Incentive Rewards

Compensation
Motivation, Performance, and Pay
 Incentives
 Financial rewards paid to workers whose
production exceeds a predetermined standard.

 Frederick Taylor
 Popularized scientific management and the use
of financial incentives in the late 1800s.
 Systematic soldiering
 Fair day’s work
Strategic Reasons for Incentive Plans
 Establish a performance “threshold” to qualify for incentive
payments.
 Emphasize a shared focus on organizational objectives.
 Encourage employees to assume “ownership” of their jobs,
thereby improving effort and job performance.
 Motivate employees to expend more effort than under hourly
and/or seniority-based compensation systems.
 Support a compensation strategy to attract and retain top-
performing employees.
Setting Performance Measures—The Keys

• Performance measures—at all organizational levels—must be

consistent with the strategic goals of the organization.
• Define the intent of performance measures and champion
the cause relentlessly.
• Involve employees suggestions.
• Consider the organization’s culture and workforce
demographics when designing performance measures.
• Widely communicate the importance of performance
measures.
 Incentive systems effectiveness
 When incentives are based on actual differences in
individual, team, or organizational performance and not
seen as entitlements.
 When annual incentive budgets are large enough to
reward and reinforce exceptional performance.
 When overhead costs associated with plan
implementation and administration are properly
considered beforehand and are controllable.
Successful Incentive Plans
 Employees have a desire for an incentive plan.
 Employees are encouraged to participate.
 Employees see a clear connection between the
incentive payments they receive and their job
performance.
 Employees are committed to meeting the standards.
 Standards are challenging but achievable.
 Payout formulas are simple and understandable.
 Payouts are a separate, distinct part of compensation.
Motivation and Incentives
 Herzberg’s Hygiene–Motivator theory
 Hygienes (extrinsic job factors)
 Inadequate working conditions, salary, and incentive
pay can cause dissatisfaction and prevent
satisfaction.
 Motivators (intrinsic job factors)
 Job enrichment (challenging job, feedback, and
recognition) addresses higher-level (achievement,
self-actualization) needs.
 The best way to motivate someone is to
organize the job so that doing it helps satisfy
the person’s higher-level needs.
Motivation and Incentives
(continued)
 Edward Deci
 Intrinsically motivated behaviors are motivated
by the underlying need for competence and
self-determination.
 Offering an extrinsic reward for an intrinsically-
motivated act can conflict with the acting
individual’s internal sense of responsibility.
 Some behaviors are best motivated by job
challenge and recognition, others by financial
rewards.
Motivation and Incentives
(continued)
 Victor Vroom’s Expectancy Theory
 Motivation is a function of:
 Expectancy: that effort will lead to performance.
 Instrumentality: the connection between
performance and the appropriate reward.
 Valence: the value the person places on the reward.
 Motivation = E x I x V
 If any factor (E, I, or V) is zero, then there is no
motivation to work toward the reward.
 Employee confidence building and training, accurate
appraisals, and knowledge of workers’ desired
rewards can increase employee motivation.
Motivation and Incentives
(continued)
 Behavior Modification/Reinforcement Theory
 B. F. Skinner’s Principles
 To understand behavior one must understand the
consequences of that behavior.
 Behavior that leads to a positive consequence
(reward) tends to be repeated, while behavior that
leads to a negative consequence (punishment) tends
not to be repeated.
 Behavior can be changed by providing the properly
scheduled rewards (or punishments).
Employee Opposition to Incentive Plans
 Production standards are set unfairly.
 Incentive plans are really “work speedup.”
 Incentive plans create competition among
workers.
 Increased earnings result in tougher standards.
 Payout formulas are complex and difficult to
understand.
 Incentive plans cause friction between employees
and management.
Types of Incentive Plans
Individual Incentive Plans
 Straight Piecework
 An incentive plan under which employees receive a
certain rate for each unit produced.
 Differential Piece Rate
 A compensation rate under which employees whose
production exceeds the standard amount of output
receive a higher rate for all of their work than the rate
paid to those who do not exceed the standard amount.
 Can be used when work is standardized, output can be
measured readily, quality is less critical & when a
constant work flow can be maintained.
Piecework: The Drawbacks
 Problems with piecework systems:
 Is not always an effective motivator
 Piecework standards can be difficult to develop.
 Individual contributions can be difficult measure.
 Not easily applied to work that is highly mechanized with
little employee control over output.
 Piecework may conflict with organizational culture
(teamwork) and/or group norms (“rate busting”).
 When quality is more important than quantity.
 Individual Incentive Plans (cont’d)
 Standard Hour Plan
 An incentive plan that sets pay rates
based on the completion of a job in a
predetermined “standard time.”
 If employees finish the work in less than
the expected time, the worker is paid a
bonus of 50%of the time saved at the rate
in addition to normal time wage .
 Total Earnings =time taken * hourly
rate + bonus ( bonus + 50%of time
saved).
Production Bonus
 Production bonus systems pay an
hourly rate plus a bonus when the
standard is exceeded
 The bonus usually equals 50 percent of labor
savings
Individual Incentives: Commissions
 A commission is compensation based
on a percentage of sales in units or
dollars
 Straight commission is the equivalent of
straight piecework and is typically a
percentage of the
price of the item
 A variation pays the salesperson a small salary
plus a commission or bonus when the sales
goal is exceeded
Individual Incentive Plans :Bonus
 Bonus (Payment of Bonus Act 1965)
 Incentive payment that is supplemental to the base
wage for cost reduction, quality improvement, or
other performance criteria.
 Performance bonus & statutory bonus
 Statutory bonus (2500-10000)limit(8.33% to 20
%)
 Spot bonus
 Unplanned bonus given for employee effort
unrelated to an established performance measure.
Incentive Awards and Recognition
 Awards
 Often used to recognize productivity gains,
special contributions or achievements, and
service to the organization.
 Employees feel appreciated when employers
tie awards to performance and deliver awards
in a timely, sincere and specific way.
 Noncash Incentive Awards
 Are most effective as motivators when the
award is combined with a meaningful
employee recognition program.
Individual Incentives
 Are individual incentives effective?
 Theory predicts that piece rates encourage workers to earn
more, and empirically they do
 Firms with piece rate systems often find that
problems result from the compensation plans
 If an employer tries to change work standards or pay rates,
workers often oppose the changes
 Individual incentives increase output, but other
performance criteria may suffer
 Some jobs paid at piece rate probably should not be
Individual Incentives
 Individual incentive plans are likely to
be effective if:
 The plan is acceptable to employees and managers
 The incentive is financially sufficient to induce increased
output
 Quality of work is not especially important
 Most work delays are under the employees' control
Sales Incentives

Sales Incentive Plans

Straight Salary

Straight Commission

Salary and Commission

Combinations
Incentives for Professional
Employees
Managerial and Executive Incentives

Bonuses and merit increases

Performance incentive bonuses

Profit sharing and stock ownership

Executive perquisites (perks)

Team Incentives
 Individual incentives can be paid to
teams of individuals
 Team incentive plans can reduce
administrative costs

 Reasons to choose a team incentive

plan
 It is difficult to measure individual output
 Cooperation is needed to complete a task or
project
 Management thinks this is a more appropriate
measure on which to base incentives
Organizationwide Incentives
 Three approaches to incentive plans
are used at the organizationwide
level:
 Suggestion systems(idea champ)
 Company group incentive
plans (gainsharing)
 Profit sharing
Suggestion Systems
 A formal method of obtaining employee
advice about organizational effectiveness
 It includes some kind of reward based on the successful
application of the idea
 The key to success is employee involvement
 These programs are quite cost-effective

 Suggestion systems can:

 Improve employee relations
 Foster high-quality products
 Reduce costs
 Increase revenue
Gainsharing Incentive Plans
 Gain sharing plans are companywide group
incentive plans that use a financial formula
to:
 Distribute organization wide gains, and
 Unite diverse organizational elements in the common
pursuit of improved organizational effectiveness

 Through cash bonuses, these systems share

the benefits of:
 Improved productivity
 Reduced costs
 Improved quality
Gainsharing Incentive Plans
 Gain sharing incentive systems are
exceptionally effective in enhancing
teamwork in:
 Manufacturing organizations
 Service organizations

 Commonly used gain sharing plans:

 Lincoln Electric
 Scanlon
 Rucker
 ImproShare
Lincoln Electric Plan
 The most successful gainsharing or
productivity sharing plan at a single
company
 Developed by James F. Lincoln in 1907

 Employees are paid only for what they

individually produce
 There are no paid holidays, sick leaves, or unions
 Promotions are based on merit
 Job reassignments must be accepted
 Overtime is mandatory
Lincoln Electric Plan
 The basic compensation system at Lincoln
rests on these principles:
 All compensation is based on piecework
 There are no perquisites for managers
 After two years of employment, the worker cannot be
laid off
 There is no mandatory retirement

 An advisory board reviews and makes

suggestions for improvements
Lincoln Electric Plan
 The firm has a stock purchase plan
 About two-thirds of the employees participate
 They now own about one-third of the total stock

 Employees hire replacements for vacancies

in their work group
 The company subcontracts the work to the group

 When established standards are beaten, the

employees share generously
 The bonus is not a substitute for adequate wages
and benefits
Scanlon Plan
 Philosophy that employees should offer “Ideas” and
suggestions to increase productivity.
 Use of employee committees at different operational levels
called ,”shop” & “ screening” committees
 Designed to lower labor costs without lowering level of a
firm’s activity
 Incentives are derived as a function of ratio between labor
costs and sales value of production (SVOP)
 Offered to all employees

Rewards come from employee participation

Scanlon Plan
in improving productivity and reducing costs.
 Rucker Plan
 Normally covers just production employees but can be
extended to all.
 utilizes a bonus formula based on value added (which is
defined as sales minus raw materials and services)
 Does not work on committee basis.
 Financial incentive based on historic relationship total
earning of the hourly employee and the production value
that employees create.
 Incentive comes from difference between the two.
 Improshare (Improved productivity
through sharing)
 Based on overall productivity of the work
team.
 Seen as a measure of the total ,”finished
products”.
 Both production and non production
employees are given an incentive.
 The employee and company each receive
a gain of 50% of improvement.

Gain sharing based on increases in

Improshare productivity of the standard hour output of
work teams.
New Gainsharing Schemes
 Business plan gain sharing
 Future-oriented goals determine performance
standards

 Win sharing
 All employees in the group "win" or share
equally when goals are met
 The plan differs from profit sharing in that to
grant awards the company must profit from
the results of the team's efforts
Traditional Gainsharing Schemes
 Traditional gainsharing plans like the
Scanlon plan fall short in three areas:
 They tend to become institutionalized and thus
fail to continue to vary pay with performance
 They are not flexible enough to reward "star
performers"
 Service-sector firms are unable to isolate or
measure productivity gains
Spot Gainsharing
 Spot gainsharing focuses on a specific
problem in a specific department
 The goal is to produce peak performance
during a specified time period
 It is generally short and focused on a specific
solution to a specific production problem
 Employees know the plan ends once the
problem is solved, so bonuses are seen as
rewards for extra effort
 The firm must identify a clear business need
unrelated to any specific failure on the part of
management or employees in the unit
Successful Gainsharing
 Unsuccessful plans are characterized
by:
 Poorly designed bonus formulas
 Extended periods where low or no bonuses are
paid
 Lack of management support
 Cost factors that undermine the bonus formula
 Poor communication
 Lack of trust
 Administration costs that exceed the plan
benefits
 Employee apathy
Profit-Sharing Plans
 Profit-sharing plans distribute a fixed
percentage of total profit to
employees in cash or deferred
bonuses
 Profit-sharing plans are typically
found in three combinations:
 Cash or current distribution plans
 Deferred plans
 A combination of both
Profit-Sharing Plans
 The incentive value of profit-sharing
declines as:
 The time between performance and payoff increases
 The size of the payoff declines

 Profit-sharing plans offer two distinct

advantages
 They do not need elaborate cost-accounting systems to
calculate rewards
 Companies of any size can implement them
 Smaller companies use the current distribution
method; larger organizations use the deferred
option
Ownership
 An employee ownership plan (ESOP):
 Is similar to profit sharing and is intended to increase
worker commitment and performance
 Is a qualified, defined contribution benefit plan that
invests primarily in the stock of the company
 The employer makes yearly contributions that
accumulate to produce a benefit that is not predefined

 An ESOP is a variation of a stock bonus or

stock bonus/money purchase plan that
invests primarily in employer stock
People-Based Pay
 The bureaucratic job-based method of
determining pay will not be used in
the future
 The new designs will be people-based

 Variants of people-based pay:

 Skill-based
 Knowledge-based
 Credential-based
 Feedback
 Competency-based
Skill-Based Pay
 Skill-based pay sets pay levels on the
basis of:
 How many skills employees have, or
 How many jobs they can do
When a new
 Expected positive outcomes include:
skill is added to
 Increased quality an existing job,
the employee
 Higher productivity earns a pay
 A more flexible workforce increase by
mastering it
 Improved morale
 Decreased absenteeism and turnover
Skill-Based Pay

 Methods for defining individual skills:

 Direct observation

 Testing

 Measurable results
Skill-Based Pay
 Instead of job descriptions, "person" and
"skill block" descriptions are developed
 Skill block descriptions are priced much
like job evaluations
 Skill-based pay systems focus on
manufacturing workers and routine,
high-volume jobs
 The more a job involves skills that are
easy to identify in terms of performance
outcomes, the better the fit of the pay
model
Skill-Based Pay
 Skill-based pay:
 Is difficult to design
 Does not fit all situations
 Involves a time-consuming process of
constructing skill blocks, mapping pay
progressions, and assigning dollar values to
skills
 It works best when built on a broad
base of skills
in a stable but expanding work
environment
Knowledge-based Pay
 Knowledge-based pay rewards employees
for acquiring additional knowledge
 Applies to both the current and new job
 Stretches the skill-based model to professionals,
managers, and some technical personnel

 A study compared two manufacturing plants

 One used the job-centered pay design; the other a
knowledge-based design
 After 10 months, the pay-for-knowledge facility had
higher quality, lower absenteeism, fewer accidents
 The traditional plant had higher productivity
Credential-based Pay
 Credential-based pay rests on the fact
that an individual must have:
 A diploma or license, or
 Pass one or more examinations from
a third-party professional or regulatory
agency

 Credential-based pay is more cut-and-

dried than skill-based or knowledge-
based pay
Feedback Pay
 Feedback pay is based on:
 Aligning pay with strategic business objectives
 Establishing a direct connection between the
jobholder and his/her part in accomplishing
goals

 This design must conform to four

principles:
 Flows directly from strategic business goals
 Directly links employees' actions to these goals
 Provides sufficient opportunity for rewards to
hold employees' attention
 Is timely
Credential-based Pay
 Competency-based pay is a combination of
skill-, knowledge-, and credential-based pay
 The term is often applied to skill-based pay designs used
with highly educated "knowledge workers"

 Because the definition is so inclusive, it is

difficult to put a dollar value on this model
 Includes personal characteristics, such as values,
motives, personality traits, self-image, and social role, in
addition to skills, knowledge, and credentials

 Competencies are independent of the job

and can be taken from job to job by the
individual
 Thankyou!