Chapter 12 dessler 12-ce_ppt_ch12

Chapter 12: Pay-for-Performance and
Financial Incentives

Pay-for-Performance and Financial Incentives | 12-1

Copyright © 2014 Pearson Canada Inc. All rights reserved.

Dessler, Chhinzer, Cole
Human Resources
Management in Canada
Canadian Twelfth Edition

Learning Outcomes

• EXPLAIN how to use short-term and
long-term incentives for managers and
executives.
• ANALYZE the main advantages and
disadvantages of salary plans and
commission plans for salespeople.


• DISCUSS how piecework and team or
group incentive plans are used.

Learning Outcomes

• COMPARE the three types of organizationwide incentive plans.
• EXPLAIN under what conditions it is best to
use an incentive plan.
• ANALYZE the emerging emphasis on
employee recognition.


• EXPLAIN why money is somewhat less
important as an incentive for professional
employees than it is for other employees.

Money and Motivation
Fixed pay

• includes base pay, allowances

Variable pay
• any plan that ties pay to productivity or
profitability

• may be in addition to base pay


• compensation independent of performance
level

reserved.
Copyright © 2014 Pearson Canada Inc. All rights reserved

Variable Pay Programs, 2011


Types of Incentive Plans
• operations employees

• senior managers and executives
• other managers and professional employees
• organization-wide



• salespeople

Incentives for Operations
Employees – Piecework Plans
• oldest and most commonly used plan

• based on production standard

• guaranteed piecework plan
• differential piecework plan



• straight piecework plan

Piecework Plans
• advantages:

• disadvantages:
•
•
•
•

some employers arbitrarily raise standards
difficult to adjust for changes in hourly rates
resistance to revising the standard
quality may be compromised



• simple
• appears equitable
• directly tied to performance

Incentives for Operations Employees
– Team or Group Incentives

• incentives paid if the group exceeds the
standard



• production standard is set for a specific
work group

Implementing Team or Group
Incentives

• members paid based on highest performer
• members paid based on lowest performer
• members paid based on average performance

2. set standards for the group as a whole
• all members paid equally

3. use a group defined measure of
performance


1. set standards for each member of the
group

Incentives for Senior Managers
and Executives
• short term incentives – annual bonus

• long term incentives – capital accumulation
• stock options
• performance share units plan
• appropriate link to strategy



• who is eligible?
• how much to pay?
• individual rewards?

reserved.

Long-Term Incentive
Plans, 2011


reserved.

Stock Option Deductions


Executive Compensation Plan
Recommendations

• group executive compensation
components into a whole plan

• check plan for legal compliance and tax
effectiveness
• review/evaluate plan whenever a major
business change occurs


• define internal and external issues facing
the company

Incentives for Salespeople
Salary plan

Commission plan

• pay in direct proportion to sales generated
Combination plan
• base salary plus commission


• fixed salary

Incentives for Salespeople:
Salary Plan
•
•
•
•

works for prospecting and account servicing
sales people know their income in advance
easy to reassign sales people
enhances long term perspective

• disadvantages:
• high performance not recognized/rewarded
• salary usually based on seniority, demotivating for
high performing sales people



• advantages:

Commission Plan
• greatest incentive, attracts high performing sales
people
• sales costs proportion to sales level
• easy to understand/compute

• disadvantages:
• focus on sales, not customer relationship
• variances in income among sales people
• sales people may neglect other duties



• advantages:

Combination Plan
• advantages:

• disadvantages:
• may be a compromise
• often confusing to calculate



• earnings floor
• allows compensation for administrative work

Sales Compensation
in the E-commerce Era

• face-to-face sales reserved for high-volume,
high-margin customers

• focus on integration with online customer
ordering and supporting rapid change
• movement toward team-based sales results



• sales people encouraged to strengthen
relationships with customers

Incentives for Other Managers
Merit pay or merit raise

• usually an ongoing increase to base pay
• link to performance acts as motivator
• success depends on validity of performance
appraisal system


• any salary increase awarded to an employee
based on individual performance

Incentives for Professionals

• relatively high salaries; increases are not
as motivating

• often driven by high quality work and peer
recognition
• in addition to money, better equipment
and support for publishing work is used


• includes lawyers, doctors, economists, and
engineers

Organization-Wide Incentive Plans
• profit-sharing plans

• employee share purchase/stock ownership
plan
• a trust holds shares of company stock purchased for
or issued to employees
• the trust distributes the stock to employees as
prescribed by the plan



• most or all employees share in the company’s profits

Organization-Wide Incentive Plans
• gainsharing plans


• engages employees to achieve productivity objectives
and share the gains
• works in stable organizations with predictable goals
and measures of performance


Developing Effective Incentive
Plans
Considerations:

• firms get what they pay for

• pay is not a motivator
• rewards rupture relationships
• rewards may undermine responsiveness


• performance pay cannot replace good
management

Effective Implementation
of Incentive Plans
1. Pay for performance

3. Link incentives to measurable, valuable
competencies

4. Match incentives to organizational culture
5. Keep group incentives clear and simple
6. Overcommunicate
7. The greatest incentive is the work itself


2. Link incentives to activities that engage
employees

Employee Recognition Programs
• emerging as a critical component of incentive
plans

• movement toward recognition throughout the
career
• particularly effective in smaller
entrepreneurial companies

• effective in achieving improved attitudes,
increased workloads, and productivity


• traditionally, recognition has been for long
service

reserved.

Common Recognition Rewards


Chapter 12 dessler 12-ce_ppt_ch12

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