CHAPTER 10 (1).pptx

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NETA PowerPoint® Slides
to accompany
Adapted by
Ann Hrabok,
Northern Alberta
Institute of Technology
Copyright © 2020 by Nelson Education Ltd.

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CHAPTER 10
Pay for Performance:
Incentive Rewards

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Learning Outcomes
Discuss the basic requirements for successful
implementation of incentive programs.
Identify the types of and reasons for
implementing individual incentive plans and
discuss under what conditions individual
incentives are appropriate.
Indicate the advantage of each of the principal
methods used to compensate salespeople.
Identify the key aspects of team and group-level
pay-for-performance plans.

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Differentiate between profit-sharing plans and
explain the advantages and disadvantages of
these programs.
Describe the main types of employee stock
ownership plans and discuss their advantages
to employers and employees.
Learning Outcomes

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Type of Incentive Plans

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Strategic Reasons for
Incentive Plans
Variable Pay
• Tying pay to some measure of individual, group, or
organizational performance
Incentive Plans
• Establishing a performance “threshold” to qualify for
incentive payments

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Incentive Plans as Links to
Organizational Objectives

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Do Incentive Plans Work?
Requirements for a Successful Incentive Plan:
• Identify important organizational metrics that encourage
employee behaviour.
• Involve employees.
• Find the right incentive payout.
• Establish a clear link between performance and payout.
• Set performance measures.

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Dos and Don’ts of Measuring
Performance for Incentives

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Administering Incentive Plans
Incentive systems are effective when:
• Incentives are based on actual differences
• Annual incentive budgets are large enough to reward
and reinforce exceptional performance
• Overhead costs are controllable
• Gamifying incentives and rewards to improve
performance

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Successful Incentive Plans
• Employees have a desire for an incentive plan.
• Employees are encouraged to participate.
• Employees see a clear connection between the incentive
payments they receive and their job performance.
• Employees are committed to meeting the standards.
• Standards are challenging but achievable.
• Payout formulas are simple and understandable.
• Payouts are a separate, distinct part of compensation.

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Individual Incentive Plans
Straight Piecework
• An incentive plan under which employees receive a
certain rate for each unit produced
Differential Piece Rate
• A compensation rate under which employees whose
production exceeds the standard amount of output
receive a higher rate for all of their work than the rate
paid to those who do not exceed the standard amount

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Computing the Piece Rate
60 minutes (per hour)
= 5 units per hour
12 minutes (standard time per unit)
$12.75 (hourly rate)
= $2.55 per unit
5 units (per hour)

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Standard Hour Plan
• An incentive plan that sets
pay rates based on the
completion of a job in a
predetermined standard
time

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Bonus
• Incentive payment that is supplemental to the base wage
Spot Bonus
• Unplanned bonus given for employee effort unrelated to
an established performance measure

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Merit Pay
Merit Pay Program (Merit Raise)
• Links an increase in base pay to how successfully an
employee achieved some objective performance standard

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Problems with Merit Raises
1. Money for merit increases may be inadequate to
satisfactorily raise all employees’ base pay.
2. Managers may have no guidance in how to define
and measure performance.
3. Employees may not believe that their compensation
is tied to effort and performance.
4. Employees and their managers may hold different
views of the factors that contribute to job success.
5. Merit pay plans may create feelings of pay inequity.

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Merit Pay
Merit Guidelines
• Guidelines for awarding merit raises that are tied to
performance objectives
Lump-Sum Merit Program
• Program under which employees receive a year-end
merit payment, which is not added to their base pay

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Incentive Awards and Recognition
Awards
• Often used to recognize productivity
gains, special contributions or
achievements
Noncash Incentive Award
• Most effective as motivators when
the award is combined with a
meaningful employee recognition
program

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Sales Incentives
Straight Commission
Straight Salary
Combined Salary and
Commission
Types of Sales Incentive Plans

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Incentive Plans for Sales Employees
Straight Salary Plan
• Compensation plan that permits salespeople to be
paid for performing various duties that are not reflected
immediately in their sales volume
– Advantages:
• Encourages building customer relationships
• Provides compensation during periods of poor sales
– Disadvantage:
• May not provide enough motivation for maximizing
sales volume

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Straight Commission Plan
• Compensation plan based upon a percentage of sales
– Disadvantages:
• Salespeople will stress high-priced products.
• Customer service is likely to be neglected.
• Earnings tend to fluctuate widely between good and
poor periods of business.
• Salespeople are tempted to grant price concessions.

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Combined Salary and Commission Plan
• A compensation plan that includes a straight salary and
a commission component (“leverage”)
– Advantages:
• Combines the advantages of straight salary and straight
commission forms of compensation
• Offers greater design flexibility
• Can be used to develop the most favourable ratio of selling
expense to sales
• Motivates sales force to achieve specific company
marketing objectives in addition to sales volume

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Incentives for Professional
Employees
• When it comes to individual, team, and enterprise
incentives, professional employees are no different than
anyone else.

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Incentives for Executives
The Executive Pay Package
• Base salary
• Short-term incentives or bonuses
• Long-term incentives or stock plans
• Benefits
• Perquisites (perks)
• Special nonmonetary benefits given to executives;
often referred to as perks

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Justifications
• Large financial incentives reward superior performance.
• Business competition is pressure-filled and demanding.
• Good executive talent is in great demand.
• Effective executives create shareholder value.

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Group Incentive Plans
Team Incentive Plans
• A compensation plan in which all team members receive
an incentive bonus payment when production or service
standards are met or exceeded
• All organizational levels embrace the program

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Team Incentive Plans
Gainsharing Plans
• Programs under which both employees and the
organization share the financial gains according to a
predetermined formula that reflects improved productivity
and profitability
Increase in productivity is gained when:
• Greater output is obtained with less or equal input.
• Equal production output is obtained with less input.

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Enterprise Incentive Plans
Profit Sharing
• Any procedure by which an employer pays, or makes
available to all regular employees, in addition to their
base pay, current or deferred sums based upon the
profits of the enterprise

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Employee Stock Ownership Plans (ESOPs)
• Stock plans in which an organization contributes shares
of its stock to an established trust for the purpose of
stock purchases by its employees

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Rewards and Risks of ESOPS
Advantages Disadvantages
Liquidity and value
Pride of ownership
Deferred taxes
Single funding basis
Not insured
Retirement benefits

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Activity #1:
Rewarding Employees
Rewarding employees does not always mean spending
money. Imagine that you are a business owner who wishes
to reward employees for working well. How can you do this
without spending money? What types of noncash rewards
could you use?

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Activity #2:
Incentives for CEOs
• In groups, design an incentive plan for CEOs. What
types of performance indicators would you use?
• What are some problems with incentive pay for CEOs?
• What does ethics and accountability have to do with
CEO compensation?

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