fundamentals of

Human Resource Management 4th edition

by R.A. Noe, J.R. Hollenbeck, B. Gerhart, and P.M. Wright

CHAPTER 12
Recognizing Employee
Contributions with Pay

McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All Rights Reserved. 12-1
 What Do I Need to Know?

1. Discuss the connection between incentive

pay and employee performance.
2. Describe how organizations recognize
individual performance.
3. Identify ways to recognize group
performance.
4. Explain how organizations link pay to their
overall performance.

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 What Do I Need to Know? (continued)

5. Describe how organizations combine

incentive plans in a “balanced scorecard.”
6. Summarize processes that can contribute to
the success of incentive programs.
7. Discuss issues related to performance-based
pay for executives.

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 Incentive Pay

• Incentive pay – forms of pay linked to an

employee’s performance as an individual,
group member, or organization member.
• Incentive pay is influential because the
amount paid is linked to certain predefined
behaviors or outcomes.
• For incentive pay to motivate employees to
contribute to the organization’s success, the
pay plans must be well designed.
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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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Investing in Human Resources

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Pay for Individual Performance

Piecework rates

Standard hour plans

Merit pay

Individual bonuses

Sales commissions
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Pay for Individual Performance:
Piecework Rates
Straight Differential
Piecework Rate
Piecework Plan Piece Rates
• A wage based • Incentive pay • Incentive pay
on the in which the in which the
amount employer pays piece rate is
workers the same rate higher when a
produce. per piece, no greater
matter how amount is
much the produced.
worker
produces.

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Figure 12.1:
How Incentives Sometimes “Work”

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

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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 done
in less than a preset
“standard time.”
• These plans are much like
piecework plans.
• They encourage employees
to work as fast as they can,
but not necessarily to care
about quality or service.
Merit Pay
• A system of linking pay
increases to ratings on a
performance scale.
• They make use of a merit
increase grid.
• The system gives the lowest
paid best performers the
biggest pay increases.
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Table 12.1: Sample Merit Increase Grid

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Figure 12.2: Ratings and Raises –
Underrewarding the Best

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Pay for Individual Performance:
Performance Bonuses
• Performance bonuses are not rolled into base
pay.
• The employee must re-earn them during each
performance period.
• Sometimes the bonus is a one-time reward.
• Bonuses may also be linked to objective
performance measures, rather than subjective
ratings.

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Pay for Individual Performance:
Sales Commissions
• Commissions – incentive pay calculated as a
percentage of sales.
• Some salespeople earn a commission in
addition to a base salary.
• Straight commission plan – some salespeople
earn only commissions.
• Some salespeople earn no commissions at all,
but a straight salary.

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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 bonus
b) Sales commissions; merit pay
c) Piecework, Merit pay
d) Individual bonus, sales commissions

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Pay for Group Performance

Gainsharing

Bonuses

Team Awards

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Pay for Group Performance:
Gainsharing
• Gainsharing – group • Gainsharing addresses
incentive program that the challenge of
identifying appropriate
measures improvements performance measures
in productivity and for complex jobs.
effectiveness and • Gainsharing frees
distributes a portion of employees to determine
each to employees. how to improve their
own and their group’s
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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Figure 12.3:
Finding the Gain in
a Scanlon Plan
Scanlon Plan – a
gainsharing program
in which employees
receive a bonus if
the ratio of labor
costs to the sales
value of production
is below a set
standard.

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Pay for Group Performance:
Group Bonuses and Team Awards
Group Bonuses Team Awards
• Bonuses for group • Similar to group bonuses,
performance tend to be for but are more likely to use a
smaller work groups. broad range of performance
• These bonuses reward the measures:
members of a group for – Cost savings
attaining a specific goal, – Successful completion of a
usually measured in terms project
of physical output. – Meeting deadlines

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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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Figure 12.4: 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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 Considerations for Setting Up a
Profit-Sharing Plan
1. Get supervisors on board with the plan.
2. Make sure employees understand how the plan
works.
3. Identify the behaviors and results that contribute to
greater profits.
4. Make sure managers understand that they
contribute to the profit-sharing goals by
encouraging their employees and keeping them
focused on their goals.

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 Considerations for Setting Up a
Profit-Sharing Plan (continued)
5. Consider linking rewards to the department’s or
division’s performance, if profits can be assigned to
the group.
6. Make the rewards big enough to matter.
7. Time the profit-sharing payments for maximum
effect.

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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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Figure 12.5: Number of ESOPs

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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, Pepsi
2. Recruiter, Verizon
3. Cashier, CVS (drugstore)
4. Salesperson, Macy’s
a) Individual
b) Group
c) Organizational

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 Balanced Scorecard

• Balanced scorecard – a • The four categories of a

combination of balanced scorecard
performance measures include:
directed toward the – financial
company’s long- and – customer
short-term goals and – internal
used as the basis for – learning and growth
awarding incentive pay.

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• Tellabs is one company that
uses a balanced scorecard.
• The company conducts
quarterly meetings at which
employees learn how their
performance will be
evaluated according to the
scorecard.
• The company also makes
this information available
on the their intranet.

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Table 12.2: Sample Balanced Scorecard for
an Electric Cooperative

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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.
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Table 12.3: Balanced Scorecard for
Whirlpool Executives

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Incentive Pay for Executives:
Ethical Issues
• Incentive pay for executives lays the
groundwork for significant ethical issues.
• When an organization links pay to its stock
performance, executives need the courage to
be honest about their company’s performance
even when dishonesty or clever shading of the
truth offers the tempting potential for large
earnings.

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 Summary
• 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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 Summary (continued)

• 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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 Summary (continued)

• 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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 Summary (continued)

• Communication is especially important when the

organization is changing its pay plan.
• Because executives have such a strong influence over
the organization’s performance, incentive pay for
them receives special attention. Performance
measures should encourage behavior that is in the
organization’s best interests, including ethical
behavior.

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