Human Resource Management 11e gary dessler chapter 12

1. © 2008 Prentice Hall, Inc.© 2008 Prentice Hall, Inc.
All rights reserved.All rights reserved.
PowerPoint Presentation by Charlie CookPowerPoint Presentation by Charlie Cook
The University of West AlabamaThe University of West Alabama
1
Human ResourceHuman Resource
ManagementManagement
ELEVENTH EDITIONELEVENTH EDITION
G A R Y D E S S L E RG A R Y D E S S L E R
Pay for Performance andPay for Performance and
Financial IncentivesFinancial Incentives
ChapterChapter
1212
Part 4 | CompensationPart 4 | Compensation

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After studying this chapter, you should be able to:
1.1. Discuss the main incentives for individual employees.Discuss the main incentives for individual employees.
2.2. Discuss the pros and cons of incentives forDiscuss the pros and cons of incentives for
salespeople.salespeople.
3.3. Name and define the most popular organizationwideName and define the most popular organizationwide
variable pay plans.variable pay plans.
4.4. Describe the main incentives for managers andDescribe the main incentives for managers and
executives.executives.
5.5. Outline the steps in developing effective incentiveOutline the steps in developing effective incentive
plans.plans.

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Motivation, Performance, and PayMotivation, Performance, and Pay
• IncentivesIncentives
 Financial rewards paid to workers whose productionFinancial rewards paid to workers whose production
exceeds a predetermined standard.exceeds a predetermined standard.
• Frederick TaylorFrederick Taylor
 Popularized scientific management and the use ofPopularized scientific management and the use of
financial incentives in the late 1800s.financial incentives in the late 1800s.
 Systematic soldieringSystematic soldiering
 Fair day’s workFair day’s work

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Employee Incentive PlansEmployee Incentive Plans
Individual Employee Incentive
and Recognition Programs
Sales Compensation
Programs
Organizationwide Incentive
Programs
Executive Incentive
Compensation Programs
Team/Group-based Variable
Pay Programs
Pay-for-Performance
Plans

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Incentives for SalespeopleIncentives for Salespeople
• Salary PlanSalary Plan
 Straight salariesStraight salaries
 Best for: prospecting (finding new clients), accountBest for: prospecting (finding new clients), account
servicing, training customer’s salesforce, or participating inservicing, training customer’s salesforce, or participating in
national and local trade shows.national and local trade shows.
• Commission PlanCommission Plan
 Pay is a percentage of sales results.Pay is a percentage of sales results.
 Keeps sales costs proportionate to sales revenues.Keeps sales costs proportionate to sales revenues.
 May cause a neglect of nonselling duties.May cause a neglect of nonselling duties.
 Can create wide variation in salesperson’s income.Can create wide variation in salesperson’s income.
 Likelihood of sales success may be linked to external factorsLikelihood of sales success may be linked to external factors
rather than to salesperson’s performance.rather than to salesperson’s performance.
 Can increase turnover of salespeople.Can increase turnover of salespeople.

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Incentives for Salespeople (cont’d)Incentives for Salespeople (cont’d)
• Combination PlanCombination Plan
 Pay is a combination of salary and commissions,Pay is a combination of salary and commissions,
usually with a sizable salary component.usually with a sizable salary component.
 Plan gives salespeople a floor (safety net) to theirPlan gives salespeople a floor (safety net) to their
earnings.earnings.
 Salary component covers company-specified serviceSalary component covers company-specified service
activities.activities.
 Plans tend to become complicated, andPlans tend to become complicated, and
misunderstandings can result.misunderstandings can result.

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Specialized Combination PlansSpecialized Combination Plans
• Commission-plus-Drawing-Account PlanCommission-plus-Drawing-Account Plan
 Commissions are paid but a draw on future earningsCommissions are paid but a draw on future earnings
helps the salesperson to get through low saleshelps the salesperson to get through low sales
periods.periods.
• Commission-plus-Bonus PlanCommission-plus-Bonus Plan
 Pay is mostly based on commissions.Pay is mostly based on commissions.
 Small bonuses are paid for directed activities likeSmall bonuses are paid for directed activities like
selling slow-moving items.selling slow-moving items.

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Team/Group Incentive PlansTeam/Group Incentive Plans
• Team (or Group) Incentive PlansTeam (or Group) Incentive Plans
 Incentives are based on team’s performance.Incentives are based on team’s performance.
• How to Design Team IncentivesHow to Design Team Incentives
 Set individual work standards.Set individual work standards.
 Set work standards for each team member and thenSet work standards for each team member and then
calculate each member’s output.calculate each member’s output.
 Members are paid based on one of three formulas:Members are paid based on one of three formulas:
 All receive the same pay earned by the highest producer.All receive the same pay earned by the highest producer.
 All receive the same pay earned by the lowest producer.All receive the same pay earned by the lowest producer.
 All receive the same pay equal to the average pay earnedAll receive the same pay equal to the average pay earned
by the group.by the group.

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Team/Group Incentive Plans (cont’d)Team/Group Incentive Plans (cont’d)
• ProsPros
 Reinforces team planning and problem solvingReinforces team planning and problem solving
 Helps ensure collaborationHelps ensure collaboration
 Encourages a sense of cooperationEncourages a sense of cooperation
 Encourages rapid training of new membersEncourages rapid training of new members
• ConsCons
 Pay is not proportionate to an individual’s effortPay is not proportionate to an individual’s effort
 Rewards “free riders”Rewards “free riders”

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Organizationwide Incentive PlansOrganizationwide Incentive Plans
• Employee Stock Ownership Plan (ESOP)Employee Stock Ownership Plan (ESOP)
 A firm annually contributes its own stock—or cashA firm annually contributes its own stock—or cash
(with a limit of 15% of compensation) to be used to(with a limit of 15% of compensation) to be used to
purchase the stock—to a trust established for thepurchase the stock—to a trust established for the
employees.employees.
 The trust holds the stock in individual employeeThe trust holds the stock in individual employee
accounts and distributes it to employees uponaccounts and distributes it to employees upon
separation from the firm if the employee has workedseparation from the firm if the employee has worked
long enough to earn ownership of the stock.long enough to earn ownership of the stock.

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Gainsharing PlansGainsharing Plans
Philosophy
of
Cooperation
Involvement
System
Identity
Scanlon Plan
Competence
Sharing of
Benefits
Formula

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At-Risk Variable Pay PlansAt-Risk Variable Pay Plans
• Put some portion of the employee’sPut some portion of the employee’s
weekly pay at risk.weekly pay at risk.
 If employees meet or exceed their goals,If employees meet or exceed their goals,
they earn incentives.they earn incentives.
 If they fail to meet their goals, they forgoIf they fail to meet their goals, they forgo
some of the pay they would normally havesome of the pay they would normally have
earned.earned.

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Incentives for Managers and ExecutivesIncentives for Managers and Executives
• Short-Term Incentives: The Annual BonusShort-Term Incentives: The Annual Bonus
 Plans that are designed to motivate short-termPlans that are designed to motivate short-term
performance of managers and are tied to companyperformance of managers and are tied to company
profitability.profitability.
• Issues in Awarding BonusesIssues in Awarding Bonuses
 Eligibility basisEligibility basis
 Fund size basisFund size basis
 Individual awardsIndividual awards

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K E Y T E R M S
financial incentivesfinancial incentives
fair day’s workfair day’s work
scientific managementscientific management
expectancyexpectancy
instrumentalityinstrumentality
valencevalence
behavior modificationbehavior modification
variable payvariable pay
pieceworkpiecework
straight pieceworkstraight piecework
standard hour planstandard hour plan
merit pay (merit raise)merit pay (merit raise)
team or group incentive planteam or group incentive plan
organization wide incentive plansorganization wide incentive plans
profit-sharing planprofit-sharing plan
employee stock ownership plan (ESOP)employee stock ownership plan (ESOP)
Scanlon planScanlon plan
gainsharing plangainsharing plan
at-risk variable pay plansat-risk variable pay plans
annual bonusannual bonus
stock optionstock option
golden parachutesgolden parachutes