Pros and cons of gainsharing

12

Incentive Pay

Media Library

CHAPTER 12 Media Library

PREMIUM VIDEO

HRM in Action Video

Incentive Pay

LICENSED VIDEO Video

Pay for Performance

Bonuses

image LEARNING OBJECTIVES

After studying this chapter, you should be able to do the following:

12-1. Discuss the major reasons why companies use incentive pay. PAGE 425

12-2. Identify the advantages and disadvantages of both individual and group incentives. PAGE 427

12-3. Briefly discuss options for individual incentives. PAGE 431

12-4. Briefly discuss options for group-based incentives. PAGE 439

12-5. Discuss the major reasons why incentive plans fail and the challenges involved. PAGE 443

12-6. Identify the guidelines for creating motivational incentive systems. PAGE 445

12-7. Discuss the issue of executive compensation and how the major provisions of the Dodd-Frank Act affect the issue. PAGE 449

12-8. Briefly discuss the question of whether incentives improve performance and some options available for incentivizing employees other than knowledge workers. PAGE 453

image CHAPTER OUTLINE

Incentive Compensation

Why Do We Use Incentive Pay?

Individual or Group-Based Incentives?

Individual Incentives

Group Incentives

Options for Individual Incentives

Bonus

Commissions

Merit Pay

Piecework Plans

Standard Hour Plans

Giving Praise and Other Nonmonetary Incentives

Options for Group Incentives

Profit-Sharing Plans

Gainsharing Plans

Employee Stock Ownership Plan (ESOP)

Stock Options and Stock Purchasing Plans

Failures and Challenges in Creating Incentive Pay Systems

Why Do Incentive Pay Systems Fail?

Challenges to Incentive Pay Systems

Guidelines for Creating Motivational Incentive Systems

Executive Compensation

Too Much or Just Enough?

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010

Executive Incentives

Short-Term Versus Long-Term

The Goal of Executive Compensation

Trends and Issues in HRM

Does Incentive Pay Actually Improve Performance?

Comprehensive Pay and Incentive Programs Aren’t Just for Highly Skilled Employees

p.425

Practitioner’s Perspective

Cindy reflects: Whether the economy is up or down, your star employees can always find another job. This keeps HR departments looking for ways to keep their best employees motivated and engaged in their positions.

One of Cindy’s colleagues, Terry, is a big advocate of incentive pay. “We need to look at ways to reward our exceptional employees now without expanding our base labor costs into future years,” Terry said at one of their strategy meetings. “I’ve seen evidence to support the case that employees work harder if they know they have a fair chance of being rewarded for that extra effort.”

“Well, I’ve heard lots of complaints against incentive pay,” says Bill, another member of their department. “I’m not sure we want to open our compensation program to those issues.”

Is incentive pay a good idea? The pros and cons plus the methods of implementation are detailed for your consideration in Chapter 12.

INCENTIVE COMPENSATION

LO 12-1

Discuss the major reasons why companies use incentive pay.

Chapter 11 provided an overview of compensation planning, so we now know that the HR department typically develops pay systems1 and that compensation is an important part of the HRM process.2 Recall for a moment the motivation theories that we discussed in that chapter. Incentive compensation takes advantage of both expectancy theory (where the employee expects a reward that matches their effort and performance) and equity theory (where that individual employee evaluates their rewards against others based on the amount of “input” effort that they provide). Incentives allow us to vary the reward based on the individual (or group) effort put into the work process. While we briefly discussed incentive pay in the last chapter, let’s get into some more detail on why we use incentives, what they are, their advantages and disadvantages, and why they might be successful in motivating our workforce.

HRM in Action Incentive Pay

SHRM HR CONTENT

See Appendix: SHRM 2016 Curriculum Guidebook for the complete list

A. Employee and Labor Relations

24. Promotion

25. Recognition

26. Service awards

K. Total Rewards

A. Compensation

5. Pay programs: Merit pay, pay-for-performance, incentives/bonuses, profit sharing, group incentives/gainsharing, balanced scorecard

15. Motivation theories: Equity theory, reinforcement theory, agency theory

B. Employee Benefits

18. Financial benefits (gainsharing, group incentives, team awards, merit pay/bonuses)

image

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p.426

Why Do We Use Incentive Pay?

Incentives, or variable pay, is compensation that depends on some measure of individual or group performance or results in order to be awarded. But why do we need variable pay? Isn’t it enough that our employees get a set amount of money each week or month in a paycheck from the organization? The simple answer is “Not always.” So to answer employees’ often unasked question What’s in it for me? companies develop incentive systems.3 People respond to incentives,4 and rewards and recognition are combined to create motivational incentive systems.5 The use of pay for performance rather than hours worked is the trend today.6