectiveness anddistributes a portion ofeach to employees.

• Gainsharing addressesthe challenge ofidentifying appropriateperformance measuresfor complex jobs.

• Gainsharing freesemployees to determine

effectiveness anddistributes a portion ofeach to employees.

• Gainsharing freesemployees to determinehow to improve theirown and their group’sperformance.

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Pay for Group Performance:Group Bonuses and Team Awards

Group Bonuses• Bonuses for group

performance tend to be forsmaller work groups.

• These bonuses reward themembers of a group for

Team Awards• Similar to group bonuses,

but are more likely to use abroad range of performancemeasures:• These bonuses reward the

members of a group forattaining a specific goal,usually measured in termsof physical output.

broad range of performancemeasures:- Cost savings- Successful completion of a

project- Meeting deadlines

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Pay for Organizational Performance:Profit Sharing

• Profit sharing - incentive pay in whichpayments are a percentage of theorganization’s profits and do not become partof the employees’ base salary.organization’s profits and do not become partof the employees’ base salary.• Profit sharing may encourage employees tothink like owners.

• Evidence is not clear whether profit sharinghelps organizations perform better.

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Figure 12.4: Types of Pay forOrganizational Performance

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Pay for Organizational Performance:Stock Ownership

Stock Options• Rights to buy a certain

number of shares of stockat a specified price.

• Traditionally, stock options

ESOPs• Employee Stock Ownership

Plan (ESOP) - anarrangement in which theorganization distributesshares of stock to all its

• Traditionally, stock optionshave been granted toexecutives.

• Some companies are tryingto push eligibility foroptions further down theorganization’s structure

arrangement in which theorganization distributesshares of stock to all itsemployees by placing it in atrust.

• This is the most commonform of employeeownership.

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Balanced Scorecard (BSC)

• Balanced scorecard - acombination ofperformance measuresdirected toward thecompany’s long‐ andshort‐term goals andused as the basis forawarding incentive pay

• The four categories of abalanced scorecardinclude:- financial

- customer

performance measuresdirected toward thecompany’s long‐ andshort‐term goals andused as the basis forawarding incentive pay

- customer- internal

- learning and growth

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Summary (continued)

• Organizations may recognize individual performancethrough such incentives as piecework rates, standardhour plans, merit pay, sales commissions, andbonuses for meeting individual performanceobjectives.

• Organizations may recognize individual performancethrough such incentives as piecework rates, standardhour plans, merit pay, sales commissions, andbonuses for meeting individual performanceobjectives.• Common group incentives include gainsharing,bonuses, and team awards.• Incentives for meeting organizational objectivesinclude profit sharing and stock ownership.

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