MGT351: Human Resource Management

Instructor:

Topic Nine
Pay for Performance and
Financial Incentives
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 Pay for Performance
Background and trends
Standards of production was first identified by
Frederick Taylor in the late 1800s
He is the father of Scientific Management
He realized that workers have a tendency to
work at the minimum pace and produce
minimum
During late 1800s piece rate was in use

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 Pay for Performance
A fair day’s work
Taylor first identified this
A fair day’s work is also called acceptable
standard of production

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 Pay for Performance
Types of incentive plans
 Variable pay - Any plan that ties pay to productivity
or profitability, usually a one time lump sum
payment.
 Spot bonus - Sudden incentive awarded to workers
for accomplishments not readily measured by
standard.
 Group incentive program - Incentive plan that pays
over and above base salary to team members when
the group collectively meets a specified standard
for performance, productivity, and work related
behavior.
 Profit sharing plan - Organization wide incentive
program that is based on an established formula
designed around the company’s profitability. 4
 Individual Incentive Plans
Piecework Plans
The worker is paid a sum for each unit he or
she produces successfully.
Pieces*Rate = Amount
Defectives and scraps are rejected
 For example, for 100 units of books produced, an
employee is paid Tk 500 @ 5.00 Tk/Book

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 Piecework
This is one of the oldest tools still in
application today
Careful piece rate plan requires systematic
study of job evaluation and industrial
engineering
Job evaluation : Enables us to devise an hourly
wage rate.
Industrial engineering: Enables us to devise
the production standard.
 Usually it is expressed as the number of units per
hour or minute
How to determine a piece rate:

Piece rate = Wage rate/Standard of 6

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 Individual Incentive Plans (cont’d)
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 employee’s base
salary

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Incentives for Professional Employees
Professional Employees
Those whose work involves the application of
learned knowledge to the solution of the
employer’s problems.
 Lawyers, doctors, economists, and engineers
Possible Incentives
Bonuses and incentives, including stock
options and profit sharing

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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

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 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.

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Incentives for Managers and Executives
Executive Total Reward Package
Base salary (cash)
Short-term incentives (bonuses)
Long-term incentives (e.g., stock options)

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Incentives for Managers and Executives
Determinants of bonus
Split award method
 Here the person gets two bonuses - one for
individual effort and the other for corporate
results
 So even if the company does not make profit a
manager may still earn individual bonus based on
his performance
Problem with split award
 Itpays some incentives even to the marginal
performer in the form of corporate performance

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Incentives for Managers and Executives
Determinants of bonus
Multiplier method
 Here the manager whose performance is poor
might not even receive the corporate bonus
 Because the assumption is bonus is the
combination of individual effort and corporate
performance

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 Team/Group Incentive Plans
Team or Group Incentive Plan
 A plan in which production standard is set for a
specific work group and its members are paid
incentives if the group exceeds the production
standard.

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 Team/Group Incentive Plans
Pros
Reinforces team planning and problem solving
Encourages a sense of cooperation
Encourages rapid training (on the job training)
of new members
Cons
Pay is not proportionate to an individual’s
effort
Rewards “free riders”
Individual may not be motivated to perform as
they see no individual recognition

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 Organization-wide Incentive Plans
Profit-Sharing Plans
Plans in which all or most employees receive a
share of the firm’s annual profits.
Gain-Sharing Plans
Gain-sharing is an incentive plan that engages
many or all employees in a common effort to
achieve a company’s productivity objectives.

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 Organizationwide Incentive Plans
(cont’d)
Employee Stock Ownership Plan (ESOP)
Company-wide plans in which the employer
annually contributes shares of its own stock—
or cash (with a limit of 15% of compensation)
to be used to purchase the stock—to a trust
established to purchase shares of the firm’s
stock for employees.

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