Pay for Performance and Financial
Incentives
Topic - 9
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.
Linking Pay and Performance
Understanding the motivational
bases of incentive plans
The Hierarchy of Needs
Abraham Maslows 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 the person one believes one can
become)
Maslows prepotency process principle:
People are motivated first to satisfy each lower-order need and
then, in sequence, each of the higher-level needs.
4
Frederick Herzbergs HygieneMotivator
Theory
Hygienes (extrinsic job factors)
Satisfy lower-level needs
Inadequate working conditions, salary, and incentive pay can cause
dissatisfaction.
Motivators (intrinsic job factors)
Satisfy higher-level needs
Job enrichment (challenging job, feedback, and recognition)
addresses higher-level (achievement, self-actualization) needs.
Premise:
Relying exclusively on financial incentives is risky.
The best way to motivate someone is to organize the job so that doing
it provides feedback and challenge that helps satisfy the persons
higher-level needs for things like accomplishment and recognition.
5
Herzbergs Motivation-Hygiene
Theory
Motivators
Hygiene Factors
Achievement
Recognition
Work Itself
Responsibility
Advancement
Growth
Extremely Satisfied
Supervision
Company Policy
Relationship with
Supervisor
Working Conditions
Salary
Relationship with Peers
Personal Life
Relationship with
Subordinates
Status
Security
Neutral
Extremely Dissatisfied
6
Victor Vrooms Expectancy Motivation
Theory
This theory states that people will pursue rewards they desire when they believe that
they are likely to be successful in obtaining the rewards.
Motivation is a function of:
Expectancy: the belief that effort will lead to performance.
Instrumentality: the connection between successful performance and
actually obtaining the reward.
Valence: the value the person attaches to 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.
7
Incentive Pay Terminology
Pay-for-Performance Plan
Ties employees pay to the employees performance
Variable Pay Plan
- Any plan that ties pay to productivity or profitability. Variable pay is
generally used to recognize and reward employees contribution toward
company productivity, profitability, team-work, quality where all or
most employees can participate.
Individual Incentive Plans
Piecework Plans
The worker is paid a sum (piece rate) for
each unit he or she produces.
Pieces*Rate = Amount
Individual Incentive Plans (contd)
Merit Pay (or a merit raise)
Permanent cumulative salary increase the firm
awards to an individual employee based on his
or her individual performance
Usually becomes part of the employees base
salary
10
Incentives for Professional Employees
Professional Employees
Those whose work involves the application of learned
knowledge to the solution of the employers problems.
Lawyers, doctors, economists, and engineers
Possible Incentives
Bonuses and incentives, including stock options and
profit sharing
11
Nonfinancial and Recognition Awards
Effects of Recognition-Based Awards
Recognition has a positive impact on performance,
either alone or in conjunction with financial
rewards.
Ways to Use Recognition
Recognition program
Social recognition program
Performance feedback
12
Incentives for Salespeople
Salary Plan
Straight salaries
Commission Plan
Pay is a percentage of sales results.
Combination Plan
Pay is a combination of salary and commissions,
usually with a sizable salary component.
Plan gives salespeople a floor (safety net) to
their earnings.
13
Incentives for Managers and Executives
Executive Total Reward Package
Base salary (cash)
Short-term incentives (bonuses)
Long-term incentives (e.g., stock options)
14
Team/Group Incentive Plans
Team (or Group) Incentive Plans
Incentives are based on teams performance.
Pros
Reinforces team planning and problem solving
Encourages a sense of cooperation
Encourages rapid training of new members
Cons
Pay is not proportionate to an individuals effort
Rewards free riders
15
Organization-wide Incentive Plans
Organization-wide Incentive Plans
Plans in which all or most employees can participate, and which
generally tie the reward to some measure of company-wide
performance.
Also called variable pay plans.
Profit-Sharing Plans:
- Plans in which all or most employees receive a share of the firms
annual profits.
Gain-Sharing Plans:
- Gain-sharing is an incentive plan that engages many or all
employees in a common effort to achieve a companys productivity
objectives.
16
Organizationwide Incentive Plans
(contd)
Employee Stock Ownership Plan (ESOP)
Company-wide plans in which the employer annually
contributes shares of its own stockor cash (with a
limit of 15% of compensation) to be used to purchase
the stockto a trust established to purchase shares of
the firms stock for employees.
17
At-Risk Variable Pay Plans
Plans that put some portion of the employees weekly,
monthly or yearly pay at risk.
Also called risk-sharing plans.
If employees meet or exceed their goals, they earn back the
portion of their pay that was at risk, and also an incentive.
If they fail to meet their goals, they forego some of the pay they
would normally have earned.
18
19
