chapter 4 review Flashcards
Incentive Compensation
a wide variety of pay practices that seek “incentives” to employees to behave in a particular way
How does pay influence individual employee behavior?
reinforcement theory, expectancy theory, and agency theory
reinforcement theory
Compensation can be a
tool to encourage desirable employee behaviors
expectancy theory
people are motivate to work hard if they believe their efforts will pay off
instrumentality and valence
performance is rewarded, and rewards are valued
extrinsic motivation
engaging in a behavior to earn an external reward or avoid punishment.
Intrinsic motivation
engaging in an activity for its own sake, driven by internal rewards and personal satisfaction
agency theory
Stakeholders in an organization may have different interests and goals, and compensation helps to align those interests and goals
Principles
a person who seeks to direct another’s behavior (owner)
agents
a person who is expected to behave on behalf of a principal (manager)
principles and agents
their interests don’t always align so the principle aligns them with agency costs
agency costs
goal incongruence and information asymmetry
sorting effect
the effect a pay plan has on the composition of the current workforce
pay-for-performance
pay rates depending on how well you succeed in your job
incentive rewards include
bonuses and raises
incentive intensity
the strength of the relationship between performance and pay
bonus
one-time or periodic payment given to employees in addition to their regular salary
pay raise
a permanent increase in an employee’s base pay or hourly wage
how does a merit pay plan work
annual base pay increases are usually linked to performance ratings
merit bonus
merit pay paid in the form of a bonus instead of a salary increase
criticisms of a merit pay plan
discourages teamwork, measurement is unfair, too much emphasis on individual performance, unfair rates, rates don’t exist, plan can breakdown
individual incentive plan pros
pushes people to work harder, ex: 5% commission increase every sale made
individual incentive plan cons
competitive, costly, and can hurt organizational culture
what are individual incentive plans
profit sharing, stock options, employee stock ownership plan
profit sharing
payments are based on a measure of profit made, not a part of base pay
stock options
plan that allow employees to buy company stock at a previously fixed price. It was typically reserved for executives
employee stock ownership plans
give employers certain tax and financial advantages when restricted stock units is granted to employees
team compensation plans
group incentives, broader range of performance measures
individual incentive plans
person is rewarded based on their own performance, bonus, commission etc.
gainsharing as a group incentive plan
group-wide compensation, not a part of employees’ salary
What is executive compensation?
Top managers and executives are a strategically important group whose compensation warrants special attention
