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LEARNING OUTCOMES
1. Explain how you would apply five motivation theories in
formulating an incentive plan.
2. Discuss the main incentives for individual employees.
3. Discuss the pros and cons of commissions versus
straight pay incentives for salespeople.
4. Describe the main incentives for managers and
executives.
5. Name and define the most popular organizationwide
variable pay plans.
6. Outline the steps in designing effective incentive plans.
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predetermined standard.
Frederick Taylor
Popularized scientific management and the use of financial
Systematic soldiering
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Herzbergs HygieneMotivator
Theory
Hygienes (extrinsic job factors)
Satisfy lower-level needs
Inadequate working conditions, salary, and incentive pay can
Premise:
The best way to motivate someone is to organize the job so that
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Motivation = (E x I x V)
If any factor (E, I, or V) is zero, then there is no motivation
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Behavior Modification /
Reinforcement Theory
B. F. Skinners Principles
To understand behavior one must understand
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Pay-forPerformance
Plans
Team/Group-based
Variable Pay Programs
Organizationwide
Incentive Programs
Executive Incentive
Compensation Programs
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Straight piecework
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performance.
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TABLE 121
Outstanding
Excellent
Good
Marginal
Unacceptable
Outstanding
1.00
0.90
0.80
0.70
0.00
Excellent
0.90
0.80
0.70
0.60
0.00
Good
0.80
0.70
0.60
0.50
0.00
Marginal
Unacceptable
To determine the dollar value of each employees incentive award: (1) multiply the
employees annual, straight-time wage or salary as of June 30 times his or her maximum
incentive award and (2) multiply the resultant product by the appropriate percentage figure
from this table.
Example: if an employee had an annual salary of $20,000 on June 30 and a maximum
incentive award of 7% and if her performance and the organizations performance were
both excellent, the employees award would be $1,120 ($20,000 0.07 0.80 = $1,120).
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Possible Incentives
Bonuses, stock options and grants, profit sharing
Better vacations, more flexible work hours
Improved pension plans
Equipment for home offices
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FIGURE 121
Compliments
Expression of appreciation in
front of others
Note of thanks
Employee-of-the-month award
Job rotation
Bigger desk
Special commendation
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Commission Plan
Pay is a percentage of sales results.
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Commission-plus-Bonus Plan
Pay is mostly based on commissions.
Small bonuses (spiffs) are paid for directed
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TABLE 122
Excellent
Good
Fair
Poor
Excellent
1.00
0.90
0.80
0.70
Good
0.80
0.70
0.60
0.50
Fair
0.00
0.00
0.00
0.00
Poor
0.00
0.00
0.00
0.00
Note: To determine the dollar amount of a managers award, multiply the maximum possible
(target) bonus by the appropriate factor in the matrix.
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Creating an Executive
Compensation
Plan for the executive
1. Define the strategic context
compensation program.
2. Shape each component of the package to focus
the manager on achieving the firms strategic goals.
3. Check the executive compensation plan for
compliance with all legal and regulatory
requirements and for tax effectiveness.
4. Install a process for reviewing and evaluating
the executive compensation plan whenever
a major business change occurs.
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Cons
Pay is not proportionate to an individuals effort
Rewards free riders
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Gainsharing Plans
Scanlon Plan
Components
Philosophy
of
cooperation
Identity
Competenc
e
Involvemen
t system
Benefits
sharing
formula
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Advantages of ESOPs
For the Company
Can take a tax deduction equal to the fair market value
a distribution.
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Implementing an Effective
Incentive
1. Ask: Does itPlan
make sense to use an incentive here?
2. Link the incentive with your strategy.
3. Make sure the program is motivational.
4. Set complete standards.
5. Be scientific in analyzing the effects of the plan.
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TABLE 123
Responsibility of Team
1. Sales force
Persuade buyer to
purchase a car.
2. Finance office
3. Detailing
4. Mechanics
5. Receptionists/
phone service
personnel
Minimum wage
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KEY TERMS
financial incentives
annual bonus
stock option
expectancy
golden parachutes
instrumentality
valence
behavior modification
profit-sharing plan
variable pay
Scanlon plan
piecework
gainsharing plan
straight piecework
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