Chapter 11 Flashcards
Fixed rewards
are all types of predetermined compensation including salary and benefits
Variable rewards
also called incentives, links rewards to factors identified as valuable, including performance, skills, competence, and contribution.
Top four reasons for tying pay to performance
- Recognize, reward and motivate high performers
- Increase the likelihood of achieving corporate goals
- Improve productivity
- Move away from an entitlement culture
Reinforcement theory
- people are likely to repeat actions that result in positive consequences.
- Incentives reinforces desirable behaviors in rewarded individuals and signals what the organizations considers as important to their peers.
Goal setting theory
- goals serve as a motivator to focus the efforts of employees when the goals are:
- Specific/clear
- Measurable
- Challenging
- Attainable and Realistic
- Timely
Expectancy theory
- employees make decisions regarding how to act at work based on which behaviors they believe will lead to their most valued rewards and outcomes.
- Expectancy — the degree to which employees believe they will be able to achieve the objective
- Instrumentality— employees believe that achieving the objective will be rewarded; link between achievement and reward.
- Valence — the degree of value employees place on different rewards
Agency theory
managers motivate their employees to act in certain ways by aligning their interests with the firm’s other stakeholders (e.g., the owners).
Agency Problems
occurs when the two parties (the principal/owner and the agent/employee) have different interests and goals.
Short-term incentives
- are one-time variable rewards used to motivate short-term employee behavior and performance (typically one year or less).
- Bonuses and profit sharing
- Attendance, customer service, safety behaviors,
production quality and quantity.
Long-term incentives
are intended to motivate employee behaviors and performance that support company values (e.g., share price) and long-term organizational health.
Extrinsic motivation
- comes from outside the individual, including performance bonuses
- When motivated to do a task because doing so will lead to a valued reward (money or money-equivalent incentives).
Intrinsic motivation
- comes from an interest in or enjoyment from doing a task.
- When motivated by the task rather than by tangible external rewards for doing it
- When people engage in a hobby, they are experiencing intrinsic motivation.
Merit Pay Programs
- employees receive a compensation adjustment based on results of their performance evaluation.
- The highest performers receive the greater percentage increase to their base pay.
- Performance evaluations should be valid, reliable and bias-free
- Permanently raises base salary and company’s costs
- Employees might be incapable to differentiate between merit-based salary increases and cost-of-living adjustments.
Lump-Sum Merit Bonuses
- one-time payment for performance not rolled into employees’ salaries.
- Tend to be preferred by organizations as they won’t be raising the salary.
- Has a significant psychological impact on employees due to receiving a substantial amount of money at one shot.
Piecework Incentive Plans
reward employees for future performance
Straight piecework plan
receive a certain rate of pay for each unit produced
Differential piecework plan
- the pay received per unit produced changes at certain levels of output
- Makes employees focus on specific tasks with clear outputs; thus easy to communicate.
- Employees may focus only on aspects of job that get rewarded
- Some tasks are difficult to measure
- Therefore, such plans are highly effective for narrow scope jobs that involve frequent performance of certain objective tasks.
Standard Hour Plan
- pay rate set based on expected amount of time an employee needs to complete task
- If employees complete the tasks in less time than expected, they still receive the full pay rate.
- If employees complete more tasks than they are expected to in a given time period, they will receive a premium for their higher level of work.
- It encourages employees to work fast.
Compared to piecework systems, they motivate employees at more complex jobs.
Spot-Awards
- used to encourage employees to work toward specific outcomes
- Manager gives awards “on the spot” when they see certain behaviors exhibited by employees
- Can be cash or non-cash (e.g., merchandise, gift certificates, paid time off)
- Recognition programs like employee-of-the-month can also be used
- Provide managers with flexibility as they can link them to variety of actions at any time.
Straight commission plan
- pays an employee a percentage of the total sales they generate
- Company pays employees only for what they sell.
- High financial risk for employees
- Focused only on sales, thus might inhibit cooperation
Straight salary plans
- employees receive a set compensation, regardless of their level of sales (employees may not be as motivated to sell as much as they can)
- Might not be motivated to focus on sales figures
- More income security
- Employees might tend to focus more on quality, customer relations and cooperation
Mixed salary/commission plan
- employees receive a lower base salary and the remaining is commission based.
- Try to maximize the benefits of both
Team Incentive Plans
- All members are rewarded when team reaches or exceeds its target objectives
- Highly useful when tasks are interdependent and cooperation and collaboration are required to achieve objectives.
- Potential for “free riders” who do not work as hard as others, which might de-motivate high performers and dysfunction the team
Gain Sharing Plans
designed to help increase a company’s efficiency by rewarding teams that exceed productivity levels and/or lowering labor costs with a share of the gains realized
Scanlon plans
implementing employee suggestions for lowering the cost per unit produced; the gains are shared with employees.
Improshare Plan
- compares a performance baseline with actual productivity during a given period with the goal of reducing production time; the gains of more production is shared with employees.
- Foster a participative environment and cooperation.
- Instrumentality – clear link between output and incentives.
- Potential for free riders
- The plan might be complex to understand by common employees.
- Goals might be unachievable, especially when a plant is performing at maximum efficiency.
Profit Sharing Plans
company profits are shared with employees; can be directly distributed to employees or can be deferred.
Deferred profit sharing plan
incentive money paid to an employee is put into a retirement account for the person (tax advantage).
Stock option plans
- provides employees the right to purchase shares of their company stock at some established price (exercise price) during some future period of time.
- Vesting the point at which employees can sell or transfer the stock options
Employee stock ownership plan (ESOP)
company contributes shares of its stock to a trust set up for its employees (tax-exempt for employees and tax reduction for firms).
Leveraged ESOP
- the trust borrows against the company’s future earnings in order to buy the organization’s stock. And as debt is repaid, employees receive shares of stock from trust.
- Employees can sell the stocks to the organization or in the open market after they leave or retire.
Mixed-level plans
- multiple incentives are used simultaneously.
- Goal is to maximize the benefits of each plan and minimize the downsides of each
- Usually a mix of individual, group and organizational incentives.
- Limit free riders – as part of income is dependent on individual performance.
- Encourage cooperation – as part of income is dependent on others.
Executive compensation
- designed to attract, motivate and retain top managerial talent.
- Has similar components as other compensation packages but there is more emphasis on variable pay as part of the total compensation package.
Common components are:
- Base Salary
- Short and long-term incentives
- Benefits
- Services (Perks)
