Prof Maria Kraimer Managing Rewards Systems Spring 2021 Week 11 Incentive Pay (Chapter 4) Activities for Week 11 Watch “Chapter 4B” video Watch Lincoln Electric video (see Discussion Forum or Homework Assignment document) Complete the Discussion Forum “Lincoln Electric” by 6:00pm EST, Friday, April 2 Post a reply by 6:00pm, Saturday, April 3 Complete Homework Assignment (Lincoln Electric) by 11:59pm EST, Sunday, April 4 NOTE: Although both the Forum and Homework are based on the LE video, you have different questions to answer across the two assignments. Key Objectives for Chapter 4 Understand how Incentive Pay differs from Base pay and why companies adopt Incentive Pay Know the different types of incentive pay plans: individual, group, and company-wide Know the advantages and disadvantages of individual, group, and company-wide incentive plans. Know the theories that underlie effective incentive plans Know common problems with designing incentive pay systems 3 2.Types of Incentive Plans 4 4 Individual-based Piecework or standard hourly plans Management incentive plans (MBO) Group-based Organization-wide Profit-sharing plans Stock plans (ESOPs and stock options) Team- or unit-based bonuses Bonuses (referrals, spot, signing) Gainsharing plans Sales commission Behavioral encouragement plans Which type of plan? ANSWERS A salesperson gets paid 20% of the total dollar amount she sells to customers each month (Sales ommission) A manager is paid a cash bonus at the end of the year because the company met their profit goals (Profit-sharing plan) A call center worker receives a bonus of $100 each month that he has perfect attendance (Behavioral encouragement plan) Members of a new product team will each receive a $500 bonus if the new product is launched by November 1 (team bonus) John recommended Jane for the open position in his department; after Jane was hired, John received $100 gift card (Referral bonus) All employees that work for Pioneer Co-op are given stock options in the company’s stock after one year of service (ESOP) 4. Theories that can explain how and why incentive pay can motivate employees 6 Goal-setting theory Agency theory Expectancy theory Goal-Setting Theory: Goals improve performance through four specific motivational processes 7 SMART Goals (with feedback and employee involvement)… 7 SMART goals = Specific, Measurable, Achievable, Relevant, and Time-bound WHAT TYPES OF INCENTIVE PLANS ARE BASED ON GOAL-SETTING? Bonuses, commissions, and piece-rates Focus attention away from other activities toward the desired behavior. Get people energized and excited about accomplishing something worthwhile. Help people work on tasks longer when they have specific goals. Encourage the discovery and use of knowledge. Piece-rates, commission, and performance-based bonuses require SMART goals The set of specific goals should reflect all important jo ...

1. Prof Maria Kraimer
Managing Rewards Systems
Spring 2021
Week 11
Incentive Pay (Chapter 4)
Activities for Week 11
Watch “Chapter 4B” video
Watch Lincoln Electric video (see Discussion Forum or
Homework Assignment document)
Complete the Discussion Forum “Lincoln Electric” by 6:00pm
EST, Friday, April 2
Post a reply by 6:00pm, Saturday, April 3
Complete Homework Assignment (Lincoln Electric) by 11:59pm
EST, Sunday, April 4
NOTE: Although both the Forum and Homework are based on
the LE video, you have different questions to answer across the
two assignments.

2. Key Objectives for Chapter 4
Understand how Incentive Pay differs from Base pay and why
companies adopt Incentive Pay
Know the different types of incentive pay plans: individual ,
group, and company-wide
Know the advantages and disadvantages of individual, group,
and company-wide incentive plans.
Know the theories that underlie effective incentive plans
Know common problems with designing incentive pay systems
3
2.Types of Incentive Plans
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4
Individual-based
Piecework or standard hourly plans
Management incentive plans (MBO)
Group-based

3. Organization-wide
Profit-sharing plans
Stock plans (ESOPs and stock options)
Team- or unit-based bonuses
Bonuses (referrals, spot, signing)
Gainsharing plans
Sales commission
Behavioral encouragement plans
Which type of plan? ANSWERS
A salesperson gets paid 20% of the total dollar amount she sells
to customers each month (Sales ommission)
A manager is paid a cash bonus at the end of the year because
the company met their profit goals (Profit-sharing plan)
A call center worker receives a bonus of $100 each month that

4. he has perfect attendance (Behavioral encouragement plan)
Members of a new product team will each receive a $500 bonus
if the new product is launched by November 1 (team bonus)
John recommended Jane for the open position in his department;
after Jane was hired, John received $100 gift card (Referral
bonus)
All employees that work for Pioneer Co-op are given stock
options in the company’s stock after one year of service (ESOP)
4. Theories that can explain how and why incentive pay can
motivate employees
6
Goal-setting theory
Agency theory
Expectancy theory
Goal-Setting Theory: Goals improve performance through four

5. specific motivational processes
7
SMART Goals (with feedback and employee involvement)…
7
SMART goals = Specific, Measurable, Achievable, Relevant,
and Time-bound
WHAT TYPES OF INCENTIVE PLANS ARE BASED ON
GOAL-SETTING? Bonuses, commissions, and piece-rates
Focus attention away from other activities toward the desired
behavior.
Get people energized and excited about accomplishing
something worthwhile.
Help people work on tasks longer when they have specific
goals.
Encourage the discovery and use of knowledge.
Piece-rates, commission, and performance-based bonuses
require SMART goals
The set of specific goals should reflect all important job tasks
(relevant to entire job)
Employees should be involved in setting realistic goals

6. The goals must be achievable without compromising ethical
standards
Feedback should encourage strategizing new ways to reach goal
(that are ethical)
Company must create an ethical culture
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Implications of Goal-setting Theory for Incentive Pay
8
Agency Theory applies to publicly traded companies and has 3
principles:
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9
Agency theory, developed in the 1970s, focuses on the way
management of a firm manages its relations and enters into
contractual arrangements with its managers or employees.
The conditions under which subordinate agents work with
corporate managers may directly influence the behavior of the
organization, such as taking risks pertain to new ventures.
Issues such as remuneration, accounting techniques or ri sk-
taking are among the major concerns of both parties in this
relationship.

7. 1. Executives/managers are the shareholders’ agents and are
expected to act on behalf of the shareholders’ best interest.
2. An agency problem exists if executive/managerial pay is not
aligned with shareholder’s interests (long-term growth).
3. The more risk a manager is expected to bear, the higher the
wages and/or bonuses should be when the manager is
successful.
Which incentive plans are based on agency theory?
Profit-sharing plans
Stock option plans
Gainsharing plans
What are the primary, if not only, performance outcomes that
would matter based on agency theory?
Company profits and stock price
According to agency theory, should senior executives have more
of their pay based on fixed salary or incentive-based
bonuses/stock options?
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Implications of Agency Theory
10
Expectancy Theory proposes that motivation comes from 3
beliefs: valence, instrumentality, and expectancy.

8. 11
11
According to expectancy theory, all three desirable beliefs must
be present for motivation to occur.
What does expectancy theory mean for the design of incentive
pay plans?
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The financial reward must be large enough to be valued by
employees (valence).
Problem with most merit-based pay raises is the amount is too
small; incentive bonuses tend to be larger
Expectancy must be provided by managers, HR practices, and
job design.
Problems when goals are too hard (unrealistic); employee is not

9. properly trained; equipment malfunctions; or external factors
influence performance
Instrumentality must be provided by managers and HR
practices.
Problems when incentive system is not communicated to
employees or performance measure is subjective and prone to
biases.
Expectancy Theory
What other “external factors” might make you feel that no
matter how hard you work, you will not reach the performance
goal (expectancy link)?
Competition; no cooperation from coworkers
Not enough time
Dependent on others to get work done; they may not do their
part (team interdependence tasks)
Didn’t understand goal or what meeting goal “looks like”.
Why else might lead you to believe that even if you achieve
your goals, you may not receive the reward (instrumentality
link)?
Favoritism or supervisor biases (if performance determined by
boss)
Company doesn’t have money to pay bonuses
5. Common problems created by incentive plans

10. Quantity is achieved, but quality goes down (you get what you
pay for -- quantity, not quality).
Decreased cooperation among employees; a more competitive
culture.
Unethical (or unsafe) behavior if focus is only on results, and
not the means or actions used to achieve results.
Extrinsic rewards can undermine intrinsic motivation
(employees do it for the money, not for enjoyment)?
What should companies do to avoid these problems? Think
about these issues when watching the Lincoln Electric video
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For this week’s Homework and Discussion Forum, first watch
the Lincoln Electric video.
it’s an old video (about 25 years ago), but still accurate other
than a different CEO and President, and company does now
contribute to health insurance plan
https://www.youtube.com/watch?v=WZRV9Xp9rsI
You have DIFFERENT questions that need to be answered in
the Discussion Forum VERSUS Homework. You need to do both
assignments.
15
LE Video for Homework & Forum

11. 15
Founded 125 years ago by John C. Lincoln and privately held
until about 20 years ago.
Today, a Fortune 500 company headquartered in Cleveland,
with 40+ locations world-wide.
A global market leader in the arc welding industry for decades;
sales in 2019 was $3 billion.
Has not had lay-offs since 1948 and has never experienced a
work stoppage.
Internationally-renowned for their profit-sharing bonus plan:
Average employee bonus is 40% of employee’s annual base
salary.
Bonuses have been paid every year since 1934.
In 2016, average profit-sharing bonus paid to an employee was
$24,111.
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Lincoln Electric
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Standard hourly piece-rate pay (for production workers)
A yearly bonus based on the profit-sharing pool
Company must hit target profits for money to be allocated to
profit-sharing pool
Individuals receive bonus based on their performance rating. All
employees are eligible.

12. Stock ownership plan for those with 1+ years of service.
Guaranteed employment for those with 1+ years of service.
Lincoln Electric’s Incentive System
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Standard hourly/ piece-rate plans
Used mostly in manufacturing settings
Employee is paid for each “piece” (product) produced
Standard hourly plan: company sets a “standard rate of
production” (e.g., 10 pieces produced per hour).
If employee beats standard rate (e.g., produced 12 pieces per
hour), employee gets paid based on PIECE RATE (e.g., $2.00
per piece that day, or $24.00 per hour that day).
If employees does not meet standard rate (e.g., produced 8
pieces per hour), employee gets paid an hourly rate, that is
lower than the piece rate, that day (e.g., $15.00 per hour).
5-19
Profit Sharing Plans
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13. Two Kinds
Current Profit-Sharing (cash bonuses paid quarterly or yearly)
Deferred Profit-Sharing (bonus amount paid into retirement
plan)
Distribution Methods
Equal payments to all employees
Proportional payments based on annual salaries
Proportional payments based on contribution to profits
What about proportional payments based on performance?
Reminder: Activities for Week 11
Watch Lincoln Electric video (see Discussion Forum or
Homework Assignment document)
Complete the Discussion Forum “Lincoln Electric” by 6:00pm
EST, Friday, April 2
Post a reply by 6:00pm, Saturday, April 3
Complete Homework Assignment (Lincoln Electric) by 11:59pm
EST, Sunday, April 4
NOTE: Although both the Forum and Homework are based on
the LE video, you have different questions to answer across the

14. two assignments.
YOUR NAME:
Homework Assignment
Lincoln Electric’s Incentive Management System
First, watch the Lincoln Electric (LE) video at the following
website: https://www.youtube.com/watch?v=WZRV9Xp9rsI
· Please note: it is an old video (about 25 years ago), but it still
accurately discusses their Incentive Management System and
depicts their organizational culture; what has changed is (a)
there is a different CEO and President of the company; and (b)
the company does now contribute to an employee health
insurance plan (in the video, they will mention that at that time,
the company did not provide any health insurance benefits and
that is no longer true).
See also the last few slides of Week 11 Lecture Slides for more
information about Lincoln Electric.
Then, answer the following three questions about Lincoln
Electric. You can answer the questions directly below in the
space provided, then save your work and upload the file into
Canvas for Week 11 Homework Assignme nt.
1. Based on the LE video and textbook, what do you see as
advantages and disadvantages to a piece-rate system (or

15. standard hourly plan)? From the video, you should draw some
of your own conclusions about advantages and disadvantages of
their piece-rate system that goes beyond the textbook.
Answer:
2. In what ways is LE’s profit-sharing program aligned with
expectancy theory? That is, explain how LE designed their
profit-sharing program to provide expectancy, instrumentality,
and valence. Expectancy theory is explained in the Chapter 11
Lecture Slides (see also my Chapter 4 lecture video).
Answer:
3. Of the “common problems of incentive plans” (see week 11
slides), which does Lincoln Electric seem to experience and
which has it avoided? Justify your answer.
Answer: