incentive

356 PART 4 Compensating Human Resources

i*cen{ive PaY Forms of PaY linked

to an emPloYee's performance as an

individual, grouP

member, or

organization member.

L{".13 Discuss the

connection between

incentive PaY and

employee perf orma n ce.

In conlrast to decisions about pay struclul'e' organlzatiolls have -tt^1lt:'t:':::l:':l

settilrg performance-ti;i;;;' t"li"d incentive pay' otganizatiorls can lle lncel1-

tive pay to i.ciividr-ral;;{o.|;,.,."' p'ofit'' ot

'tu'-'y o'l-'tt

'.'-ttu"'res of success' They

select ir-rcentives based on their.orrr, "ro".,.Jir-rnr.".e o. perfortnance, and fit

with the orgar-rizarion'. rr.."a., HR and company grlicies and goals' These decisions

ar.e sicnifica.r. A srrrcly of 150 orgarrizariorrr io,"r,f that th,e,ri;ay olganizati,rr: paid

ilrH;H;;;';;.;';io' associateJ with their level of profitabiIitv', This chapter "*pfor"l

riJ;h;1."t availabie to organizations rvith regard to incen'

ri'e pay. First, the .h";;;J.tU"t ,rt" li.k betrveen pay and enployee performance'

Nexr, we discuss *^or';;;;;;;rl."tp-tiae a Variety of pay incenrives to individu-

als. The follorving ,*o ,"lrior-r, d.r.rib" pay related to grolrp a'd otganizational per'-

forinance. we then explore the Organization's proces"i thut can sLrpfioft the use of

';;;;;;t; n;y' Finally' we cliscuss incerrti'c l)a)'

for- the orga'izatiotr's executives'

fin**sng*v* Fax5r Along with r,r,ages and salaries, natly organizations

of{et incentiue pay-that is' pay

,;..,f:.;ur;.Jg""a ro "r.rgir", ,-1irecr, or conrrol e.rployees' behavior. l'centi'e pay

is influenrial becar-rse ;;;il;; paid is iinked to certai' predefined beha'iors or

outcomes. For exarnpie, as we \vill see in this chapter, an olganization can pay a sales'

;;;;;.";;i*r"'f.; .i;.i"*" r"f", or the 'Lrernbers of a productio' deparrmeut can

earn a bonus ;or,t""';;;;;:."1'ty'p'oduttion goal' Usually' these paf inents are in

addition ro wages ^ra ,"T"ri"r. i;.;ri;g they can ear11 extra lnoney for. closi'rg sales

or

neeting d.ep-.,artnrerital goals, the empioyees often try lrarder.ol.get mole crealive than

they rnight without ,h""-;;;r*" p^y.'1r, ac,dr.ion, tba polrcy o{ offerurg h'igh-et pa'';

for higher p",fo1.*u,1." may make n,', o,ga,.,i,ntio,.' u,,.u.,i.,. to high perfornrers wherr

ir is trying ro r.ecr.uir ,,.,j;J,;'; ;i"r" "ilrrbl. enrployees.4 FoL reasorrs such as thcse,

the share of .oropur1il;e,.t* variabie pay rose in less rhan trvo decadcs from about

half of comPanies to 9 out of 10''

For incenriv" puy-ro *oiiuor" "-ployees to contribute to the organization's sttc-

cess, the pay pians ,r"r, rr" *.li d"rigr-r".1. I. pu.ti.uln., effecti'e plans rneet t1're fol-

lorving requirements:

. Performance measures are linked to the olganization's goals'

. ^E;i;;",

b.li"u"?"y can-lneet perfor'ance standards' .Theorganizationgivesemployeestheresourcestheyneedtomeettheirgoals. . Employees value the rervards given' . frr'litoy".s believe the rervard system is fair' r The pay plan ,uk"r-l*o u.cor.rnt that employees may rgnore

any goals that are not

rewarded.

The ,,HR Hon, To" box provides some additional i.deas

for creating and implement-

ing an effecti,r" ltlt"^Jit-o"u pf^" even u'hen resources are limited'

Sir-rce incenr-" O^O'O ft""Li io purti.ular outcolnes or behaviors' t6e orga'ization

isencotrragingenployeestodernonstratethosechosenoutcolnesandbehaviors.As obrrious as that ,'Iruy ,o.rr-rd, the implications

are more complicated' if incentive pay is

extremely ter.varding, ernployees may focus.t-r ".iv ,rr" performance measllres rei'varded

under the ptan an<1 ;il;;", thut ur" ro. rewarded. Suppose an organization

pays lnanage., u Uor"lo when ernploy""' ^'" *ioft"a' this pollcy may interfere wlth

other managerlent ,oj1t' A;;;;ug"' "'t-'o ao"t";t quite know how to inspire employ'

ees to do rheir best rnighr be ternptetl ro fall bacl on overiy positive performance

On isj reir ou{ lot but ide an

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One advantage of incentive PaY is that, because it is targeted to reinforcing desired behaviors and outcomes, there are ways to get a lot of benefits out of it even when budgets are tight. Here are some ideas for getting the most out of an incentive-paY Plan:

. Be very clear about what behavior or outcomes You want to encourage. ManY options are available, from delighting customers to Pre- venting accidents to selling the products that have the biggest profit margins. Direct most or all of the incentive PaY to rewarding performance on the measurements that will have the most impact on the organi- zation's success.

r Set up objective ways to mea- sure whether the individual or group earns the incentive, so that rewards don't become a popularity contest or lotterY'

The measurement should include a minimum level of Per- formance required for receiving pad or all of the reward' Commu nicate with emPloyees. Especially if moneY is tight. be honest about the comPany's resources. lnvite ideas about what employees would aPPre- ciate receiving, so that You'll be spending on what matters most. Combine the forms of incen- tive pay with nonmonetarY rewards such as thank-You notes and public recogni- tion for grouP and individual accomplishments. ln some cases, emploYees maY be wowed by a chance to have breakfast with the boss or attend a meeting with a com- pany expert. When delivering the reward, communicate what accom- plishment led to the award, so

employees see the connection- and that theY see that the com- pany also notices what theY have contributed.

. Consider giving managers a pool of money to use for granting bonuses when indi- viduals or grouPS exhibit the desired performance or exceed objectives.

. Grant bonuses or other incen- tives frequentlY. Smaller PaY- outs delivered more frequentlY can keep excitement higher for the same amount of moneY as the organization would have spent on an annual bonus'

Sources: "How to Reward EmPloYees on a Budget," lnc., APril 19, 2010, www. inc.com; and "Try Two Bonus Tactics Suited for Tough Times," HR Specidist: Compensatton & Benefits, March 2010,

Business & Company Resource Center,

http://galenet.galegrouP.com

.:

ti

appraisals, letting u,clrk slide to keep', everyone happy. Sirnilarly, rnaly call cel1te.rs pay

"nlploy""i based"on horv many calli they har-rdle, as an incentive to work quickly and

efficiently. Hou,ever, speedy call handling does not llecessarily foster good customer. relationships. As n,e *'i11 ,.. in this chapter, organizations malr combine :r nr'rmber of incentives ro ero;.loy".s c{o not focr"rs on One l11easule to the exch-rsion of others'

Attitucles thai influer-ice the sllccess of incentive pay incl-rde lr,i-rether ernpklyees value the reu,ards ar-rc1 think the pay plan is fair. Sorne obsetvers of today's u'orkplace have found that 1,or-rng workers typicaliy wa't freqllent encoufagelne't, and creative managers haye clevelgped incentives that get this type of u'orkel excited. A beverage rvhole"saler, {or e"ample, began arvarding its employees "points." For every ror'rtine ancl

extra task inrrolvetl in running the r.varehouse, empiol'ees earn poinrs, and those points

capbeexchange,-lforextra;',ayoltirr-reoff.En-rplol,eesseeacollnectiollbetu'een1-rard u,ork ancl irnnecliate."rvard, (pornts), so tirey n,ork hariler. Similar11', a tnanager of ar-l

a.1 agency discor.ered rhat a yclung ernployee was so clelighted to learn she t-rad been arvar,le.l

i'extra Lroitlls" for goir-rg above and be1'ond her trsr::rl duties thar the agencl'

begal ar.varding points to all employees for beatir-rg deadlilres antl rtrrning in excep- tiial rvork. Tli"-og.t.y counts Lrp t1-re poir-rts ut-tr-1 i,rtt'..t, them into bor-rus pay'6

357

358 PART 4 Compensating Human Resources

L*3 Describe how orga nizations

recognize individual performance.

Althoughmost,ifnotall,employeesvalrrePaY,itisimportanttorememberthat earning money

'.s not th;;;ly t"u'o* 9::pt" tiy ro do a

good !ob' As we discuss in

;;#;"h"0;*, (r"" c6^pr;4, B, u'-'d.i:)' p"opi" ulto want interesting work' appre-

;i;;;." for their "fforrr,

fi."iliirty, and u ,.r-tr" of belonglng,to the work group-not

ro menrion the inne*uiiri*lo" of work well done' Therefore, a complete plan for

motivating "r-ra

.o*p"iorl"g "*pitvees

has many components' from pay to work

J"rigr-, to ieveioping ^^r-r"g".",

,o 'h"y

can exercise poslti'e leadership' -"

\i;hG".d to tli" fairnJss of incentive pay, the preceding chapter described equity tn."rv, ,nj.h e*plains ho* "*ploy"",

form ludgmenrs about the fairness of a pay

strucrure, The same pr;;rr "ppi*r to judgmenls about incentive pay' In general,""*l;;,

.ornpu." ,fr-r .ff."r ur-rd ,.turld, with other employees', considerir-rg a pi"l r, O. fair when if-tl ."**ar are distributed according to what the employees contribute.-"

ii-r. remainder of this chapter identifies eiements of incentive pay syste''-'s' .ffe consider each optiorl, ,tr.rrgth, and limitations with regard

to these princi-

;i;.-Th;"f n"i. of incentirie pay fall into three broad categories: incentives

it"L.a io ir'raiuia,rul, group, or organizational performance.' Choices from these cat-

;;;;,;:;;;ld .o'r'd?, ,-,oi o.,ly"rh"ir strengths and weaknesses,.but also their fir

wirh the organizarion;;ir. ii" chotce- of"incentive pay may affect not only the

level of morivation lur"Jo the kinds of employees r'vho are attracted to and stay

with the organization. fo. """*pfe, there is some evidence that organizations with

team-based rewards will tend to attfact employees who are more team-oriented'

*nii" ."*"rds tied to individual performance make an organization more attrac-

rive ro rhose who ,fri^t-".a ui, *a.p..rdently,. as-individual,'? Gitt"" the poten'

tial impact, o.gu.rir"tiorr, ,to'o"ty shtuld r'r'eigh the strengths and lveaknesses in

;;l;.#g ,yp"rlf i.r."..it . pay bt'i also should measure the results of these programs

(see "Did You Know?")'

Pay fon !ndividua[ Penformanee organizations may reward individual performance u,ith

a variety of incentives:

o Piecework rates . Standard hour Plans o Merit pay r Individual bonuses o Sales commissions

Piecework Rates As an incentive to work efficiently, sorne organizations _pay

produclion workers a

piecework rate, a;;;;;;;;J"r,',ih" ,-o.,rir they produce. The amount paid per

unit is set at a r"r.r ir-,li r"*ura, employees for above-average production volume'

For example, suppose that on average, assembiers can finish 10 components in an

hour. If the organization wants to pay its average assenrblers $8^p,t'hour' it carr pay

;;;;;;i,"?"-"f g6ihour dividei by i0-components/hour, o. $.80 per component'

Ai-, ".r"*bl.r

who produces the average of 10 components per hour earns an amount

equal to $B per lro,rr- A.t assembler -ho p'odtttts 12 components in an hour would

.l* S.sO x'12, o, $9.;;;;.h hour' This is an example of a straight piecework

plan, becaur. ,t',. .*pLy;; ;"yt the same rate per piece' no matter how much the

worker produces.

Piecework ftate

A wage based on

the amount workers produce.

Straight Piecework Plan

lncentive PaY in which

the emploYer PaYs the

same rate Per Piece, no matter how much

the worker Produces.

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la

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lng L

inor( iates empl ri the :ates l ila\re This lhar

fiece' lerfor .:tisfa realize :.hi1e tonus :aop a ,:oals r --thers. :n orgi ,rrganiz .olving