© 2008 Prentice Hall, Inc. © 2008 Prentice Hall, Inc. All rights reserved. All rights reserved. PowerPoint Presentation by Charlie Cook PowerPoint Presentation by Charlie Cook The University of West Alabama The University of West Alabama 1 Human Resource Human Resource Management Management ELEVENTH EDITION ELEVENTH EDITION G A R Y D E S S L E R G A R Y D E S S L E R Pay for Performance and Pay for Performance and Financial Incentives Financial Incentives Chapter Chapter 12 12 Part 4 | Compensation Part 4 | Compensation © 2008 Prentice Hall, Inc. All rights reserved. 12–2 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 for Discuss the pros and cons of incentives for salespeople. salespeople. 3. 3. Name and define the most popular organizationwide Name and define the most popular organizationwide variable pay plans. variable pay plans. 4. 4. Describe the main incentives for managers and Describe the main incentives for managers and executives. executives. 5. 5. Outline the steps in developing effective incentive Outline the steps in developing effective incentive plans. plans. © 2008 Prentice Hall, Inc. All rights reserved. 12–3 Motivation, Performance, and Pay Motivation, Performance, and Pay • Incentives Incentives  Financial rewards paid to workers whose production Financial rewards paid to workers whose production exceeds a predetermined standard. exceeds a predetermined standard. • Frederick Taylor Frederick Taylor  Popularized scientific management and the use of Popularized scientific management and the use of financial incentives in the late 1800s. financial incentives in the late 1800s.  Systematic soldiering Systematic soldiering  Fair day’s work Fair day’s work © 2008 Prentice Hall, Inc. All rights reserved. 12–4 Employee Incentive Plans 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 © 2008 Prentice Hall, Inc. All rights reserved. 12–5 Incentives for Salespeople Incentives for Salespeople • Salary Plan Salary Plan  Straight salaries Straight salaries  Best for: prospecting (finding new clients), account Best for: prospecting (finding new clients), account servicing, training customer’s salesforce, or participating in servicing, training customer’s salesforce, or participating in national and local trade shows. national and local trade shows. • Commission Plan Commission 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 Likelihood of sales success may be linked to external factors rather than to salesperson’s performance. factors rather than to salesperson’s performance.  Can increase turnover of salespeople. Can increase turnover of salespeople. © 2008 Prentice Hall, Inc. All rights reserved. 12–6 Incentives for Salespeople (cont’d) Incentives for Salespeople (cont’d) • Combination Plan Combination 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 their Plan gives salespeople a floor (safety net) to their earnings. earnings.  Salary component covers company-specified service Salary component covers company-specified service activities. activities.  Plans tend to become complicated, and Plans tend to become complicated, and misunderstandings can result. misunderstandings can result. © 2008 Prentice Hall, Inc. All rights reserved. 12–7 Specialized Combination Plans Specialized Combination Plans • Commission-plus-Drawing-Account Plan Commission-plus-Drawing-Account Plan  Commissions are paid but a draw on future earnings Commissions are paid but a draw on future earnings helps the salesperson to get through low sales helps the salesperson to get through low sales periods. periods. • Commission-plus-Bonus Plan Commission-plus-Bonus Plan  Pay is mostly based on commissions. Pay is mostly based on commissions.  Small bonuses are paid for directed activities like Small bonuses are paid for directed activities like selling slow-moving items. selling slow-moving items. © 2008 Prentice Hall, Inc. All rights reserved. 12–8 Team/Group Incentive Plans Team/Group Incentive Plans • Team (or Group) Incentive Plans Team (or Group) Incentive Plans  Incentives are based on team’s performance. Incentives are based on team’s performance. • How to Design Team Incentives How to Design Team Incentives  Set individual work standards. Set individual work standards.  Set work standards for each team member and then Set 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 earned All receive the same pay equal to the average pay earned by the group. by the group. © 2008 Prentice Hall, Inc. All rights reserved. 12–9 Team/Group Incentive Plans (cont’d) Team/Group Incentive Plans (cont’d) • Pros Pros  Reinforces team planning and problem solving Reinforces team planning and problem solving  Helps ensure collaboration Helps ensure collaboration  Encourages a sense of cooperation Encourages a sense of cooperation  Encourages rapid training of new members Encourages rapid training of new members • Cons Cons  Pay is not proportionate to an individual’s effort Pay is not proportionate to an individual’s effort  Rewards “free riders” Rewards “free riders” © 2008 Prentice Hall, Inc. All rights reserved. 12–10 Organizationwide Incentive Plans Organizationwide Incentive Plans • Employee Stock Ownership Plan (ESOP) Employee Stock Ownership Plan (ESOP)  A firm annually contributes its own stock—or cash A 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 the purchase the stock—to a trust established for the employees. employees.  The trust holds the stock in individual employee The trust holds the stock in individual employee accounts and distributes it to employees upon accounts and distributes it to employees upon separation from the firm if the employee has worked separation from the firm if the employee has worked long enough to earn ownership of the stock. long enough to earn ownership of the stock. [...]... Involvement System 12 11 Sharing of Benefits Formula At-Risk Variable Pay Plans • Put some portion of the employee’s weekly pay at risk  If employees meet or exceed their goals, they earn incentives  If they fail to meet their goals, they forgo some of the pay they would normally have earned © 2008 Prentice Hall, Inc All rights reserved 12 12 Incentives for Managers and Executives • Short-Term Incentives:... Incentives: The Annual Bonus  Plans that are designed to motivate short-term performance of managers and are tied to company profitability • Issues in Awarding Bonuses  Eligibility basis  Fund size basis  Individual awards © 2008 Prentice Hall, Inc All rights reserved 12 13 KEY TERMS financial incentives fair day’s work scientific management expectancy instrumentality valence behavior modification... hour plan merit pay (merit raise) team or group incentive plan organization wide incentive plans profit-sharing plan employee stock ownership plan (ESOP) Scanlon plan gainsharing plan at-risk variable pay plans annual bonus stock option golden parachutes © 2008 Prentice Hall, Inc All rights reserved 12 14 . Hall, Inc. All rights reserved. 12 7 Specialized Combination Plans Specialized Combination Plans • Commission-plus-Drawing-Account Plan Commission-plus-Drawing-Account Plan  Commissions are. Incentives Financial Incentives Chapter Chapter 12 12 Part 4 | Compensation Part 4 | Compensation © 2008 Prentice Hall, Inc. All rights reserved. 12 2 After studying this chapter, you should be able. Charlie Cook The University of West Alabama The University of West Alabama 1 Human Resource Human Resource Management Management ELEVENTH EDITION ELEVENTH EDITION G A R Y D E S S L E R G A R Y