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Human Resource

Management
1

ELEVENTH EDITION

GARY DESSLER

Part 4 | Compensation

Chapter
12

2008 Prentice Hall, Inc.


All rights reserved.

Pay for Performance and


Financial Incentives
PowerPoint Presentation by Charlie Cook
The University of West Alabama

After studying this chapter, you should be able to:


1. Discuss the main incentives for individual employees.
2. Discuss the pros and cons of incentives for
salespeople.
3. Name and define the most popular organizationwide
variable pay plans.
4. Describe the main incentives for managers and
executives.
5. Outline the steps in developing effective incentive
plans.

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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.


Systematic
Fair

soldiering

days work

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Employee Incentive Plans


Individual Employee Incentive
and Recognition Programs
Sales Compensation
Programs

Pay-for-Performance
Plans

Team/Group-based Variable
Pay Programs
Organizationwide Incentive
Programs
Executive Incentive
Compensation Programs

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Incentives for Salespeople


Salary Plan
Straight salaries

Best for: prospecting (finding new clients), account


servicing, training customers salesforce, or participating in
national and local trade shows.

Commission Plan
Pay is a percentage of sales results.
Keeps sales costs proportionate to sales revenues.
May cause a neglect of nonselling duties.
Can create wide variation in salespersons income.
Likelihood of sales success may be linked to external factors
rather than to salespersons performance.
Can increase turnover of salespeople.

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Incentives for Salespeople (contd)


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.
Salary component covers company-specified service

activities.
Plans tend to become complicated, and

misunderstandings can result.

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Specialized Combination Plans


Commission-plus-Drawing-Account Plan
Commissions are paid but a draw on future earnings

helps the salesperson to get through low sales


periods.

Commission-plus-Bonus Plan
Pay is mostly based on commissions.
Small bonuses are paid for directed activities like

selling slow-moving items.

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Team/Group Incentive Plans


Team (or Group) Incentive Plans
Incentives are based on teams performance.

How to Design Team Incentives


Set individual work standards.
Set work standards for each team member and then

calculate each members output.


Members are paid based on one of three formulas:

All receive the same pay earned by the highest producer.

All receive the same pay earned by the lowest producer.

All receive the same pay equal to the average pay earned
by the group.

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Team/Group Incentive Plans (contd)


Pros
Reinforces team planning and problem solving
Helps ensure collaboration
Encourages a sense of cooperation
Encourages rapid training of new members

Cons
Pay is not proportionate to an individuals effort
Rewards free riders

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Organizationwide Incentive Plans


Employee Stock Ownership Plan (ESOP)
A firm annually contributes its own stockor cash

(with a limit of 15% of compensation) to be used to


purchase the stockto a trust established for the
employees.
The trust holds the stock in individual employee
accounts and distributes it to employees upon
separation from the firm if the employee has worked
long enough to earn ownership of the stock.

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Gainsharing Plans

Scanlon Plan

Philosophy
of
Cooperation

Identity

Competence

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Involvement
System

Sharing of
Benefits
Formula

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At-Risk Variable Pay Plans


Put some portion of the employees
weekly pay at risk.
If employees meet or exceed their goals,

they earn incentives.


If they fail to meet their goals, they forgo

some of the pay they would normally have


earned.

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Incentives for Managers and Executives


Short-Term Incentives: The Annual Bonus
Plans that are designed to motivate short-term

performance of managers and are tied to company


profitability.

Issues in Awarding Bonuses


Eligibility basis
Fund size basis
Individual awards

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KEY TERMS
financial incentives
fair days work
scientific management
expectancy
instrumentality
valence
behavior modification
variable pay
piecework
straight piecework
standard hour plan

merit pay (merit raise)


team or group incentive plan
organization wide incentive plans
profit-sharing plan
employee stock ownership plan (ESOP)
Scanlon plan
gainsharing plan
at-risk variable pay plans
annual bonus
stock option
golden parachutes

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