Chapter 12: Pay-For-Performance And Financial Incentives Flashcards
Fixed pay
compensation that is independent of the performance level of the individual, group, or organization
aka base pay and allowances
Variable pay
any plan that links pay with productivity, profitability, or some other measure of organizational performance
Motivators and Frederick Herzberg
the best way to motivate someone is to organize the job so that doing it provides the challenge and recognition that we all need to help satisfy “higher-level” needs, such as accomplishment and recognition.
Doing things to satisfy a worker’s “lower-level” needs for things—such as better pay and working conditions—just keeps the person from becoming dissatisfied
If hygiene factors are inadequate than workers become dissatisfied
hygiene factors
factors outside the job itself, such as working conditions, salary, and incentive pay
intrinsic motivation
motivation that derives from the pleasure someone gets from doing the job or task
Demotivators and Edward Deci
Deci found that extrinsic rewards could at times actually detract from the person’s intrinsic motivation
Expectancy Theory and Victor Vroom
In general, people won’t pursue rewards they find unattractive or where the odds of success are very low.
He says a person’s motivation to exert some level of effort depends on three things:
1) the person’s expectancy (in terms of probability) that his or her effort will lead to performance;
2) instrumentality, or the perceived connection (if any) between successful performance and actually obtaining the rewards;
3) and valence, which represents the perceived value the person attaches to the reward.
expectancy
A person’s expectations that his effort will lead to performance
instrumentality
The perceived relationship between successful performance and obtaining the reward
Valence
Perceived value a person attaches to the reward
Motivation =
equation
Vroom theory
(E x I x V)
where E represents expectancy, I instrumentality, and V valence
Organization-wide incentive plans
provide monetary incentives to all employees of the organization. Examples are profit-sharing plans that provide employees with a share of the organization’s profits in a specified period
Group incentive programs
are like individual incentive plans, but they provide payments over and above base salary to all team members when the group or team collectively meets a specified standard for performance, productivity, or other work-related behaviour.
nonmonetary recognition programs
motivate employees through praise and expressions of appreciation for their work.
Merit Pay
aka merit raise
any salary increase that is awarded to an employee based on his or her individual performance
Merit pay vs Bonus
It is different from a bonus in that it usually represents a continuing increment, whereas the bonus represents a one-time payment
However, although problems such as these can undermine a merit pay plan, the consensus of opinion is that merit pay can and does improve performance
Word
Traditional merit pay plans have two basic characteristics:
(1) merit increases are usually granted to employees at a designated time of the year in the form of a higher base salary (or raise)
(2) the merit raise is usually based exclusively on individual performance, although the overall level of company profits may affect the total sum available for merit raises
Employee Share Purchase/Stock Ownership Plan
ESOPs
A plan whereby a trust is established to hold shared of company stock purchased for or issued to employees.
The trust distributes the stock to employees on retirement, separation from service, or as otherwise prescribed by the plan
Profit-Sharing Plans
A plan whereby most or all employees share in the company’s profits
Scanlon Plans
An incentive plan developed in 1937 by Joseph Scanlon and designed to encourage cooperation, involvement, and sharing of benefits
Scanlon plans have five basic features
1) philosophy of cooperation: assumes that managers and workers must rid themselves of the “us” and “them” attitudes that normally inhibit employees from developing a sense of ownership in the company
2) Identity: in order to focus employee involvement, the company must articulate its mission or purpose, and employees must understand how the business operates in terms of customers, prices, and costs
3) Competence: The program, say three experts, “explicitly recognizes that a Scanlon plan demands a high level of competence from employees at all levels; this suggests careful selection and training.
4) Involvement system: Employees present improvement suggestions to the appropriate departmental-level committees, which transmit the valuable ones to the executive-level committee
5) sharing of benefits formula: If a suggestion is implemented and successful, all employees usually share in 75 percent of the savings.
Gainsharing Plans
an incentive plan that engages many or all employees in a common effort to achieve a company’s productivity objectives; any resulting incremental cost-saving gains are shared among employees and the company
The Rucker formula
One type of gainsharing
uses sales value minus materials and supplies, all divided into payroll expenses
The improshare plan
One type of gainsharing
creates production standards for each department. It does not include a participative management component but instead considers participation an outcome of the bonus plan.
Piecework Plans
A system of pay based on the number of items processed by each individual worker in a unit of time, such as items per hour or items per day
Oldest incentive plan
Straight piecework plan
A set payment for each piece produced or processed
paid on the basis of the customer service calls he completes; there would be no guaranteed minimum wage
Guaranteed piecework plan
Minimum hourly wage + an incentive for each unit produced above a set number of units per hour
Differential piece-rate plan
Plan in which a worker is paid a basic hourly rate plus an extra percentage of his base rate for production exceeding the standard per hour or on day.
Similar to piecework payment but is based on a percentage premium
Team or Group Incentives Plans
A plan in which a production standard is set for a specific work group and its members are paid incentives if the group exceed the production standard
Members are then paid based on one of three formulas:
(1) all members receive the pay earned by the highest producer;
(2) all members receive the pay earned by the lowest producer; or
(3) all members receive payment equal to the average pay earned by the group
There are five elements in an executive and managerial compensation package:
salary, benefits, short-term incentives, long-term incentives, and perquisites
_____ is the cornerstone of executive compensation because it is the element on which the others are layered, with benefits, incentives, and perquisites often awarded in some proportion to base pay
Salary
Three basic issues should be considered when awarding short-term incentives:
1) eligibility,
2) fund-size determination,
3) individual awards
Eligibility
Eligibility is usually decided in one of three ways.
1) Key position: Here, a job-by-job review is conducted to identify the key jobs (typically only line jobs) that have a measurable impact on profitability
2) Salary-level cut off point: all employees earning over that threshold amount are automatically eligible for consideration for short-term incentives
3) salary grade: all employees at a certain grade or above should be eligible for the short-term incentive program
How Much to Pay Out (Fund Size)
the total amount of bonus money that will be available
1) nondeductible formula: Here a straight percentage (usually of the company’s net income) is used to create the short-term incentive fund
2) deductible formula: the assumption that the short-term incentive fund should begin to accumulate only after the firm has met a specified level of earnings.
Determining Individual Awards
the amount is determined on a discretionary basis (usually by the employee’s boss)
typically a target bonus is set for each eligible position and adjustments are then made for greater or less than targeted performance
split-award method
Here, the manager actually gets two separate bonuses, one based on his or her individual effort and one based on the organization’s overall performance
Long-Term Incentives
intended to motivate and reward top management for the firm’s long-term growth and prosperity and to inject a long-term perspective into executive decisions
Capital accumulation programs
Long term incentives most often reserved for senior executives
Some of the most common long-term incentive plans (for capital accumulation) in Canada are
stock options, performance share unit plans, restricted share unit plans, and deferred share unit plans
Stock Options
The right to purchase a stated number of shares of a company stock at today’s price some time in the future
In the real estate industry, for instance, salespeople are paid entirely via ________, while in the pharmaceutical industry, salespeople tend to be paid a ________
commissions
Salary
Salary Plan for Salespeople
salespeople are paid a fixed salary, although there may be occasional incentives in the form of bonuses, sales contest prizes, and so on
The main disadvantage of salary plans is that pay is not tied to performance
Commission Plans for Salespeople
pay salespeople in direct proportion to their sales—they pay for results and only for results
Salespeople have the greatest possible incentive, and there is a tendency to attract high-performing salespeople who see that effort will clearly lead to rewards
The problem with straight commission plans is that there is a tendency to focus on “big-ticket” or “quick-sell” items and to disregard long-term customer relationships
Combination Plans for Salespeople
Combination plans provide some of the advantages of both straight salary and straight commission plans and also some of their disadvantages
Before deciding to implement an incentive plan, it is important to remember several points:
Performance pay cannot replace good management.
Firms get what they pay for
“Pay is not a motivator.”
Rewards rupture relationships
Rewards may undermine responsiveness.
Research indicates that there are ____ principles that support effective implementation of incentive plans that lead to superior business results:
seven
Pay for performance
and make sure that performance is tied to the successful achievement of critical business goals.
Link incentives to other activities that engage employees in the business, such as career development and challenging opportunities.
Good incentive plan
Link incentives to measurable competencies that are valued by the organization.
Good incentive plan
Match incentives to the culture of the organization—its vision, mission, and operation principles.
Good incentive plan
Keep group incentives clear and simple—employee understanding is the most important factor differentiating effective from ineffective group incentive plans.
Good incentive plan
Overcommunicate
employees become engaged when they hear the message that they are neither faceless nor expendable.
Good incentive plan
Remember that the greatest incentive is the work itself.
Good incentive plan
SMART goals
Specific, Measurable, Attainable, Relevant, and Timely
What is Victor Vroom’s term for the perceived value that a person attaches to the reward?
QUIZ QUESTION
Valence
Which type of incentive plan engages many or all employees in a common effort and is designed to reward those employees for improvements in productivity?
QUIZ QUESTION
A gainsharing plan
Amy is part of a team of four software developers. Upon completion of a major client project, she and each of her team members received a set amount in addition to their base salary. What is this most likely an example of?
QUIZ QUESTION
Group incentive program
Accurate ________ are a precondition for effective pay-for-performance plans.
QUIZ QUESTION
performance appraisals
According to the textbook, what long-term incentive is most often reserved for senior executives but has more recently begun to be extended to employees at lower organizational levels?
QUIZ QUESTION
Capital accumulation programs
Under this pay system, each worker receives the minimum hourly wage plus an incentive for each unit produced above a set number of units per hour; this system is known as a______________.
QUIZ QUESTION
Guaranteed piecework plan.
What does Frederick Herzberg call factors that satisfy lower-level needs?
QUIZ QUESTION
Hygienes
What form of compensation is most common for salespeople working in the pharmaceutical industry, which is known as an industry where salespeople are mostly involved in account servicing?
QUIZ QUESTION
Salary
Amy received a salary increase based on her individual performance as a Marketing Manager over the past year. Which type of compensation did Amy receive?
QUIZ QUESTION
Merit pay
Compensation plans for salespeople have typically relied heavily on incentives, such as sales
commissions.
QUIZ QUESTION
True
According to Frederick Herzberg what kind of factor is working conditions?
QUIZ QUESTION
Hygiene
According to the textbook, the chief disadvantage of group incentive plans is that
QUIZ QUESTION
each worker’s rewards are no longer based just on his or her own effort.
For short-term incentives, what does the term fund size refer to?
QUIZ QUESTION
The total amount of bonus money that will be available to be paid out
Which is the most commonly used and oldest type of incentive plan system of pay and is based on the number of items processed by each individual worker in a unit of time?
QUIZ QUESTION
Piecework plan
The oldest and most commonly used type of incentive plan for operations employees is the standard hour plan.
QUIZ QUESTION
FALSE
