Chapter 12

Pay for Performance

and Financial
Incentives

Part Four | Compensation

Copyright
Copyright ©© 2011
2011 Pearson
Pearson Education,
Education, Inc.
Inc. PowerPoint
PowerPoint Presentation
Presentation by
by Charlie
Charlie Cook
Cook
publishing
publishing as
as Prentice
Prentice Hall
Hall The
The University
University of
of West
West Alabama
Alabama
Incentive Plans
• Companies use employee incentive plans for a variety of
reasons–to meet or increase sales goals, to meet or
increase production goals, to raise employee morale or
for extraordinary employee performance, all of which
drive the success of the company. 

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Objective of the plan

• The objective of incentive plans is to motivate employees

at all levels and to show appreciation for a job well done

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Motivation, Performance, and Pay
• Incentives
⮚ Financial rewards paid to workers whose production exceeds a
predetermined standard.
• Frederick Taylor
⮚ Popularized scientific management and the use of financial
incentives in the late 1800s.
❖ Systematic soldiering
❖ Fair day’s work
• Linking Pay and Performance
⮚ Understanding the motivational
bases of incentive plans

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The Hierarchy of Needs
• Maslow’s Hierarchy of Needs:
⮚ Physiological (food, water, warmth)
⮚ Security (a secure income, knowing one has a job)
⮚ Social (friendships and camaraderie)
⮚ Self-esteem (respect)
⮚ Self-actualization (becoming a whole person)
• Maslow’s prepotency process principle:
⮚ People are motivated first to satisfy each lower-order need
and then, in sequence, each of the higher-level needs.

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Maslow Hierarchy of Needs

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Herzberg’s Hygiene–Motivator Theory

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Herzberg’s Hygiene–Motivator Theory
• Hygienes (extrinsic job factors)
⮚ Satisfy lower-level needs
⮚ Inadequate working conditions, salary, and incentive pay can
cause dissatisfaction and prevent satisfaction.
• Motivators (intrinsic job factors)
⮚ Satisfy higher-level needs
⮚ Job enrichment (challenging job, feedback, and recognition)
addresses higher-level (achievement, self-actualization) needs.
• Premise:
⮚ The best way to motivate someone is to organize the job so that
doing it provides feedback and challenge that helps satisfy the
person’s higher-level needs.

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Demotivators and Edward Deci
• Intrinsically motivated behaviors are motivated by the
individual’s underlying need for competence and self-
determination.
⮚ Offering an extrinsic reward for an intrinsically-motivated act
can conflict with the acting individual’s internal sense of
responsibility.
⮚ Some behaviors are best motivated by job challenge and
recognition, others by financial rewards.

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Victor Vroom’s Expectancy Theory
• Motivation is a function of:
⮚ Expectancy: the belief that effort will lead to performance.
⮚ Instrumentality: the connection between performance and
the appropriate reward.
⮚ Valence: the value the person places on the reward.
• Motivation = (E x I x V)
⮚ If any factor (E, I, or V) is zero, then there is no motivation
to work toward the reward.
⮚ Employee confidence building and training, accurate
appraisals, and knowledge of workers’ desired rewards can
increase employee motivation.

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Behavior Modification /
Reinforcement Theory
• B. F. Skinner’s Principles
⮚ To understand behavior one must understand
the consequences of that behavior.
⮚ Behavior that leads to a positive consequence (reward)
tends to be repeated, while behavior that leads to a
negative consequence (punishment) tends not to be
repeated.
⮚ Behavior can be changed by providing properly scheduled
rewards (or punishments).

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Incentive Pay Terminology
• Pay-for-Performance Plan
⮚ Ties employee’s pay to the employee’s performance
• Variable Pay Plan
⮚ Is an incentive plan that ties a group or team’s pay to some
measure of the firm’s (or the facility’s) overall profitability
❖ Example: profit-sharing plans
⮚ May include incentive plans for individual employees

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 Types of Employee Incentive Plans

Individual Employee Incentive and

Recognition Programs

Sales Compensation
Programs
Pay-for-Performance
Team/Group-based
Plans
Variable Pay Programs

Organizationwide Incentive
Programs

Executive Incentive Compensation

Programs

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Individual Incentive Plans
• Piecework Plans
⮚ The worker is paid a sum (“piece rate”)
for each unit he or she produces.
❖ Straight piecework
❖ Standard hour plan

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Pros and Cons of Piecework
• Easily understandable, equitable,
and powerful incentives
• Employee resistance to changes
in standards or work processes
affecting output
• Quality problems caused by
an overriding output focus
• Possibility of violating minimum
wage standards
• Employee dissatisfaction when
incentives either cannot be earned
or are withdrawn

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Individual Incentive Plans (cont’d)
• Merit Pay
⮚ Is a permanent cumulative salary increase the firm awards
to an individual employee based on his or her individual
performance
⮚ Can detract from performance if awarded across the board
⮚ Becomes permanent ongoing reward for past performance
• Merit Pay Options
⮚ Give annual lump-sum merit raises that do not make the
raise part of an employee’s base salary.
⮚ Tie merit awards to both individual and organizational
performance.

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Organizational wide incentives

• There are three basic types of organization wide

incentive plans;

1.profit sharing
2.Gain sharing (For example, teams may enjoy a bonus if
customer satisfaction levels rise a certain percentage above figures
from the previous year)
3.Employees stock ownership plans Profit sharing

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