Incentives and PerformanceBased Rewards

1
Chapter Twelve

• Incentives and Performance-Based Rewards

2
Chapter Outline

• Purposes of Performance-Based Rewards
• Merit Compensation Systems
• Incentive Compensation Systems
• Teams and Group Incentive Reward Systems
• Executive Compensation
• New Approaches to Performance-Based Rewards

3
Chapter Objectives

• Summarize the purposes of performance-based
  rewards.
  
• Discuss merit compensation systems and their
  limitations.
  
• Identify and discuss forms and limitations of
  incentive compensation systems.
  
• Identify and describe forms and limitations of
  team and group incentive reward systems.

4
Chapter Objectives (contd)

• Discuss both standard and special forms of
  executive compensation and summarize criticisms
  of recent trends in executive compensation.
  
• Summarize new approaches to performance-based
  rewards in organizations.
  
• Understand basic concepts underlying a
  compensation strategy as applied to incentives
  and performance-based pay.

5
Purposes of Performance-Based Rewards

• The major purposes involve the relationship of
  rewards to motivation and to performance.
  
• Specifically, organizations want employees to
  perform at relatively high levels and need to
  make it worth it for them to do so.
  
• When rewards are associated with higher levels of
  performance, employees will be motivated to work
  harder in the effort to achieve those awards.

6
Rewards and Motivation

• It is important that organizations motivate
  employees to exert effort aimed at accomplishing
  organizational goals.
  
• Rewards play an important role in how motivation
  occurs.
  
• Expectancy theory suggests that people are
  motivated to engage in behaviors if they perceive
  that those behaviors are likely to lead to
  outcomes they value.

7
Rewards and Motivation in Organizations
8
Agency Theory

• Is concerned with the diverse interests and goals
  held by the organizations stakeholders,
  including its employees and managers, and the
  methods through which the organizations reward
  system can be used to align these diverse
  interests and goals.

9
Rewards, Motivation, and Performance in
Organizations
10
Rewards and Other Employee Behaviors

• Rewards can be used to influence
• Turnover
• Absenteeism/attendance

11
Merit Compensation Systems

• Merit pay
• Pay awarded to employees on the basis of the
  relative value of their contributions to the
  organization
  
• Merit-pay plans
• Compensation plans that formally base at least
  some meaningful portion of compensation on merit

12
Limitations of Merit Compensation Systems

• They focus almost exclusively on individual
  performance.
  
• They are based primarily on performance appraisal
  systems, which may be subject to error.
  
• They may be prone to focusing on too broad a
  period of performance.
  
• They are subject to considerable disagreement
  among employees.
  
• Increases given to individuals become a permanent
  part of base pay.

13
Skill- and Knowledge-BasedPay Systems and Merit

• Skill- and knowledge-based pay systems reward
  employees for the acquisition of more skills or
  knowledge.

14
Incentive Compensation Systems

• Piece-rate incentive plan
• Paying an employee a certain amount of money for
  every unit she or he produces
  
• Individual incentive plans
• Reward individual performance on a real-time
  basis
  
• Sales commission
• An incentive paid to salespeople
• Other forms
• Time off, special perks

15
Limitations of Incentive Compensation Systems

• They are practical only when performance can be
  measured easily and objectively.
  
• They are often an administrative burden.
• They are likely to focus attention on only a
  narrow range of behaviors, perhaps at the expense
  of other behaviors.

16
Team and Group Incentive Reward Systems

• Gainsharing
• A team- and group-based incentive system designed
  to share the cost savings from productivity
  improvements with employees
  
• Scanlon plan
• A type of gainsharing plan in which the
  distribution of gains is tilted much more heavily
  toward employees and across the entire
  organization.

17
Other Types of Team and Group Rewards

• Profit sharing
• An incentive system in which, at the end of the
  year, some portion of the companys profits is
  paid into a profit-sharing pool, which is then
  distributed to all employees
• Employee stock ownership plans (ESOPs)
• Group-level reward systems in which employees are
  gradually given a major stake in the ownership of
  a corporation

18
Limitations of Team and Group Reward Systems

• Not every member of a group may contribute
  equally to the groups performance.
  
• Employees may not see how their efforts lead to
  increased profits.
  
• Employees may come to view the group-level
  incentive as a normal part of their compensation.

19
Standard Forms ofExecutive Compensation

• Base salary
• A guaranteed amount of money that the individual
  will be paid
  
• Stock-option plan
• An incentive plan established to give senior
  managers the option to buy the company stock in
  the future at a predetermined fixed price

20
Criticisms of Executive Compensation

• The levels of executive compensation attained by
  some managers seem too high for the average
  shareholder to understand.
  
• Executive compensation in the U.S. seems far out
  of line with that paid to senior executives in
  other countries.
  
• Little or no relationship seems to exist between
  the performance of the organization and the
  compensation paid to its senior executives.
  
• The gap between the earnings of the CEO and the
  earnings of a typical employee is enormous.

21
New Approaches to Performance-Based Rewards

• A company could grant a salary-increase budget to
  work groups and then allow the members of those
  groups themselves to determine how the rewards
  will be allocated.
• Some companies now offer stock options to all
  their employees rather than just top executives.

22
A Strategic Perspective on Incentives and
Performance-Based Rewards

• The organization must decide what it needs in
  order to compete more effectively.
  
• Reward systems should provide incentives to
  employees so that they work for the desired
  outcomes.
  
• Organization must be careful that the incentive
  plan does not encourage undesirable behaviors and
  outcomes.