4.1 EXPLORING INCENTIVE PAY4-1 Explore the incentive pay a

4.1 EXPLORING INCENTIVE PAY
4-1 Explore the incentive pay approach.
Incentive pay
(http://content.thuzelearning.com/books/Martocchio.7916.16.1/s
ections/bm01#bm01goss212) or
variable pay
ections/bm01#bm01goss462)
rewards employees for partially or completely attaining a
predetermined work objective.
Incentive or variable pay is defined as compensation, other than
base wages or salaries that
fluctuate according to employees’ attainment of some standard,
such as a preestablished
formula, individual or group goals, or company earnings.
Effective incentive pay systems are based on three assumptions:
Individual employees and work teams differ in how much they
contribute to the
company, both in what they do as well as in how well they do it.
The company’s overall performance depends to a large degree
on the performance of
individuals and groups within the company.
To attract, retain, and motivate high performers and to be fair to
all employees, a
company needs to reward employees on the basis of their
relative performance.

Much like seniority and merit pay approaches, incentive pay
augments employees’ base pay,
but incentive pay appears as a one-time payment. Employees
usually receive a combination
of recurring base pay and incentive pay, with base pay
representing the greater portion of
core compensation. More employees are presently eligible for
incentive pay than ever before,
as companies seek to control costs and motivate personnel
continually to strive for exemplary
performance. Companies increasingly recognize the importance
of applying incentive pay
programs to various kinds of employees as well, including
production workers, technical
employees, and service workers.
Some companies use incentive pay extensively. Lincoln Electric
Company, a manufacturer of
welding machines and motors, is renowned for its use of
incentive pay plans. At Lincoln
Electric, production employees receive recurring base pay as
well as incentive pay. The
company determines incentive pay awards according to five
performance criteria: quality,
output, dependability, cooperation, and ideas. The company has
awarded incentive payments
every year since 1934, through prosperous and poor economic
times. In 2014, the average
profit sharing payment per employee was $33,984.
Coupled with average base
pay, total core compensation for Lincoln employees was
$82,903. Over the past 10 years,
Lincoln’s profit-sharing payments averaged approximately 40
percent of annual salary.

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ections/ch04lev1sec11#ch04end1)
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4.1 Exploring Incentive Pay
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Similarly, Southwest
Airlines has distributed profit-sharing payments to employees
every year for the past 40
years. In 2014, Southwest
announced that it would share $228 million in profits.
Companies generally institute incentive pay programs to control
payroll costs or to motivate

employee productivity. Companies can control costs by
replacing annual merit or seniority
increases or fixed salaries with incentive plans that award pay
raises only when the company
enjoys an offsetting rise in productivity, profits, or some other
measure of business success.
Well-developed incentive programs base pay on performance, so
employees control their
own compensation levels. Companies can choose incentives to
further business objectives.
For example, the management of H. Lee Moffitt Cancer Center
and Research Institute at the
University of South Florida continually strives to improve
patient care as well as control
costs. Moffitt’s incentives are usually tied to net income or
operating surplus, quality of care
measures, patient satisfaction scores, and operating efficiencies.
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Page 2 of 2
Student’s Last Name 2

Student’s Name
Professor’s Name
PHIL 202 OL
Due Date
Working Title
Goal: Discuss the views on ancestors in African Indigenous
religion, Daoism, and Hinduism.
Project A Outline (Point-by-Point Model)
I. Introduction
Working Thesis: Though ancestors play an important role in
African Indigenous religion, Daoism, and Hinduism, these
religions view them in unique ways.
a. Ideas for engaging the audience.
b. Citation from one scholarly article on general religious views
on ancestors.
II. Body: Paragraph 1) African Indigenous religion
a. State one way in which African Indigenous believers view
their ancestors.
b. Expound on this idea, including any relevant background
information.
c. Cite a quote from the text to reinforce your claim put forth in
the topic sentence.
d. Your analysis regarding African Indigenous ancestral
practice or concept discussed in the topic sentence.
III. Body: Paragraph 2) Daoism

a. State one way in which Daoism regards its ancestors.
information.
the topic sentence.
d. Your analysis regarding Daoist ancestral practice or concept
discussed in the topic sentence.
IV. Body: Paragraph 3) Hinduism
a. State one way in which Hinduism sees its ancestors.
information.
the topic sentence.
d. Your analysis regarding Hindu ancestral practice or concept
discussed in the topic sentence.
V. Conclusion
a. Discuss importance to the overall theme of ancestors here.
b. Make conclusive comments regarding why these religions are
notably different and worthy of individualized attention.
Works Cited
List sources alphabetically. Use MLA 8 for correct formatting.
4.3 INDIVIDUAL INCENTIVES

4-3 Summarize five types of individual incentive pay plans.
Individual incentive pay plans are most appropriate under three
conditions. First, employees’
performance can be measured objectively. Examples of
objective performance measures
include:
Number of units produced—an automobile parts production
worker’s completion of a
turn signal lighting assembly
Sales amount—a Mary Kay Cosmetics sales professional’s
monthly sales revenue
Reduction in error rate—a word processor’s reduction in typing
errors
Second, individual incentive plans are appropriate when
employees have sufficient control
over work outcomes. Factors such as frequent equipment
breakdowns and delays in receipt of
raw materials limit employees’ ability to control their
performance levels. Employees are not
likely to be diligent when they encounter interference: Chances
are good that employees who
previously experienced interference will expect to encounter
interference in the future.
Employees’ resistance threatens profits because companies will
find it difficult to motivate
people to work hard when problem factors are not present.
TABLE 4-2 Typical Performance Measures for Individual,
Group, and Company-wide
Incentive Plans

Individual Incentive Plans
Quantity of work output
Quality of work output
Monthly sales
Work safety record
Work attendance
Group Incentive Plans
Customer satisfaction
Labor cost savings (through gain sharing plans)
Materials cost savings
Services cost savings (e.g., utilities)
Company-wide Incentive Plans
Operational Measures:
Customer satisfaction
Operational efficiency
Service/quality
4.3 Individual IncentivesTOC/Annotation
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Safety/occupational injury
Financial Measures:
Revenue
Earnings per company stock share
Operating income
Revenue growth

Note: Measures such as safety records and customer satisfaction
can be measured on an individual,
group, or company-wide basis according to a company’s
objectives.
Third, individual incentive plans are appropriate when they do
not create a level of unhealthy
competition among workers that ultimately leads to poor
quality. For example, a company
may create unhealthy competition when it limits the number of
incentive awards to only 10
percent of the employees who have demonstrated the highest
levels of performance. If the
company judges performance according to volume, then
employees may sacrifice quality as
they compete against each other to outmatch quantity. In
addition, under an incentive plan
that rewards quantity of output, those employees who meet or
exceed the highest standard
established by their employer may be subject to intimidation by
workers whose work falls
below the standard.
Unions may use these intimidation tactics to prevent plan
standards from being raised.
Defining Individual Incentives
Individual incentive plans reward employees for meeting such
work-related performance
standards as quality, productivity, customer satisfaction, safety,
or attendance. Any one of
these standards by itself or in combination may be used. A
company ultimately should
employ the standards that represent work that an employee
actually performs. For instance,
take the case of telemarketers. Customer satisfaction and sales
volume measures indicate

telemarketers’ performance. Tardiness would not be as relevant
unless absenteeism was a
general management problem.
Managers should also choose factors that are within the
individual employee’s control when
they create individual performance standards. Furthermore,
employees must know about
standards and potential awards before the performance period
starts. When designed and
implemented well, individual incentive plans reward employees
based on results for which
they are directly responsible. The end result should be that
excellent performers receive
higher incentive awards than poor performers.
Types of Individual Incentive Plans
There are five common types of individual incentive plans:
Piecework plans
Management incentive plans
Behavioral encouragement plans
Referral plans
Spot bonuses
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PIECEWORK PLANS
Companies generally use one of two piecework plans
(http://content.thuzelearning.com/books/Martocchio.7916.16.1/ s
ections/bm01#bm01goss337) .
The first, which is typically
found in manufacturing settings, rewards employees based on
their individual hourly
production against an objective output standard and are
determined by the pace at which
manufacturing equipment operates. For each hour, workers
receive piecework incentives for
every item produced over the designated production standard.
Workers also receive a
guaranteed hourly pay rate regardless of whether they meet the
designated production
standard. Table 4-3
ections/ch04lev1sec3#ch04tab03)
illustrates the calculation of a piecework incentive.
Companies use piecework plans when the time to produce a unit
is relatively short, usually
less than 15 minutes, and the cycle repeats continuously.
Piecework plans are usually found
in such manufacturing industries as textiles and apparel.
Quality is also an important consideration. Companies do not
reward employees for
producing defective products. In the apparel industry,
manufacturers attempt to minimize
defect rates because they cannot sell defective clothing for the
same price as nondefective

clothing. Selling defective clothing at a lower price reduces
company profits.
TABLE 4-3 Calculation of a Piecework Award for a Garment
Worker
Piecework standard: 15 stitched garments per hour
Hourly base pay rate awarded to employees when the standard is
not met: $4.50 per hour
That is, workers receive $4.50 per hour worked regardless of
whether they meet the
piecework standard of 15 stitched garments per hour.
Piecework incentive award: $0.75 per garment stitched per hour
above the piecework
standard
Guaranteed
Hourly
Base Pay
($)
Piecework Award (No. of Garments Stitched
above the Piecework Standard × Piecework
Incentive Award)
Total
Hourly
Earnings
($)
First
hour

4.50 10 garments × $0.75/garment = $7.50 12.00
Second
hour
4.50 Fewer than 15 stitched garments, thus
piecework award equals $0
4.50
The second type of piecework incentive plan establishes
individual performance standards
that include both objective and subjective criteria. Units
produced represent an objective
standard. Overall work quality is a subjective criterion that is
based on supervisors’
interpretations and judgments. For example, supervisors may
judge customer service
representatives’ performance to be higher when sales
professionals emphasize the benefits of
purchasing extended product warranties than when sales
professionals merely mention the
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availability and price of extended product warranties.

Economists argue that there are two advantages to companies of
using piecework plans in
manufacturing settings known as the incentive effect
ections/bm01#bm01goss211) and
sorting effect
The incentive effect refers
to a worker’s willingness to work diligently to produce more
quality output than simply
attending work without putting in the effort. To put this simply,
employees earn much less
under the piecework system than they would under a standard
hourly pay system. Whereas
employees are certainly expected to perform without an
incentive (piece rate), research
shows that incentives often are associated with higher employee
performance.
The sorting effect addresses an employee’s choice to stay versus
leave his or her employer
for another job, presumably one without an incentive pay
contingency. Specifically, a
hardworking, highly skilled employee is likely to choose to
remain employed under an
incentive system because both diligence and skill presumably
contribute to higher quantity
and quality of output—thus, higher pay.
MANAGEMENT INCENTIVE PLANS
Management incentive plans
ections/bm01#bm01goss264) award
bonuses to managers when they meet or exceed objectives based

on sales, profit, production,
or other measures for their division, department, or unit.
Management incentive plans differ
from piecework plans in that piecework plans base rewards on
the attainment of one specific
objective, and management incentive plans often require
multiple complex objectives. For
example, management incentive plans reward managers for
increasing market share or
reducing their budgets without compromising the quality and
quantity of output. The best-
known management incentive plan is management by objectives
(MBO).
In Chapter 3
ections/ch03#ch03) , MBO was
presented as an outcome-oriented performance appraisal
technique for merit pay systems.
When MBO is used as part of merit pay systems, superiors make
subjective assessments of
managers’ performance, and they use these assessments to
determine permanent merit pay
increases. When used as part of incentive programs, superiors
communicate the amount of
incentive pay managers will receive based on the attainment of
specific goals.
TABLE 4-4 A Sample Behavioral Encouragement Plan that
Rewards Employee
Attendance
At the end of each 3-month period, employees with exemplary
attendance records will
receive monetary incentive awards according to the following
schedule. Note that the

number of days absent does not refer to such company-approved
absences as vacation,
personal illness, jury duty, bereavement leave, military duty,
scheduled holidays, and
educational leave.
Number of Days Absent Monetary Incentive Award ($)
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0 (perfect attendance) 250
1 200
2 100
3 50
4 25
BEHAVIORAL ENCOURAGEMENT PLANS
Under behavioral encouragement plans

ections/bm01#bm01goss24) ,
employees receive payments for specific behavioral
accomplishments (e.g., good attendance
or safety records). For example, companies usually award
monetary bonuses to employees
who have exemplary attendance records for a specified period.
When behavioral
encouragement plans are applied to safety records, workers earn
awards for lower personal
injury or accident rates associated with the improper use of
heavy equipment or hazardous
chemicals. Table 4-4
contains an illustration of a sample behavioral encouragement
plan that rewards employees
for excellent attendance. Employees can earn $250 for perfect
attendance during a three-
month period. With perfect attendance for an entire year,
employees can earn $1,000.
Behavioral encouragement plans have the potential to save
companies substantially more
money than the cost of these awards. For example, frequent
absenteeism in a company’s
workforce could disrupt production goals and quality.
Customers may respond by choosing
to make purchases for better quality products from other
companies. Loss of customer bases
will have a negative impact on profitability and reputation that
prompts prospective
customers to choose alternate sources to purchase products.
REFERRAL PLANS
Employees may receive monetary bonuses under referral plans
ections/bm01#bm01goss371) for

referring new customers or recruiting successful job applicants.
Companies commonly rely
on referral bonuses to enhance recruitment of highly qualified
employees, particularly when
the supply of highly qualified individuals is low, or the
company is experiencing explosive
growth. HubSpot, the developer of inbound marketing software,
recently experienced growth
in excess of 80 percent.
The company relies heavily on the work of talented software
engineers and designers. In
response to this substantial growth, HubSpot offered a $30,000
bonus to employees whose
referral was hired as a software engineer or designer. This
program expands eligibility to any
individual regardless of employment status.
A successful referral usually means that companies award
bonuses only if hired referrals
remain employed with the company in good standing beyond a
designated period, often at
least 30 days. Referral plans rely on the idea that current
employees’ familiarity with
company culture should enable them to identify viable
candidates for job openings more
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efficiently than employment agencies could because agents are
probably less familiar with
client companies’ cultures. Employees are likely to make only
those referrals they truly
believe are worthwhile because their personal reputations are at
stake.
SPOT BONUSES
Many organizations today are providing spot bonuses for
critical areas and talents. Spot
bonuses
ections/bm01#bm01goss422) are
relatively small monetary gifts provided to employees for
outstanding work or effort during a
reasonably short period of time. If an employee’s performance
has been exceptional, the
employer may reward the worker with a one-time bonus with an
amount as low as $50. For
certain professional jobs it is not unheard of for a highly
productive worker to receive $5,000
shortly after a noteworthy achievement.
Advantages of Individual Incentive Pay Programs
There are three key advantages of individual incentive pay
plans. First, individual incentive
plans can promote the relationship between pay and
performance. As discussed in Chapter 1
ections/ch01#ch01) , employees in
the United States are highly motivated by earning money.
Employees strive for excellence
when they expect to earn incentive awards commensurate with
their job performance.
Second, individual incentive plans promote an equitable

distribution of compensation within
companies (i.e., the amount employees earn depends on their
job performance). The better
they perform, the more they earn. Equitable pay ultimately
enables companies to retain the
best performers. Paying better performers more money sends a
signal that the company
appropriately values positive job performance.
A third advantage of individual incentive plans is their
compatibility with such individualistic
cultures as the United States. Because U.S. employees are
socialized to make individual
contributions and be recognized for them, the national culture
of the United States probably
enhances the motivational value of individual incentive
programs.
Disadvantages of Individual Incentive Pay Programs
Although individual incentive plans can prove effective in
certain settings, these programs
also have serious limitations. Supervisors, human resource (HR)
managers, and
compensation professionals should know about three potential
problems with individual
incentive plans.
First, individual incentive plans possess the potential to
promote inflexibility. Because
supervisors determine employee performance levels, workers
under individual incentive
plans become dependent on supervisors for setting work goals.
If employees become highly
proficient performers, they are not likely to increase their
performance beyond their reward
compensation. For example, let’s assume that management

defines the maximum incentive
award as $500 per month, which is awarded to employees whose
productivity rates 15
percent above the performance standard. Employees who
produce more than 15 percent
above the production standard will not receive additional
incentive pay beyond the $500.
With this design, employees would not be motivated to further
improve their performance.
Second, with merit pay systems, supervisors must develop and
maintain comprehensive
performance measures to properly grant incentive awards.
Individual incentive programs
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pose measurement problems when management implements
improved work methods or
equipment. When such changes occur, it will take some time for
employees to become
proficient performers. Thus, it will be difficult for companies to
determine equitable
incentive awards, which may lead to employees’ resistance to
the new methods.
A third limitation of individual incentive plans is that they may
encourage undesirable
workplace behavior when these plans reward only one or a
subset of dimensions that
constitute employees’ total job performance. Let’s assume that
an incentive plan rewards
employees for quantity of output. If employees’ jobs address

such various dimensions as
quantity of output, quality, and customer satisfaction,
employees may focus on the one
dimension—in this case, quantity of output—that leads to
incentive pay and thereby neglect
the other dimensions.
Our focus has been on financial incentive awards. Companies
may provide nonfinancial
incentives to employees, including companies such as hotels
that operate in a low-paying
industry. Hotel chain Joie de Vivre Hospitality does just that.
Several times a year, employees
are given the opportunity to stay in any of the company’s hotels
at no charge and to take full
advantage of the amenities. By assuming the customer role, Joie
de Vivre Hospitality
employees can improve job performance because they gain a
better understanding of their
guests’ needs.
WATCH IT!
If your professor has assigned this, go to the Assignments
section of
mymangementlab.com (http://mymangementlab.com) to
complete the video exercise
titled Joie de Vivre Hospitality: Pay for Performance and
Financial Incentives.
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Page 7 of 7

3.2 MERIT PAY
3-2 Explain the merit pay approach to compensation.
Merit pay programs
ections/bm01#bm01goss284)
assume that employees’ compensation over time should be
determined, at least in part, by
differences in job performance.
Employees earn permanent
merit increases based on their performance. The increases
reward excellent effort or results,
motivate future performance, and help employers retain valued
employees. Merit increases
are usually expressed as a percentage of hourly wages for
nonexempt employees and as a
percentage of annual salaries for exempt employees. In 2014,
employees earned average
merit increases of 3.0 percent across all industries, and the
projected average increase for
2015 was 3.1 percent.
This average increase did not vary significantly across
employee groups (exempt vs.
nonexempt, nonunion vs. union); however, the average raise
differed based on employee
performance and industry. Merit increases for high performers
averaged 4.1 percent.
The health care and social
assistance industry’s average merit increase was 2.5 and 3.8
percent for the mining industry.
Who Participates?
Merit pay is one of the most commonly used compensation

methods in the United States. In
2014, a survey of WorldatWork members revealed that 72
percent of companies indicated that
they use a rating system with a performance score that is tied to
pay increases. The rates were
65 percent and 71 percent in 2010 and 2011, respectively.
Merit pay programs occur
most often in the private for-profit sector of the economy rather
than in such public sector
organizations as local and state governments.
Exploring the Elements of Merit Pay
Managers rely on objective as well as subjective performance
indicators to determine
whether an employee will receive a merit increase and the
amount of increase warranted. As
a rule, supervisors give merit increases to employees based on
subjective appraisal of
employees’ performance.
Supervisors periodically review individual employee
performance to evaluate how well each
worker is accomplishing assigned duties relative to established
standards and goals. Thus, as
we will discuss later in this chapter, accurate performance
appraisals are key to effective
merit pay programs.
For merit pay programs to succeed, employees must know that
their efforts in meeting
production quotas or quality standards will lead to pay raises.
Job requirements must be
realistic, and employees must have the skills and abilities to
meet job goals. Moreover,
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3.2 Merit Pay
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Page 1 of 4
employees must perceive a strong relationship between attaining
performance standards and
receiving pay increases.
Furthermore, companies that use merit programs must ensure

that the funds needed to fulfill
these promises to compensate employees are available. For now,
we assume that adequate
funding for merit pay programs is in place. We will address the
ramifications of insufficient
budgets for funding merit pay programs in Chapter 8
ections/ch08#ch08) .
Finally, companies should make permanent adjustments to base
pay according to changes in
the cost of living or inflation before awarding merit pay raises.
Then, permanent merit pay
raises should always reward employee performance rather than
represent adjustments for
inflation. Inflation represents rises in the cost of consumer
goods and services (e.g., food and
health care) that boost the overall cost of living. Over time,
inflation erodes the purchasing
power of the dollar. You’ve no doubt heard the comment, “It’s
harder to stretch a dollar these
days.” Employees are concerned about how well merit increases
raise purchasing power.
Compensation professionals attempt to minimize negative
inflationary effects by making
permanent increases to base pay, known as cost-of-living
adjustments. For now, let’s assume
that inflation is not an issue. (As a side note, this principle also
applies to seniority pay. Pay
increases should reflect additional seniority after making
specific adjustments for inflation.)
Although fairly common, merit pay systems are not appropriate
for all companies.
Compensation professionals should consider two factors—
commitment from top

management and the design of jobs—before endorsing the use
of merit pay systems. Top
management must be willing to reward employees’ job
performances with meaningful pay
differentials that match employee performance differentials.
Companies ideally should grant
sufficiently large pay increases to reward employees for
exemplary job performance and to
encourage similar expectations about future good work.
The amount of a merit pay increase should reflect prior job
performance levels and motivate
employees toward striving for exemplary performance. The pay
raise amount should be
meaningful to employees. The concept of just-meaningful pay
increase
ections/bm01#bm01goss242) refers
to the minimum pay increase that employees will see as making
a meaningful change in
compensation. The basic
premise of this concept is that a trivial pay increase for average
or better employees is not
likely to reinforce their performance or to motivate enhanced
future performance. In addition
to top management’s commitment to merit pay programs, HR
professionals must design jobs
explicitly enough that employees’ performance can be measured
accurately. Merit programs
are most appropriate when employees have control over their
performance and when
conditions outside employees’ control do not substantially
affect their performance.
Conditions beyond employees’ control that are likely to limit
job performance vary by the
type of job. For sales professionals, recessionary economic

spells generally lead consumers
to limit spending on new purchases because they anticipate the
possibility of layoffs. Sales
professionals certainly do not create recessionary periods nor
can they allay consumers’ fears
about the future. For production workers, regular equipment
breakdowns will lead to lower
output.
Furthermore, there must be explicit performance standards that
specify the procedures or
outcomes against which employees’ job performance can be
clearly evaluated. At Pratt &
Whitney, HR professionals and employees worked together to
rewrite job descriptions. The
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Page 2 of 4
purpose was to define and put into writing the major duties of a
job and to specify written
performance standards for each duty to ensure that the job
requirements provided a useful
measurement standard for evaluation. The main performance
standards included such factors
as quality, quantity, and timeliness of work.
Table 3-3

displays a job description for an Account Clerk II in the
California Department of
Rehabilitation Services. The description lists the activities the
jobholder performs and
qualifications necessary to perform the job at an acceptable
level. For instance, a successful
candidate must demonstrate knowledge of bookkeeping practice.
TABLE 3-3 Account Clerk II
Job: Account Clerk II
Agency/Department: California Department of Rehabilitation
Services
Location: Fresno, CA
Job Summary:
Under the supervision of the Supervising Program Technician II
(SPTII), the Account
Clerk II provides support for the district accounting unit.
Follow prescribed procedures
involving arith-metical calculations. Compile, investigate and
verify numerical or
financial information. Follow written and oral instructions.
Must be courteous and tactful
and work cooperatively with others.
Key Job Duties:
Process revolving fund checks and bank drafts
Maintain check counterfoils and bank drafts audit file
Provide check/bank draft information to staff
Ready invoices for processing by auditing invoice for
appropriate/necessary
information, number of copies/supporting documents, receipts,
underscoring
participants name, date of services, FEIN #, amount of invoice

Verify funds are available/encumbered to make payment.
Qualifications Required:
Good communication skills
Willingness to learn
Ability to use various assistive technology communication
devices, and other
adaptive re-sources in order to meet the needs of individuals
with different abilities
and diverse back-grounds
Ability to use good judgment and awareness and knowledge of
disability conditions
to independently act, respond, and assist with various consumer
situations
Ability to interact in a team environment with consumers and
coworkers in a
professional manner, and with integrity and respect
Ability to follow approved department policies and procedures
Source: State of California, Department of Rehabilitation.
Account Clerk II (position number 813-
150-1733-XXX). Available:
http://jobs.spb.ca.gov/wvpos/more_info.cfm?recno=512397
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Page 3 of 4
(http://jobs.spb.ca.gov/wvpos/more_info.cfm?recno=512397) ,
accessed February 1, 2015.
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Page 4 of 4

4.2 CONTRASTING INCENTIVE PAY WITH
TRADITIONAL PAY
4-2 Describe the differences between incentive pay methods and
traditional pay methods.
In traditional pay plans, employees receive compensation based
on a fixed hourly pay rate or
annual salary. Some companies use incentive pay programs that
replace all or a portion of
base pay in order to control payroll expenditures and to link pay
to performance. Since 1998,
there has been a 47 percent increase in the use of incentive pay
programs. Companies use
incentive pay programs in varying degrees for different kinds of
positions.
Nowadays, most companies
use a mix of traditional and incentive pay methods. The mix has
steadily changed. In 1998,
traditional pay increases totaled 4.2 percent of payroll while
incentive pay increases
amounted to 8.0 percent. In 2014, the amounts were 2.9 percent
and 12.7 percent,
respectively.
As we discussed in Chapter 3
ections/ch03#ch03) , employees
under traditional pay structures earn raises according to their
length of service in the
organization or to supervisors’ subjective appraisals of
employees’ job performance. Again,
both merit pay raises and seniority pay raises are permanent

increases to base pay. Annual
merit pay increase amounts usually total no more than a small
percentage of base pay
(approximately 3 percent), but the dollar impact represents a
significant cost to employers
over time. Table 4-1
shows the contrast in rate of compensation increase between a
traditional merit compensation
plan and an incentive plan.
Companies use incentive pay to reward individual employees,
teams of employees, or whole
companies based on their performance. Incentive pay plans are
not limited solely to
production or nonsupervisory workers. Many incentive plans
apply to such categories of
employees as sales professionals, managers, and executives.
Management typically relies on
business objectives to determine incentive pay levels such as
company profits and sales
growth. Management then communicates these planned
incentive levels and performance
goals to managers. Although merit pay performance standards
aim to be measurable and
objective, incentive levels tend to be based on even more
objective criteria, such as quantity
of items an employee produces per production period or market
indicators of a company’s
performance (e.g., an increase in market share for the fiscal
year). Moreover, supervisors
communicate the incentive award amounts in advance that
correspond to objective
performance levels. On the other hand, supervisors generally do
not communicate the merit

award amounts until after they offer subjective assessments of
employees’ performance.
TABLE 4-1 Permanent Annual Merit Increases versus Incentive
Awards: A
Comparison
7
8
4.2 Contrasting Incentive Pay with Tradi…
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Page 1 of 3
(At the end of 2015, John Smith earned an annual salary of
$35,000.)
Total Salary under
Cost of Increase (Total
Current Salary—2015
Annual Salary equals
$35,000)
Permanent Merit

Increase (Percent
Increase ×
Previous Year
Annual Salary) +
Previous Annual
Salary ($)
Incentive
Award ($)
(Percent
Increase ×
2015 Salary) +
Fixed Base
Pay ($35,000)
($)Year
Increase
Amount
(%)
Permanent
Merit
Increase
($)
Incentive
Award

($)
2016 3 1,050 1,050 36,050 36,050
2017 5 2,853 1,750 37,853 36,750
2018 4 4,367 1,400 39,367 36,400
2019 7 7,122 2,450 42,122 37,450
2020 6 9,649 2,100 44,649 37,100
Incentive pay plans can be broadly classified into three
categories:
Individual incentive plans
These plans reward employees whose work is performed
independently. Some
companies have piecework plans, typically for their production
employees. Under
piecework plans, an employee’s compensation depends on the
number of units she or he
produces over a given period.
Group incentive plans. These plans promote supportive,
collaborative behavior among
employees. Group incentives work well in manufacturing and
service delivery
environments that rely on interdependent teams. In gain sharing
programs, group
improvements in productivity, cost savings, or product quality
are shared by employees
within the group.

Company-wide incentive plans. These plans tie employee
compensation to a
company’s performance over a short time frame, usually from a
one-month period to a
five-year period.
Table 4-2
lists common performance measures used in individual, group,
and company-wide incentive
9
4/15/20, 8:50 PM
Page 2 of 3
plans .
9
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Page 3 of 3

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