This PowerPoint presentation discusses pay for performance and financial incentives. It covers several theories of motivation including Maslow's hierarchy of needs, Herzberg's hygiene-motivator theory, Vroom's expectancy theory, and reinforcement theory. It also discusses different types of incentive plans such as individual incentive plans like piecework and merit pay plans, sales compensation programs, organizationwide incentives, executive compensation, and team or group-based variable pay programs.

1. PowerPoint Presentation by Charlie Cook
The University of West Alabama
Chapter 12
Pay for Performance
and Financial
Incentives
Part Four | Compensation
Copyright © 2011 Pearson Education, Inc.
publishing as Prentice Hall

2. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 12–2
Motivation, Performance, and PayMotivation, Performance, and Pay
• IncentivesIncentives
 Financial rewards paid to workers whose production exceeds aFinancial rewards paid to workers whose production exceeds a
predetermined standard.predetermined standard.
• Frederick TaylorFrederick Taylor
 Popularized scientific management and the use of financialPopularized scientific management and the use of financial
incentives in the late 1800s.incentives in the late 1800s.
• Linking Pay and PerformanceLinking Pay and Performance
 Understanding the motivationalUnderstanding the motivational
bases of incentive plansbases of incentive plans

3. Types of incentivesTypes of incentives
• Financial incentivesFinancial incentives
• Non financial incentives.Non financial incentives.
Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 12–3

4. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 12–4
The Hierarchy of NeedsThe Hierarchy of Needs
• Maslow’s Hierarchy of Needs:Maslow’s Hierarchy of Needs:
 Physiological (food, water, warmth)Physiological (food, water, warmth)
 Security (a secure income, knowing one has a job)Security (a secure income, knowing one has a job)
 Social (friendships and camaraderie)Social (friendships and camaraderie)
 Self-esteem (respect)Self-esteem (respect)
 Self-actualization (becoming a whole person)Self-actualization (becoming a whole person)
• Maslow’s prepotency process principle:Maslow’s prepotency process principle:
 People are motivated first to satisfy each lower-order needPeople are motivated first to satisfy each lower-order need
and then, in sequence, each of the higher-level needs.and then, in sequence, each of the higher-level needs.

5. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 12–5
Herzberg’s Hygiene–Motivator TheoryHerzberg’s Hygiene–Motivator Theory
• Hygienes (extrinsic job factors)Hygienes (extrinsic job factors)
 Satisfy lower-level needsSatisfy lower-level needs
 Inadequate working conditions, salary, and incentive pay canInadequate working conditions, salary, and incentive pay can
cause dissatisfaction and prevent satisfaction.cause dissatisfaction and prevent satisfaction.
• Motivators (intrinsic job factors)Motivators (intrinsic job factors)
 Satisfy higher-level needsSatisfy higher-level needs
 Job enrichment (challenging job, feedback, and recognition)Job enrichment (challenging job, feedback, and recognition)
addresses higher-level (achievement, self-actualization) needs.addresses higher-level (achievement, self-actualization) needs.
• Premise:Premise:
 The best way to motivate someone is to organize the job so thatThe best way to motivate someone is to organize the job so that
doing it provides feedback and challenge that helps satisfy thedoing it provides feedback and challenge that helps satisfy the
person’s higher-level needs.person’s higher-level needs.

6. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 12–6
Victor Vroom’s Expectancy TheoryVictor Vroom’s Expectancy Theory
• Motivation is a function of:Motivation is a function of:
 Expectancy:Expectancy: the belief that effort will lead to performance.the belief that effort will lead to performance.
 Instrumentality:Instrumentality: the connection between performance andthe connection between performance and
the appropriate reward.the appropriate reward.
 Valence:Valence: the value the person places on the reward.the value the person places on the reward.
• Motivation = (E x I x V)Motivation = (E x I x V)
 If any factor (E, I, or V) is zero, then there is no motivationIf any factor (E, I, or V) is zero, then there is no motivation
to work toward the reward.to work toward the reward.
 Employee confidence building and training, accurateEmployee confidence building and training, accurate
appraisals, and knowledge of workers’ desired rewards canappraisals, and knowledge of workers’ desired rewards can
increase employee motivation.increase employee motivation.

7. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 12–7
Behavior Modification /Behavior Modification /
Reinforcement TheoryReinforcement Theory
• B. F. Skinner’s PrinciplesB. F. Skinner’s Principles
 To understand behavior one must understandTo understand behavior one must understand
the consequences of that behavior.the consequences of that behavior.
 Behavior that leads to a positive consequence (reward)Behavior that leads to a positive consequence (reward)
tends to be repeated, while behavior that leads to a negativetends to be repeated, while behavior that leads to a negative
consequence (punishment) tends not to be repeated.consequence (punishment) tends not to be repeated.
 Behavior can be changed by providing properly scheduledBehavior can be changed by providing properly scheduled
rewards (or punishments).rewards (or punishments).

8. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 12–8
Incentive Pay TerminologyIncentive Pay Terminology
• Pay-for-Performance PlanPay-for-Performance Plan
 Ties employee’s pay to the employee’s performanceTies employee’s pay to the employee’s performance
• Variable Pay PlanVariable Pay Plan
 Is an incentive plan that ties a group or team’s pay to someIs an incentive plan that ties a group or team’s pay to some
measure of the firm’s (or the facility’s) overall profitabilitymeasure of the firm’s (or the facility’s) overall profitability
 Example: profit-sharing plansExample: profit-sharing plans
 May include incentive plans for individual employeesMay include incentive plans for individual employees

9. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 12–9
Types of Employee Incentive PlansTypes of Employee 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

10. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 12–10
Individual Incentive PlansIndividual Incentive Plans
• Piecework PlansPiecework Plans
 The worker is paid a sum (“piece rate”)The worker is paid a sum (“piece rate”)
for each unit he or she produces.for each unit he or she produces.
 Straight pieceworkStraight piecework
 Standard hour planStandard hour plan

11. Advantages of pieceworkAdvantages of piecework
• Increases the efficiency of all the employees
• They do not constantly require any kind of
micromanagement
• It is very easy to calculate the dues of the
worker
• They are encouraged to think of better working
methods
• The workers set deadlines for themselves
Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 12–11

12. Disadvantages of pieceworkDisadvantages of piecework
• Workers pay much more attention to quantity and
not quality
• Sometimes even more super vision is required
• Finding and fixing on a reasonable piece cost is a
rather tough task
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13. Copyright © 2011 Pearson Education, Inc. publishing as Prentice Hall 12–13
Individual Incentive Plans (cont’d)Individual Incentive Plans (cont’d)
• Merit PayMerit Pay
 Is a permanent cumulative salary increase the firm awardsIs a permanent cumulative salary increase the firm awards
to an individual employee based on his or her individualto an individual employee based on his or her individual
performanceperformance
 Can detract from performance if awarded across the boardCan detract from performance if awarded across the board
 Becomes permanent ongoing reward for past performanceBecomes permanent ongoing reward for past performance
• Merit Pay OptionsMerit Pay Options
 Give annual lump-sum merit raises that doGive annual lump-sum merit raises that do notnot make themake the
raise part of an employee’s base salary.raise part of an employee’s base salary.
 Tie merit awards to both individual and organizationalTie merit awards to both individual and organizational
performance.performance.