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Chapter 12: Pay for Performance and Financial Incentives 12- 7
Copyright © 2017 Pearson Education, Inc.
Chapter Section Summaries:
12-1: In designing an effective financial incentive plan, it’s important to understand the
relationship between money and motivation.
12-2: Piecework is an individual employee incentives and recognition program incentive plan
in which a person is paid a sum for each item he or she makes.
12-3: Incentives for salespeople are typically sales commissions.
12-4: Managers take many things into consideration when formulating incentives for managers
and executives.
12-5: With more employers organizing their efforts around teams, team and organizational-
wide incentive plans are more important.
12-6: Consciously make employee engagement a target of your compensation plan.
Discussion Questions:
12-1: Compare and contrast six types of incentive plans.
Various types of incentive plans were presented in the text, including piecework plans,
straight and guaranteed plans, standard hour plans, plans for salespersons (commissions
and combination plans), and group incentive plans. With the piecework plans, earnings
12-2: Explain five reasons why incentive plans fail.
This item can be assigned as a Discussion Question in MyManagementLab. Student
12-3: Describe the nature of some important management incentives.
Two widely used management incentive plans are merit pay and profit-sharing plans.
Merit pay is any salary increase that is awarded to an employee on his or her individual
performance. Advocates argue that only pay tied directly to performance can motivate
12-4: You are applying for a job as a manager and are at the point of negotiating salary
and incentives. What questions would you ask your prospective employer concerning
incentives? Describe the incentives package you would try to negotiate for yourself.
Chapter 12: Pay for Performance and Financial Incentives 12- 8
Copyright © 2017 Pearson Education, Inc.
Students’ answers will vary but should include discussion on long-term and total rewards
12-5: In this chapter, we listed a number of guidelines for instituting a pay-for-
performance plan. Do you think these points make sense in terms of motivation
theory? Why or why not?
Students’ answers will vary but should include discussion on piecework and standard
12-6: What is merit pay? Do you think it’s a good idea to award employees merit raises?
Why or why not?
Merit pay is a salary increase that is awarded to an employee based on his or her
individual performance. It is a good idea to award merit raises when you have a good
12-7: Give four examples of when you would suggest using team or group incentive
programs rather than individual incentive programs.
This item can be assigned as a Discussion Question in MyManagementLab. Student
Individual and Group Activities:
12-8: Working individually or in groups, create an incentive plan for the following
positions: chemical engineer, plant manager, used-car salesperson. What factors did
you have to consider in reaching your conclusions?
Suggest giving the chemical engineer a merit raise system because he or she has little
perceived control or impact over the production or profitability of the company. The
plant manager should receive an annual bonus tied to the profitability of the plant, as well
12-9: A state university system in the Southeast instituted a “Teacher Incentive Program”
(TIP) for its faculty. Faculty committees within each university’s colleges were told to
award $5,000 raises (not bonuses) to about 40% of their faculty members based on
how good a job they did teaching undergraduates, and how many courses they taught
per year. What are the potential advantages and pitfalls of such an incentive
program? How well do you think it was accepted by the faculty? Do you think it had
the desired effect?
Chapter 12: Pay for Performance and Financial Incentives 12- 9
Copyright © 2017 Pearson Education, Inc.
This program would put a premium on undergraduate teaching as opposed to research or
graduate teaching. If it were to work, the best teachers would be motivated to teach at the
undergraduate level in order to increase their earnings. The pitfalls are many. Some
research or graduate faculty may actually earn more through consulting or other outside
12-10: Appendices A and B at the end of this book list the knowledge someone studying for
the HRCI (Appendix A) or SHRM (Appendix B) certification exam needs to have in
each area of human resource management (such as in Strategic Management and
Workforce Planning). In groups of several students, do four things: (1) review
Appendix A and/or B; (2) identify the material in this chapter that relates to the
Appendix A and/or B required knowledge lists; (3) write four multiple-choice exam
questions on this material that you believe would be suitable for inclusion in the
HRCI exam; and (4) if time permits, have someone from your team post your team’s
questions in front of the class, so that students in all teams can answer the exam
questions created by the other teams.
12-11: Several years ago, the pension plan of the Utility Workers Union of America
proposed that shareholders change the corporate bylaws of Dominion Resources,
Inc., so that in the future, management had to get shareholder approval of executive
pay exceeding $1 million, as well as detailed information about the firm’s executive
incentive plans. Many unions—most of which have pension funds with huge
investments in U.S. companies—are taking similar steps. They point out that, usually,
under Internal Revenue Service regulations; corporations can’t deduct more than $1
million in pay for any of a company’s top five paid executives. Under the new rules
the unions are pushing, boards of directors will no longer be able to approve
executive pay above $1 million; instead, shareholders would have to vote on it. In
terms of effectively running a company, what do you think are the pros and cons of
the unions’ recommendations? Would you vote for or against the unions’
recommendation? Why?
Most students may support this recommendation, but they need to be able to clearly state
rational reasoning as to why. Hopefully, you will have some students who oppose it in
Experiential Exercise: Motivating the Sales Force at Express Auto
Purpose: The purpose of this exercise is to give you practice developing an incentive plan.
Chapter 12: Pay for Performance and Financial Incentives 12- 10
Copyright © 2017 Pearson Education, Inc.
Required Understanding: Be thoroughly familiar with this chapter, and read the following:
Express Auto, an automobile mega-dealership with more than 600 employees that represents 22
brands, has just received a very discouraging set of survey results. Customer satisfaction scores
have fallen for the ninth straight quarter. Customer complaints include:
• It was hard to get prompt feedback from mechanics by phone.
• Salespeople often did not return phone calls.
• The finance people seemed “pushy.”
• New cars were often not properly cleaned or had minor items that needed immediate
repair or adjustment.
• Cars often had to be returned to have repair work redone. Table 12-3 describes Express
Auto’s current compensation system.
How to Set up the Exercise/Instructions: Divide the class into groups of four to five students.
One or more groups should analyze each of the five teams in column one. Each student group
should analyze the compensation package for its Express Auto team. Each group should address
these questions:
12-12: In what ways might your team’s compensation plan contribute to the customer
service problems?
Sales force: pay is based almost entirely on commission. The salesperson has no
motivation to assist customers who they do not believe will result in a sale. Finance
office: bonuses for getting customers to use the company financing encourage finance
12-13: What recommendations would you make to improve the compensation system in a
way that would likely improve customer satisfaction?
The dealership already has a customer satisfaction survey in place. They need to link
results from quality measures to the incentives that their employees receive. Examples
are: Sales force: one might decrease the commission somewhat and place that amount in
Chapter 12: Pay for Performance and Financial Incentives 12- 11
Copyright © 2017 Pearson Education, Inc.
will be on the test. If you want measures of customer satisfaction to improve, you reward
Application Case: Inserting the Team Concept into Compensation—or Not
Sandy Caldwell, the new Human Resources Manager for Hathaway Manufacturing,
wanted to improve teamwork at every level of the organization. As part of the process of
implementing cultural change, Sandy introduced a new pay-for-performance system. The
reaction to the change was immediate and “100% negative.”
12-14: Does the pay-for-performance plan seem like a good idea? Why or why not?
Management wants to provide incentive for team performance. Their motives are fine.
Properly crafted (and with employee involvement), a pay-for-performance system may
12-15: What advice would you give Regina and Sandy as they consider their
decision?
Most scholars suggest that pay-for-performance works best (in the U.S.), when it has both
an individual and a team component. Further, Regina and Sandy need to consider ways of
engaging the workforce in the design/decision process. This involvement will likely
12-16: What mistakes did they make in adopting and communicating the new salary
plan? How might Sandy have approached this major compensation change a
little differently?
Sandy failed to involve significant stakeholders in the process. Their input would likely
have identified potential weaknesses in her system. Further, by not involving others, the
change in pay came largely as a surprise. Employees take their pay seriously; surprises
12-17: Assuming the new pay plan was eventually accepted, how would you address
the fact that in the new performance evaluation system, employees’ input
affects their peers’ pay levels?
Typically, plans have two levels – a team component and an individual component. It is
important for the team to realize that the company does best when the whole team
Chapter 12: Pay for Performance and Financial Incentives 12- 12
Copyright © 2017 Pearson Education, Inc.
Continuing Case: Carter Cleaning Company – The Incentive Plan
12-18: Should this plan be extended to pressers in the other stores?
No, not in its present form. While the piece-rate plan does make more effective use of Walt’s
time and saves the company energy money, the quality control issue is a problem. An
12-19: Should other employees (cleaner/spotters, counter people) be put on a similar
plan? Why? Why not? If so, how exactly?
It makes sense for some positions but not for others. Cleaner-spotters are production
employees who could also benefit from a similar plan. It would have to have a quality
12-20: Is there another incentive plan you think would work better for the pressers?
Describe it.
Some ideas might include combination plans (salary plus piece-rate), profit-sharing, or merit
12-21: A store manager’s job is to keep total wages to no more than 30% of sales and to
maintain the fuel bill and the supply bill at about 9% of sales each. Managers
can also directly affect sales by ensuring courteous customer service and by
ensuring that the work is done properly. What suggestions would you make to
Jennifer and her father for an incentive plan for store managers or front-desk
clerks?
Profit-sharing, gain sharing, performance plans, annual bonus, recognition, and merit pay are
Hotel Paris: Improving Performance at the Hotel Paris – The New Incentive Plan
12-22: Discuss what you think of the measurable criteria Lisa and the CFO set for their
new incentive plan.
Having a large percentage of employees eligible for merit increases or incentive pay is good,
but will also be expensive. A 10% difference in reward level will likely motivate improved
performance. In order to justify the expense, there should be some proof that the behaviors
12-23: Given what you know about the Hotel Paris’ strategic goals, list three or four
Chapter 12: Pay for Performance and Financial Incentives 12- 13
Copyright © 2017 Pearson Education, Inc.
specific behaviors you would incentivize for each of the following groups of
employees: front desk clerks, hotel managers, valets, and housekeepers.
Answers will vary but may include:
• Front desk clerks – speed of check-in, number of positive comments by guests,
decrease in number of complaints.
• Hotel managers – decrease in absenteeism, process improvements.
12-24: Lay out a complete incentive plan (including all long- and short-term incentives)
for the Hotel Paris’ hotel managers.
The Hotel Paris has placed outstanding customer service as a major goal for all employees
especially the management staff. Unfortunately, the current pay plan does not link pay to
performance. Therefore, both short- and long-term incentives should be considered to help
support management staff who are modeling the importance of providing outstanding
customer service to the entire hotel staff. Also an incentive plan should be implemented to
My Management Lab
Students can find the following assisted-graded writing questions at mymanagementlab.com.
Answers to these questions are graded against rubrics in the MyLab.
12-25: When and why would you pay a salesperson based solely on commission? Based on a
combined salary and commission?
12-26: Explain the role recognition and other non-material incentives play in an effective
incentive plan.
Key Terms:
Financial Incentives – Financial rewards paid to workers whose production exceeds some
predetermined standard.
Chapter 12: Pay for Performance and Financial Incentives 12- 14
Copyright © 2017 Pearson Education, Inc.
Productivity – The ratio of outputs (goods and services) divided by the inputs (resources such as
labor and capital).
Fair Day’s Work – Standards of output devised based on careful, scientific analysis.
Scientific Management Movement – Management approach based on improving work methods
through observation and analysis.
Variable Pay – Any plan that ties pay to productivity or profitability, usually as one-time lump
payments.
Intrinsic Motivation – Motivation that derives from the pleasure someone gets from doing the
job or task.
Expectancy – A person’s expectation that his or her efforts will lead to performance.
Instrumentality – The perceived relationship between successful performance and obtaining the
reward.
Valence – The perceived value a person attaches to the reward.
Behavior Modification – Using contingent rewards or punishment to change behavior.
Piecework – A system of pay based on the number of items processed by each individual worker
in a unit of time, such as items per hour or items per day.
Straight Piecework – An incentive plan in which a person is paid a sum for each item he or she
makes or sells, with a strict proportionality between results and rewards.
Standard Hour Plan – A plan by which a worker is paid a basic hourly rate, but is paid an extra
percentage of his or her base rate for production exceeding the standard per hour or per day.
Similar to piecework payment but based on a percent premium.
Merit Pay (merit raise) – Any salary increase awarded to an employee based on his or her
individual performance.
Annual Bonus – Plans that are designed to motivate short-term performance of managers and
are tied to company profitability.
Stock Option – The right to purchase a stated number of shares of a company stock at today's
price at some time in the future.
Golden Parachute – Payments companies make in connection with a change in ownership or
control of a company.
Team (or Group) Incentive Plan – A plan in which a production standard is set for a specific
work group, and its members are paid incentives if the group exceeds the production standard.
Chapter 12: Pay for Performance and Financial Incentives 12- 15
Copyright © 2017 Pearson Education, Inc.
Organization-Wide Incentive Plan – Incentive plans in which all or most employees can
participate.
Profit-Sharing Plan – A plan whereby employees share in the company's profits.
Scanlon Plan – An incentive plan developed in 1937 by Joseph Scanlon and designed to
encourage cooperation, involvement, and sharing of benefits.
Gainsharing Plan – An incentive plan that engages employees in a common effort to achieve
productivity objectives and share the gains.
Earnings At-Risk Pay Plan – Plans that put some portion of the employees’ normal pay at risk
if they don’t meet their goals, in return for possibly obtaining a much larger bonus if they exceed
their goals.
Employee Stock Ownership Plan (ESOP) – A corporation contributes shares of its own stock
to a trust in which additional contributions are made annually. The trust distributes the stock to
employees on retirement or separation from service.
