pay for performance and financial incentives

Pay for performance and financial incentives

Pay for performance and financial incentives

Moneys Role IN MOTIVATIONUse of financial incentives was suggested by Frederick Taylor

His major three contributions were:Formulating a precise output standard for each job.He spearheaded scientific management movement.Popularized use of incentives to reward employees.

Incentive Pay terminologyGenerally, two terms are used synonymously with incentive plan :Traditionally, the term pay-for-performance plan is used. Variable pay is a more specific term where some measure of performance is tied to the firms well being.

In India, the terms bonus or performance bonus is used.

Linking strategy, performance and INCENTIVE payLogical as it seems, linking pay with performance is easier said than done.Most companies believed it had only limited success.Only 28% of U.S. workers said that their companies incentive plan motivated them. Some of the reasons why incentive plans fail to motivate:Incentivizing the wrong behavior.Many employers ignore the fact that incentives may motivate some people but not others.

Motivational theories and incentive plansFrederick Herzberg:Laid emphasis on providing challenge and recognition through the job.This would help satisfy higher level needs.Higher level needs are relatively insatiable according to Herzberg.Satisfying lower level needs would only keep the worker from becoming dissatisfied.

DEMOTIVATORS AND EDWARD DECIDeci found that extrinsic rewards may backfire.Extrinsic rewards may detract from intrinsic motivation.One should be careful while designing incentive pay for highly motivated employees.

Victor vrooms expectancy theoryVictor Vroom stated that a persons motivation depends on the following:

Expectancy that effort will lead to performance. Instrumentality- Connection between successful performance and obtaining rewards. Valence which represents perceived value the person attaches to reward.Motivation = E*I*V

Management implications of expectancy theoryFirst, managers must ensure that employees have the skills to do the job and believe they can do the job.Managers must make employees know that good performance will be instrumental to getting the rewards.Manager should make sure reward is of value to the employee.

Behaviour modification/REINFORCEMENTManagers apply B.F. Skinners principles by using behavior modification.Behavior modification is the changing of behavior through rewards or punishment. Two main principles behind it are:Behaviour that leads to a positive consequence tends to repeatedBehavior that leads to a negative consequence tends not to be repeated

INDIVIDUAL EMPLOYEE INCENTIVE & RECOGNITION PROGRAMS

INDIVIDUAL EMPLOYEE INCENTIVE PLANS1. Piecework :- Earnings are tied directly to what the worker produces.TypesStraight piecework plan- An employee is paid based on what he has produced- No guaranteed minimum wageStandard hour plan- Worker gets a pay premium equal to the percentage by which his or her performance exceeds the standard

PIECEWORK - ADVANTAGES & DISADVANTAGESAdvantages:Simple to calculateEasily understood by employeesAppear equitable in principlesPowerful incentive value

Disadvantages:Unsavory reputationProduction standard may become tied inseparably in workers mindWorkers may become less focused on qualityWorkers may resist switching jobsAttempts to introduce innovative processes may failEquipment maintenance may tend to decline

2. MERIT PAY

The firm awards an increase to an individuals salary based on individual performanceIt is different from a Bonus

DemeritsThe pay raises across the board may be without regard to individual meritIt may backfire due to unfair appraisal process based on which merit decisions are taken

How can these be resolved?Establish effective appraisal proceduresEnsure managers do tie merit pay awards to performance

Merit Pay OptionsLump sum merit raises - This awards merit raises in a lump sum once a year- This raise is not part of an employees monthly earningsTwo potential benefits- The merit raise is not baked into an employees salary- More dramatic motivators than traditional merit increase

Ties merit awards to both individual and organizational performance

3. DIVERSITY COUNTSWomen typically earn only about 85% as much as men

Women may not have access to the same bonus plans as men do

Affect on female employees need to be considered In designing pay componentsAny incentive plans affect

INCENTIVES FOR PROFESSIONAL EMPLOYEESFirms usually pay professionals wellProfessionals produce high-caliber workFirms work harder to maintain competitive incentives for professionals

Dual Career Ladder- Another way to manage professionals pay- Employers institute this such as one for managers and another for engineers- Same compensation levels for both tracks- Professionals are offered opportunities to earn higher without switching to management

NONFINANCIAL & RECOGNITION BASED AWARDSRecognition programs- Formal programs

Social Recognition programs- Informal in nature - Manager employee exchanges such as praise, approval or expressions of appreciation for a job well done

Performance Feedback- To provide quantitative or qualitative information on task performance

4. SOCIAL MEDIA & HRVarious apps let employees showcase their awards, contributions and praise from workersSome apps facilitate employees praising each otherSome apps let users post the positive feedback they receive to their LinkedIn profilesVodafone introduced a sci-fi game based program for employees across India where employees who qualified different levels received rewards like recharge coupons, free app downloads etc.

Fringe BenefitsA payment to a worker in addition to salary or wages.It may take the form of cash, goods, or servicesIt may include such items as health insurance, pension plans, and paid vacations.Some fringebenefitsare regarded part of ataxable incomeThe fringe benefits are classified under four heads as given under:1. For Employment Security : Includes leave travel pay, overtime pay, level for negotiation, leave for maternity, leave for grievances, holidays2. For Health Protection : Include accident insurance, health insurance, hospitalization, life insurance, medical care, sick leave3. For Old Age and Retirement : Includes pension, gratuity, provident fund 4. For Personnel Identification, Participation and Stimulation : Includes anniversary awards, attendance bonus, canteen, cooperative credit societies, educational facilities, housing, income tax aid, counseling, safety measures

Most used rewards to motivate employees:Employee recognitionGift certificatesSpecial eventsCash rewardsMerchandise incentivesE-Mail / Print communicationsTraining programsWork / Life benefitsVariable payGroup travelIndividual travelSweepstakes

Improving performance :HR tools for Line Manager The employee should have a doable goal .Recognizing employees contribution is a powerful motivation tool .Use social recognition as positive reinforcement on day to day basis .

Job design Job design is an important tool to motivate as well as retaining employees.Improving performance :HR as a profit center Financial incentives 2. Non financial incentives

Implications for managers Ask : does it make sense to use incentives ?Link the incentive with your strategy Design the program to be motivational Dont forget feedback and recognition . Set complete standards Be scientific

Salary Plan

Commission Plan

Combination Plan

Sales Incentives in Action

Incentives for Salespeople

Salary planFixed salaryInvolves prospecting(finding new clients) or account servicing

Example- Sales of technical products.

Commission PlanPay is only a percentage of sales. Can increase turnover of salespeopleMay cause a neglect of non-selling activities.

Combination Plan

Combination of salary and commissions.Reduces the salespersons downside risk.

Sales Incentives In Action

Small base salary with high commission.

How Effective Are Your IncentivesDo the salesperson understand the compensation plan?Do they know how we measure and reward performance?Are quotas fair?Does our commission plan maximizes sales of most profitable items?

VUE Software

Incentives for Managers and ExecutivesExecutive Total Reward PackageBase salary (cash)Short-term incentives (bonuses)Long-term incentives (e.g., stock options)Sarbanes-Oxley Act of 2002Makes executives and the board of directors personally liable for violating their fiduciary responsibilities to their shareholders.Requires the CEO and CFO to repay bonuses, incentives, or equity-based compensation received following issuance of a financial statement that the firm must restate.

Human Resources Management 12eGary DesslerCopyright 2011 Pearson Education1228

Short- and Long-Term IncentivesShort-Term Incentives: The Annual BonusPlans intended to motivate short-term performance of managers and tied to company profitability.Issues in awarding bonuses Eligibility basisFund size basisIndividual performance awardLong-term incentivesStock optionsPerformance sharesPremium price optionsStock appreciation rights


TABLE Multiplier Approach to Determining Annual BonusCompanys Performance (Based on Sales Targets, Weight = 0.50)Individual Performance(Based on Appraisal, Weight = .50) ExcellentGoodFair Poor Excellent1.000.900.800.70Good0.800.700.600.50Fair 0.000.000.000.00Poor0.000.00 0.000.00

Note: To determine the dollar amount of a managers award, multiply the maximum possible (target) bonus by the appropriate factor in the matrix.


Team and Organization-WideIncentive Plans

How to design Team Incentives? Engineered StandardsPros and Cons of Team Incentives

Evidence Based HR: That undercut Team Incentives

Profit Sharing Plans

Scanlon Plans Philosophy of Co-operationIdentity

3. Competence4. Involvement System5. Sharing of Benefits Formula

Other Gain Sharing PlansLincoln Incentive System

At Risk Pay Plans

Employee Stock Ownership Plans and Broad based Stock options

Incentive Plans in Practice: Nucor

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