Incentive Plans and

Performance Based Pay

PhD Zulfugar Ibrahimli

Variable pay – incentives for
performance
Variable pay is linked compensation with individual,
group/team or organizational performance.

Incentives rests on these • Employees who perform

assumptions: better should receive more
• Some jobs contribute more to compensation.
organizational success than • Many employees’ total
others. compensation should be tied
• Some people perform better directly to performance and
and are more productive than results.
others.
Successful pay for performance plan

Link strategic business goals and employee performance;

Enhance organizational results and reward employees

financially for their contributions;

Recognize different levels of employee performance through

different rewards;

Achieve HR objectives, such as increasing retention, reducing

turnover, recognizing training, and rewarding safety.
 If variable pay plane meets the objectives of the
organization it can be considered as successful.
We can identify success of any incentive program merely
to answer for next questions?
Three Categories of Variable Pay
Individual Incentives
Individual incentive systems tie personal effort to
additional rewards:

 Individual performance must be identified;

 Individual competitiveness must be desired;
 Individualism must be stressed in the organizational
culture.
Piece-rate-system
• In this system wages are determined by
multiplying the number of unites produced;
• The cost is the same for each unit;
• Quote;
• Deferential piece rate system;
Piece-Rate-System and Provision
Piece-Rate-System Provision
 The candle problem

Dan Pink on motivation - TED.com

The candle problem
Bonuses
• Individual employees may receive additional
compensation in the form of a BONUS;
• A bonus can recognize performance by an employee,
a team, or the organization as a whole;
• “Spot” Bonuses
Target bonuses
• Employee and supervisor
agree on both individual
targets and relation between
target achievement and target
bonus;
• Employees can choose from
different options reflecting
different risk preferences;
• Primarily used for managers
and seniors.
 Special incentive programs
• Special incentive programs • Safe-driving awards
can be used to reward are given to truck
individuals, ranging from one- drivers with no
time contests for meeting accidents or
performance targets to awards violations on their
for performance over time. records during a year.
• Performance Awards – Cash,
merchandise, gift, travel and etc.
• Recognition – employee of year;
• Service award.
Group/Team Incentives
Decision making and group/team
incentives
• Members vote;
• The incentive “pot” is divided equally;
• Leadership decision.
Group/Team Incentives
• Same-size reward for each member;
• Different-size reward for each member -
factors as contribution to group/team results, current
pay, years of experience, and skill levels.
Group/Team Incentives – Team
Results
• Pay plans for groups/teams may reward all members
equally on the basis of group output, cost savings, or
quality improvement.
• Rewards is obtained through improvement of
organizational results.
Group/Team Incentives -
Gainsharing
• Also called as Team Sharing or Goalsharing is the
difference between the maximum amount of effort a
person can exert and the minimum amount of effort
that person needs to exert.
• Improshare – set group piece-rate- standarts
• Scalon plan
The Scanlon plan
The Scanlon plan is a gainsharing program in which employees share
in pre-established cost savings, based upon employee effort. Formal
employee participation is necessary with the Scanlon Plan, as well as
periodic progress reporting and an incentive formula.
These plans combine leadership, total workforce education, and
widespread employee participation with a reward system linked to
d/or organization performance.

The philosophy of the plan is to promote group co-

operation and solving of organizational problems.

Cooperation and involvement start in the creation of the plan

with a Design Team and continue once the Plan is
implemented with Production and Screening Teams.
Organizational Incentives
 Profit Sharing – proportion of organizational profits are
distributed among employees according to their base pay;
 Employee Stock Ownership – Giving employee stock
ownership of the organization or the right to acquire stocks at a
price below market. Employees must keep stock for a specific
time
 Employee Stock Options – The right to buy a certain number
of shares of stock a specific price.
Executives compensation
 Chief Executive Officer
(CEO), President;

 Senior Vice President;

 Chief Operating Officer;

 Vice President;

 Chief Financial Officer, or

Senior HR Executive;
Executive compensation and fairness
In 1950 executives
In 2014 executives
compensation were 42 time
compensation are 344 time
higher than average worker
higher than average worker
compensation.
compensation

Is this fair or not?

CEO salary
The structure of CEOs
compensation
Factors affected CEOs compensation
1. Firms become much large
2. Competition top talents
3. Benchmark
Executive Salaries
• Salaries of executives vary by the type of job, size of
organization, the industry, and other factors.
• Nonprofit and profit organizations executives salary;
Annual Executive Incentives and
Bonuses
• There are two main ways determining annual
executives incentives:
 Based on measurable targets the board of directors decided
bonuses;
 To tie bonuses to specific measures, such as return on
investment, earnings per share, and net profits before taxes.
Long-Term Executive Performance
Incentives
• Executive performance based incentives tie executive
compensation to the long-term growth and success of
the organization;
• A stock option gives individuals the right to buy stock
in a company, usually at an advantageous price.
Benefits

What benefit is?

Benefit is an indirect reward

given to an employee and group
of employees for organizational
membership.

Benefits are costly. In the USA

benefits capture 30% or 40% of
payroll expenses. That’s way its
should be managed?
Benefits and HR strategy
Why companies offer
benefits?

• Successfully compete in
labour market.
• Attract best employees
• Retain the best
employees
• Motivate employees
Managing benefits
How to best manage balancing act between
growing cost of benefits and the use of those
benefits in accomplishing organizational goals?
Google company benefits
Healthy workplace; These benefits have
Work-family balance increased profitability
programs; and retention
Sabbaticals and etc.
Benefit management
Benefit metrics
Benefit communication
 Employees generally do not know much
about the values and costs associated with the
benefits they receive from employers.
 According to the survey in which only 5%
of HR executives identified that their
employees appreciated their total
compensation package.
 Benefits communication and satisfaction of
employees with their benefits are linked.
Cost of benefits
Types of benefits
Financial benefits
Benefit design and administration

Flexible Benefits
 Many employers offer employees choices for
benefits;
 A flexible benefits plan allows employees to select
the benefits they prefer from groups;