Chapter 13 – Recognizing Employee Contributions with Pay
Chapter Thirteen: Recognizing Employee
Contributions with Pay
Welcome to your guide to teaching Chapter Thirteen: Recognizing Employee
Contributions with Pay!
This guide will provide you with a chapter summary, learning objectives, lecture
outlines, solutions to in-chapter case questions and end of chapter discussion questions
and possible responses.
Chapter Thirteen Roadmap
We hope you find each chapter of your Instructor Manual practical and useful, but also,
exciting! You can adapt the chapter text, the PowerPoints, and the video to work in an online
class environment, a guided independent study environment, or a face to face or on-ground
environment.
When presenting Chapter Thirteen, have the students first read the chapter and
encourage them to absorb the “big picture” of “Recognizing Employee Contributions with
Pay.”
Use the PowerPoint for Chapter Thirteen to frame your lecture.
Have students read and discuss the cases and their respective questions.
Have students validate their knowledge of the chapter by working through the discussion
questions at the end of the chapter.
Lastly, have students review, journal, or discuss the Key Vocabulary Terms at the end of
the chapter.
ROADMAP: THE LECTURE
RECOGNIZING EMPLOYEE CONTRIBUTIONS WITH PAY
Chapter Summary
This chapter explores the choices available to organizations with regard to incentive pay. First,
the chapter describes the link between pay and employee performance. Next, it discusses
ways organizations can provided a variety of pay incentives to individuals. This is followed by a
description of pay as related to group and organizational performance. The chapter then
explores the organization’s processes that can support the use of incentive pay. Finally, the
chapter discusses incentive pay for the organization’s executives.
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whole or part.
Chapter 13 – Recognizing Employee Contributions with Pay
Learning Objectives
After studying this chapter, the student should be able to:
1. Discuss the connection between incentive pay and employee performance.
2. Describe how organizations recognize individual performance.
3. Identify ways to recognize group performance.
4. Explain how organizations link pay to their overall performance.
5. Describe how organizations combine incentive plans in a “balanced scorecard.”
6. Summarize processes that can contribute to the success of incentive programs.
7. Discuss issues related to performance-based pay for executives.
I. Introduction
The way consumers shop for cars has changed. They no longer wander the car lots looking
are cars. They now search the Internet and know what car they want to see when they
arrive on the lot. This change has meant that the way in which car salespeople do their job
is different. They are now searching for customers online. The old system for paying
salespeople was to motivate them to close the deal from a face-to-face situation. Today’s
customer is more informed so there is less room for negotiation. Revised pay plans reward
salespeople for connecting with prospects, delivering great service, and completing sales.
Discussion Question and Suggested Response
Why can’t car dealerships simply keep paying based on past systems?
Answers will vary. Students should focus on the fact that the customers have changed so it
makes sense to have the commission structure change too. Pay plans need to be current and
include the right motivation and also reward behaviors that the organization wants to continue.
1. Organizations have wide discretion in setting performance-related pay, called incentive
pay.
2. Organizations can tie incentive pay to individual performance, profits, seniority, or many
other measures of success.
3. Organizations select incentives based on their costs, expected influence on
performance, and fit with the organization’s broader HR and company policies and goals.
II. Incentive Pay
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Chapter 13 – Recognizing Employee Contributions with Pay
1. Incentive pay is pay specifically designed to energize, direct, or control employee’s
behavior. It is influential because the amount paid is linked to certain predefined
behaviors or outcomes.
2. For incentive pay to motivate employees to contribute to the organization’s success, the
pay plans must be well designed.
3. In designing incentive pay plans, organizations should consider whether the pay
encourages the kinds of behavior that are most needed, whether employees believe they
have the ability and resources to meet the performance standards, and whether they
value the rewards and think the pay plan is fair. .
4. Complications with incentive pay include: (1) performance measures are linked to the
organization’s goals; (2) employees believe they can meet performance standards; (3)
the organization gives employees the resources they need to meet their goals; (4)
employees value the rewards given; (5) employees believe the reward system is fair; (6)
the pay plan takes into account that employees may ignore any goals that are not
rewarded.
5. A complete pay plan for motivating and compensating employees has many components,
from pay to work design to developing managers so they can exercise positive
leadership.
6. The many kinds of incentive pay fall into three broad categories: incentives linked to
individual, group, or organizational performance.
Did You Know?
Employees Stress Merit Pay to Retain Workers
According to PayScale, a majority of companies consider employee retention to be a major
concern. Merit-based pay is one way companies are trying to attract and retain high-performing
employees. Fewer are relying on bonuses or stock options. About 1/3rd of the companies said
they are also relying on training and development to attract and keep talent.
Discussion Question with Possible Response
If your goal is to keep and engage high-performing employees, would you expect incentive pay
to be more effective than simply increasing pay equally for all workers? Why or why not?
Answers will vary. The incentive pay can help motivate high-performing workers as they will feel
they are being valued for the valued they are adding to the organization.
III. Pay for Individual Performance
1. Organizations may reward individual performance with incentives such as piecework
rates, standard hour plans, merit pay, individual bonuses, and sales commissions.
A. Piecework Rates
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whole or part.
Chapter 13 – Recognizing Employee Contributions with Pay
1. Some organizations pay production workers a piecework rate. This is a wage
based on the amount the employee produces. This rate is often paid in addition to
the employees’ base pay.
2. A straight piecework plan is where the employer pays the same rate per piece no
matter how much the worker produces.
3. A variation on straight piecework is differential piece rates – also called rising and
falling differentials – in which the piece rate depends on the amount produced.
4. An advantage of piece rates is the direct link between how much work the employee
does and the amount the employee earns. This type of pay is easy to understand
and seems fair to many people, if they think the production standard is reasonable.
5. This type of incentive is most suited for very routine, standardized jobs with output
that is easy to measure. It may not be helpful in an organization with complex jobs,
employee empowerment, and team-based problem solving. Figure 13.1, How
Incentives Sometimes “Work”, provides a humorous look at how incentive plans
may or may not work.
B. Standard Hour Plans
1. A standard hour plan is an incentive plan that pays workers extra for work done in
less than a preset “standard time.”
2. In terms of pros and cons, standard hour plans are much like piecework plans.
These plans encourage employees to work as fast as they can, but not necessarily
care about quality or customer service. They only succeed if employees want the
extra money more than they want to work at a pace that feels comfortable.
C. Merit Pay
1. Merit pay is a system of linking pay increases to ratings on performance appraisals.
It is most common for white-collar employees.
2. To make merit increases consistent so they will be seen as fair, many merit pay
programs use a merit increase grid, such as what is demonstrated in Table 13.1.
3. Organizations establish and revise merit increase grids in light of changing
economic conditions.
4. An advantage of merit pay is that it makes the reward more valuable by relating it to
economic conditions. A drawback is that conditions can shrink the available range
of increases.
5. During recent years, budgets for merit pay increases were about 2 to 4 percent of
pay.
6. Another advantage of merit pay is that it provides a method for rewarding
performance in all of the dimensions measured in the organization’s performance
management system.
distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part.
Chapter 13 – Recognizing Employee Contributions with Pay
7. A drawback of merit pay, from the employer’s standpoint, is that it can quickly
become expensive. Also, it can make assumptions that may be misleading.
D. Performance Bonuses
1. Performance bonuses reward individual performance, but bonuses are not rolled
into base pay. The employee must re-earn them during each performance period.
2. In some cases, the bonus is a one-time reward. Bonuses may also be linked to
objective performance measures rather than subjective ratings.
3. Bonuses for individual performance can be highly effective and give the organization
great flexibility in deciding what kinds of behavior to reward. Adding to this flexibility,
organizations also motivate employees with one-time bonuses such as retention
bonuses, which are one-time incentives paid in exchange for remaining with the
company.
E. Sales Commission
1. Commissions are pay calculated as a percentage of sales.
2. Commission rates vary tremendously from one industry to another.
3. Some salespeople earn a commission in addition to base salary while others earn
only commissions – a pay arrangement called straight commission plan. This is
common among insurance and real estate agents and car salespeople.
4. Other salespeople earn no commission at all, but a straight salary. This frees the
salesperson to focus on developing customer goodwill. Paying most or all of a
salesperson’s compensation in the form of commissions encourages the
salesperson to focus on closing sales. In this way, differences in salespeople’s
compensation directly influence how they spend their time, how they treat
customers, and how much the organization sells.
5. The nature of salespeople’s compensation also affects the kinds of people who will
want to take and keep sales jobs with the organization.
IV. Pay for Group Performance
1. Employers may address the drawbacks of individual incentives by including group
incentives in the organization’s compensation plan.
2. To win group incentives, employees must cooperate and share knowledge so that the
entire group can meet its performance targets.
A. Gainsharing
1. Gainsharing measures increases in productivity and distributes a portion of each
gain to employees.
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whole or part.
Chapter 13 – Recognizing Employee Contributions with Pay
2. Gainsharing addresses the challenge of identifying appropriate performance
measures for complex jobs. It also broadens employees’ focus beyond their
individual interests.
3. Organizations can enhance the likelihood of a gain by providing a means for
employees to share knowledge and make suggestions.
4. Gainsharing is most likely to succeed when organizations provide the right
conditions. Among those conditions, the following are considered to be the most
common:
a. Management commitment
b. Need for change or strong commitment to continuous improvement
c. Management acceptance and encouragement of employee input
d. High levels of cooperation and interaction
e. Employment security
f. Information sharing on productivity and costs
g. Goal setting
h. Commitment of all involved parties to the process of change and improvement
i. Performance standard and calculation that employees understand and consider
fair and that is closely related to managerial objectives
j. Employees who value working in groups
5. Gainsharing plans have many variations including Scanlon plans, Rucker plans, and
Improshare programs.
6. Scanlon Plans: A popular form of gainsharing is the Scanlon plan. It was
developed in the 1930s by Joseph N. Scanlon, president of a union local at Empire
Steel and Tin Plant in Mansfield, Ohio. The Scanlon plan gives employees a bonus
if the ratio of labor costs to the sales value of production is below a set standard.
7. Figure 13.3, Finding the Gain in a Scanlon Plan, provides an example of how a
Scanlon plan works.
B. Group Bonuses and Team Awards
1. Bonuses for group performance tend to be for smaller work groups. These bonuses
reward the members of a group for attaining a specific goal, usually measured in
terms of physical output.
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whole or part.
Chapter 13 – Recognizing Employee Contributions with Pay
2. Team awards are similar to group bonuses, but they are more likely to use a broad
range of performance measures, such as cost savings, successful completion of a
project, or even meeting deadlines.
3. Both types of incentives have the advantage that they encourage group or team
members to cooperate so that they can achieve their goals. However, depending on
the reward system, competition among individuals may be replaced by competition
among groups. To avoid this, the organization should carefully set the performance
goals for these incentives so that concern for costs or sales does not obscure other
objectives, such as quality, customer service, and ethical behavior. .
V. Pay for Organizational Performance
1. Two ways organizations measure their performance are in terms of their profits and their
stock price.
2. Organization-level incentives can motivate employees to align their activities with the
organization’s goals.
3. Linking incentives to the organization’s profits or stock price exposes employees to a
high degree of risk. Therefore, these kinds of incentive pay are likely to be the most
effective in organizations that emphasize growth and innovation, which tends to need
employees who thrive in a risk-taking environment.
A. Profit Sharing
1. Profit sharing: payments are a percentage of the organization’s profits and do not
become part of the employees’ base salary.
2. Organizations use profit sharing for a number of reasons:
a. May encourage employees to think more like owners
b. They are more likely to cooperate and less likely to focus on narrow self-
interests
c. Less cost especially when the organization is experiencing financial
difficulties
3. Evidence is not yet clear as to whether profit sharing helps organizations perform
better. Research does support a link between profit-sharing payments and profits,
however researchers have questioned which of these causes the other.
4. Differences in payouts raise questions not only about the effectiveness of profit-
sharing plans, but also about their equity. Employees may feel that small profit-
sharing checks are unfair because they do not have control over profits.
5. Organizations setting up profit-sharing plans should consider what to do if profits fall.
Plans should be devised so that they reward employees for high profits but do not
penalize them when profits fall.
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whole or part.
Chapter 13 – Recognizing Employee Contributions with Pay
6. Given the limitations of profit-sharing plans, one strategy is to use them as a
component of a pay system that includes other kinds of pay more directly linked to
individual behavior. This increases employees’ commitment to organizational goals
while addressing concerns about fairness.
Best Practices
Profit Sharing at Paul Downs Cabinetmakers
Paul Downs is the owner of a custom furniture shop and employees skilled craftspeople
in its facility. To encourage the employees Downs introduced a profit-sharing plan. After
analyzing the profits, Downs paid out approximately $3,122 per worker. Even in quarters
where revenue was lower, the employees still worked hard. Revenues were up 43% over
the previous year.
Discussion Questions with Possible Responses
1. What evidence suggests that profit sharing was successful at Paul Downs
Cabinetmakers?
Revenue that was up 43% from the previous year and that demonstrates the success of
the profit sharing program.
2. Do you think the workers are likely to see this profit-sharing program as equitable? Why
or why not?
Answers will vary.
B. Stock Ownership
1. A stock ownership plan actually makes employees part owners of the organization. It
encourages employees to focus on the success of the organization as a whole.
2. The drawbacks of stock ownership as a form of incentive pay are similar to those of
profit sharing. Specifically, it may not have a strong effect on individuals’ motivation.
Employees may not see a strong link between their actions and the company’s stock
price.
3. Figure 13.4, Types of Pay for Organizational Performance, illustrates profit sharing
and ownership programs such as stock options and employee stock ownership plans.
4. Stock Options: Stock options are the right to buy a certain number of shares of
stock at a specified price. Exercising the option refers to purchasing the stock.
5. Traditionally, organizations have granted stock options to their executives.
6. Some studies suggest that organizations perform better when a large percentage of
top and middle managers are eligible for long-term incentives such as stock options.
7. Recent scandals have drawn attention to the challenge of using stock options as
incentive pay. Employees may focus so much on stock price that they lose sight of
other goals including ethical behavior.
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whole or part.
Chapter 13 – Recognizing Employee Contributions with Pay
8. Employee Stock Ownership Plans: An employee stock ownership plan (ESOP)
is one in which the organization distributes shares of stock to its employees by
placing the stock into a trust fund managed on the employees’ behalf.
9. ESOPs raise a number of issues: On the negative side, they carry a significant risk
for employees such as: by law, an ESOP must invest at least 51% of its assets in the
company’s own stock so problems with the company’s performance can take away
significant value from the ESOP and many ESOPs are set up as retirement funds, but
ESOPs are not guaranteed by the Pension Benefit Guarantee Corporation.
10. ESOPs can be attractive to employers by: providing tax and financing advantages
and providing a way to build pride and commitment to the organization.
11. Some research suggests that the benefits of ESOPs are greatest when employee
participation is greatest.
12. Figure 13.5 shows the Number of Companies with ESOPs.
VI. Balanced Scorecard
1. A balanced scorecard is a combination of performance measures directed toward the
company’s long- and short-term goals and used as the basis for awarding incentive
pay.
2. Table 13.2 shows the kinds of information that go into a balanced scorecard.
3. Not only does a balanced scorecard combine the advantages of different incentive-pay
plans, it helps employees understand the organization’s goals.
HRM Social
Scoring Social Influence
Social media is starting to influence balanced scorecards. Klout tracks social media
activity to compute a user’s influence. For example many tweets on a person’s Twitter
account could add influence. Klout also drew attention when they compared famous
people. However, not everyone is sold on the idea of the value of influence.
Discussion Questions with Possible Responses
1. Suppose a manufacturing firm decided to add social influence to a balanced scorecard
for its engineers and marketing staff. What percentage of the total incentive pay do you
think should be based on the influence score? Why?
Answers will vary.
2. How fair do you think it would be to use social influence as a basis for incentive pay?
Answers will vary.
VII. Processes That Make Incentives Work
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Chapter 13 – Recognizing Employee Contributions with Pay
1. The process by which the organization creates and administers incentive pay can help
incentives achieve their goal of motivating employees.
2. The monetary rewards of gainsharing, for example, can substantially improve
productivity, but the organization can set up the process to be even more effective.
HR How To
Getting the Most from a Limited Compensation Budget
Budgets are tight so the following are some ideas on how to make the most of the
compensation budget. Make sure that merit pay is truly related to performance gains,
offer modest but frequent incentives as quick rewards for accomplishments, implement
other strategies to reward performance that can also serve as employee incentives,
target pay increases to the best employees, set and communicate clear – measurable
targets for earning incentive pay, and accept that employees who do not achieve the
requirements for earning incentive pay may leave.
Discussion Questions with Possible Responses
1. Suppose employees complain to HR managers that bonuses are meaningless because
no one understands how to earn them. What measures should the company take to
make incentive pay more effective?
Answers will vary. Students should focus on the need to tie incentives to measurable goals
that are achievable.
2. Suppose a manager has enough money to give one employee a 4% raise and another
employee no raise, or else the manger can give both employees a 2% raise. What
would you recommend to the manager, and why?
Answers will vary. Students should discuss the fact that performance should be tied to the
decision.
A.Participation in Decisions
1. Employee participation in pay-related decisions can be part of a general move
toward employee empowerment.
2. Risks of employee participation include: an increase to the complexity of creating
and administering the plans and the decisions derived will be based on the
employees’ own interests instead of the organization’s interests.
3. In spite of the potential risks, employee participation can contribute to the success
of an incentive plan, especially when monetary incentives encourage the monitoring
of performance and when the organization fosters a spirit of trust and cooperation.
B. Communication
1. Communicating is important because it demonstrates to employees that the pay
plan is fair and when employees understand the requirements of the incentive plan,
the plan is more likely to influence behavior as desired.
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Chapter 13 – Recognizing Employee Contributions with Pay
2. It is particularly important to communicate with employees when changing the plan
due to the employees’ tendency for concern about changes.
VIII. Incentive Pay for Executives
1. Because executives have a much stronger influence over the organization’s
performance than other employees do, incentive pay for executives warrants special
attention.
2.To encourage executives to develop a commitment to the organization’s long-term
success, executive compensation often combines short-term incentives (including
bonuses based on the year’s profits, return on investment, and other measures
related to the organization’s goals) and long-term incentives (including stock options
and stock purchase plans).
A. Performance Measures for Executives
1. The balanced scorecard approach is useful in designing executive pay. Table 13.3
identifies a balanced scorecard for Merck executives.
2. Regulators and shareholders have pressured companies to do a better job of linking
executive pay and performance. The Securities and Exchange Commission (SEC)
has required companies to more clearly report executive compensation levels and
the company’s performance relative to that of competitors over a five-year period.
3. Also, some forms of incentive pay offers tax advantages as demonstrated under the
Omnibus Budget Reconciliation Act of 1993.
B. Ethical Issues
1. Incentive pay for executives lays the groundwork for significant ethical issues.
These issues include maintaining integrity about the company’s performance and its
stock prices and avoidance of insider-trading practices.
ROADMAP: Chapter Vocabulary
Incentive pay
Piecework rate
Straight piecework plan
Differential piece rates
Standard hour plan
Merit pay
Commissions
Gainsharing
Scanlon plan
Profit sharing
distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part.
Chapter 13 – Recognizing Employee Contributions with Pay
Stock options
Employee stock ownership plan (ESOP)
Balanced scorecar
distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part.