137
PART FOUR COMPENSATION AND TOTAL REWARDS
C H A P T E R
E l e v e n
Pay for Performance
and Employee
Benefits
11
Lecture Outline
138
I. Individual Employee Incentive Plans
A. Individual Incentive Plans: Piecework Plans
B. Incentives and the Law
C. Merit Pay as an Incentive
D. Incentives for Professional Employees
E. Nonfinancial and Recognition-Based Awards
F. Social Media and HR
G. Job Design
H. Incentives for Salespeople
I. Incentives for Managers and Executives
J. Short-Term Managerial Incentives and the Annual
Bonus
K. Executives’ Strategic Long-Term Incentives
II. Team and Organization-wide Incentive Plans
A. How to Design Team Incentives
B. Profit-Sharing Plans
C. Gainsharing Plans
D. At-Risk Pay Plans
E. Employee Stock Ownership Plans
III. Benefits and Services: The Benefits Picture
Today
IV. Pay for Time Not Worked and Insurance
Benefits
A. Unemployment Insurance
B. Vacations and Holidays
C. Sick Leave
D. Social Media and HR
E. Parental Leaves and the Family Medical Leave Act
F. Severance Pay
G. Supplemental Unemployment Benefits
H. Insurance Benefits
I. Workers’ Compensation
A. Social Security
B. Pension Plans
C. Pension Planning and the Law
VII Employee Engagement Guide for Managers
A. Costco’s Compensation Plan
In Brief: This chapter gives an
overview of the different types of
incentive programs that are used for
different types of employees. It also
discusses organization-wide
incentive plans. In addition, it looks
at various types of benefits from
insurance to retirement and family-
friendly benefits.
Interesting Issues: There is tension
between the concept of providing
employees with a secure, stable
income (which some feel allows
them the ability to be entrepreneurial
and take appropriate risks for the
organizational performance if
incentive pay is to be more than just
another labor cost.
139
A. Individual Incentive Plans: Piecework Plans Piecework involves paying the worker
a sum (piece rate) for each unit he or she produces. Straight piecework entails a
B. Incentives and the Law There are several legal implications for incentive pay. For
example, under the Fair Labor Standards Act, incentives for non–exempt employees
must be included in overtime payments.
C. Merit Pay as an Incentive Merit pay or a merit raise is any salary increase the firm
awards to an employee based on his or her individual performance. It is different from
a bonus in that it usually becomes part of the employee’s base salary, whereas a
bonus is a one-time payment.
D. Incentives for Professional Employees Professional employees are those, such as
E. Nonfinancial and Recognition-Based Awards “Recognition programs” usually
refers to formal programs such as employee-of–the–month programs. “Social
recognition” programs are more informal manager-employee exchanges, including
praise and approval. Performance feedback is similar but provides quantitative or
qualitative information on performance in order to change the performance or
maintain it. Most employers combine both financial and non-financial incentives to
motivate employees.
F. Social Media and HR Various apps let employees showcase their awards,
1. Salary Plan Some companies pay salespeople a fixed salary. This makes
sense when the main task involves prospecting or account servicing.
2. Commission Plan Straight commission plans pay salespeople only for results.
I. Incentives for Managers and Executives Executive pay should align with the
company’s strategic aims.
1. Sarbanes-Oxley Makes executives and board members personally liable for
violating their fiduciary responsibilities to their shareholders.
140
J. Short-Term Managerial Incentives and the Annual Bonus Is aimed at motivating
the short-term performance of managers and executives.
2. Fund size Refers to the total amount of bonus money the firm makes
3. Individual Performance and Formula Typically, a target bonus (as well as a
maximum amount) is set for each eligible position, and the actual award reflects
K. Executive’s Strategic Long-Term and Incentives To avoid a manager boosting
short-term profits, employers use long-term incentives to inject a long-term
perspective into executives’ decisions.
1. Stock Options The right to purchase a stated number of shares of a company
2. Other Stock Plans The trend is toward tying rewards more explicitly to
performance goals.
II. Team and Organization-Wide Incentive Plans
A. How to Design Team Incentives Most organizations tie rewards to some overall
B. Profit-Sharing Plans Profit-sharing plans are plans in which all or most employees
receive a share of the firm’s annual profits. With current profit-sharing or cash plans,
C. Gainsharing Plans Gainsharing is an incentive plan that engages many or all
D. At-Risk Pay Plans Plan that puts 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.
E. Employee Stock Ownership Plans (ESOPs) A qualified, tax deductible stock
bonus plan in which employers contribute stock to a trust for eventual use by
employees.
III. Benefits and Services: The Benefits Picture Today
141
IV. Pay for Time Not Worked and Insurance Benefits
A. Unemployment Insurance All states have unemployment insurance or
compensation acts (that follow federal guidelines), which provide for weekly
B. Vacations and Holidays The number of paid employee vacation days and
holidays varies considerably from employer to employer. Firms have to address
several holiday- and vacation-related policy issues. There are myriad laws that
affect benefits. Vacation and holiday pay legal issues are discussed.
C. Sick leave Provides pay to employees when they’re out of work due to illness.
Most sick leave policies grant full pay for a specified number of permissible sick
D. Social Media and HR Employees posting on social media when they are on sick
leave can cause problems for themselves. Employers use several tactics to reduce
excessive sick leave absences.
E. Parental Leaves and the Family Medical Leave Act The law stipulates that: (1)
private employers of 50 or more employees must provide eligible employees up to
12 weeks of unpaid leave for their own serious illness, the birth or adoption of a
F. Severance Pay As a one-time payment when terminating an employee, severance
is considered a humanitarian gesture, and good public relations. Most managers
expect employees to give them at least one or two weeks’ notice if they plan to quit; it
therefore seems appropriate to provide at least one or two weeks’ severance if an
G. Supplemental Unemployment Benefits These supplement the employee’s
unemployment compensation and help the person maintain his or her standard of
142
H. Insurance Benefits Employers also provide various required or voluntary insurance
benefits, such as workers’ compensation and health insurance.
I. Workers’ Compensation Refers to the sure, prompt income and medical benefits
provided in work-related accidents to the victims or their dependents, regardless of
fault. Every state has its own workers’ compensation law and administrative
commission, and some run their own insurance programs. Most states require
employers to carry workers’ compensation insurance. Neither the state nor the
federal government contributes any funds for workers’ compensation.
1. Controlling Workers’ Compensation Costs The costs of insurance premiums
depend on the number and dollar amount of claims, thus minimizing such claims
is important. Some ways to reduce such claims are to screen out accident-prone
J. Hospitalization, Health, and Disability Insurance These are benefits aimed at
providing protection against hospitalization costs and loss of income arising from
accidents or illness occurring from off-the-job causes. They are offered by most
employers because medical care and insurance are so expensive. Employer health
and hospitalization plans must comply with the Americans with Disabilities Act.
Accidental death and dismemberment coverage provides a lump-sum benefit in
addition to life insurance benefits when death is accidental. Disability insurance
provides income protection for loss of salary due to illness or accident. A health
maintenance organization (HMO) is a medical organization consisting of several
specialists operating out of a community-based health care center. Preferred provider
organizations (PPOs), a cross between HMOs and the traditional doctor/patient
arrangement, are groups of health care providers that are contracted to provide
medical care services at a reduced fee.
1. Mental Health Benefits The costs of mental health treatment are rising
because of widespread drug and alcohol problems. There is an increase in the
1. Patient Protection and Affordable Care Act of 2010 Employers with at least 50
2. The Evolving Law Many legislators were not pleased with the ACA and in
146
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 which 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
A payment 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.
Organization-wide incentive plan
Plans in which all or most employees can participate,
and that generally tie the reward to some measure of
company-wide performance.
Profit-sharing plan
A plan whereby employees share in the company’s
profits.
Gainsharing plan
An incentive plan that engages employees in a
common effort to achieve productivity objectives and
share the gains.
Earnings-at-risk pay plans
Plan that puts 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 qualified, tax deductible stock bonus plan in which
employers contribute stock to a trust for eventual use
by employees.
Benefits
Indirect financial and nonfinancial payments
employees receive for continuing their employment
with the company.
Supplemental pay benefits
Benefits for time not worked such as unemployment
insurance, vacation and holiday pay, and sick pay.
Unemployment insurance(or
compensation)
Provides benefits if a person is unable to work through
some fault other than his or her own.
Sick leave
Provides pay to an employee when he or she is out of
work because of illness.
Severance pay
A one-time payment some employers provide when
terminating an employee.
147
Supplemental unemployment
benefits
Provide for a “guaranteed annual income” in certain
industries where employers must shut down to change
machinery or due to reduced work. These benefits are
paid by the company and supplement unemployment
benefits.
Workers’ compensation
Provides income and medical benefits to work–related
accident victims or their dependents regardless of fault.
Health maintenance organization
(HMO)
A prepaid health care system that generally provides
routine round-the-clock medical services as well as
preventive medicine in a clinic-type arrangement for
employees, who pay a nominal fee in addition to the
fixed annual fee the employer pays.
Preferred provider organization
(PPO)
Groups of health care providers that contract with
employers’ insurance companies or third-party payers
to provide medical care services at a reduced fee.
Group life insurance
Provides lower rates for the employer or employee and
includes all employees, including new employees,
regardless of health or physical condition.
Social Security .
Federal program that provides three types of benefits:
retirement income at age 62 and thereafter; survivor’s
or death benefits payable to the employee’s
dependents regardless of age at time of death; and
disability benefits payable to disabled employees and
their dependents. These benefits are payable only if
the employee is insured under the Social Security Act
Pension plans
Plans that provide a fixed sum when employees reach
a predetermined retirement age or when they can no
longer work due to disability.
Defined benefit pension plan
A plan that contains a formula for determining
retirement benefits.
Defined contribution pension plan
A plan in which the employer’s contribution to
employee’s retirement or savings funds is specified.
Portability
Making it easier for employees who leave the firm prior
to retirement to take their accumulated pension funds
with them.
401(k) plan
A defined contribution plan based on section 401(k) of
the Internal Revenue Code.
Savings and thrift plan
Plan where employees contribute a portion of their
earnings to a fund; the employer usually matches this
contribution in whole or in part.
Employee stock ownership plan
(ESOP)
A qualified, tax-deductible stock bonus plan in which
employers contribute stock to a trust for eventual use
by employees.
149
DISCUSSION QUESTIONS
11–1. Compare and contrast six types of incentive plans. (LO 11.1: Discuss the main
incentives for individual employees.) Various types of incentive plans were presented in
the text, including piecework plans, straight and guaranteed plans, standard hour plans,
11–2. What is merit pay? Do you think it’s a good idea to award employees merit raises?
11–3. You are applying for a job as a manager and are at the point of negotiating salary
and benefits. What questions would you ask your prospective employer
concerning benefits? Describe the benefits package you would try to negotiate for
11–4. What is unemployment insurance? Is an organization required to pay
unemployment benefits to all dismissed employees? Explain how you would go
about minimizing your organization’s unemployment insurance tax. (LO 11.4:List
11–5. Explain how ERISA protects employees’ pension rights. (LO 11.5: Describe the main
retirement benefits.) Under ERISA, pension rights must be vested under one of two
11–6. What is “portability”? Why do you think it is (or isn’t) important to a recent college
graduate? (LO 11.5: Describe the main retirement benefits.) Portability is the ability of
Copyright © 2019 Pearson Education, Inc.
may actually earn more through consulting or other outside means, thus they will not be
motivated by this system. If research is important to this organization, or the graduate
programs are vital, this incentive plan could damage those programs. The awarding of
the money is likely to be inconsistent because specific guidelines have not been spelled
out. More likely, the rewarding of the raises may become more political as the
committees who have other values determine the awards. It is very likely that the system
was met with great opposition by the faculty.
11–11. Working individually or in groups, research the unemployment rate and laws of
your state. Write a summary detailing your state’s unemployment laws. Assuming
Company X has a 30% rate of personnel terminations, calculate Company X’s
unemployment tax rate in your state. (LO 11.4: List and discuss the main pay for time
11–12. Assume you run a small business. Working individually or in groups, visit the
website www.dol.gov/elaws.See the Small Business Retirement Savings Advisor.
Write a two-page summary explaining: (1) the various retirement savings programs
available to small-business employers, and (2) which retirement savings program
you would choose for your small business and why. (LO 11.5: Describe the main
11–13. You are the HR consultant to a small business with about 40 employees. The owner
has asked you to prepare a one page summary listing (1) the mandatory benefits
the employer must provide, and (2) a strategy for figuring out what non–mandatory
benefits the employer should also offer. (LO 11.4: List and discuss the main pay for
11–14. For this activity, you will need the documents titled (1) “HRCI PHR® and SPHR®
Certification body of Knowledge” and (2) “About the Society for Human Resource
Management (SHRM) Body of Competency and KnowledgeTM Model and
Certification Exams.” Your instructor can obtain these documents from the
Pearson Instructor Resource Center and pass them on to you. These documents
list the knowledge someone studying for the HRCI or SHRM 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 the HRCI and/or SHRM documents; (2) identify the material in
this chapter that relates to the required knowledge the appendix lists; (3) write four
152
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 the students in other
11–15. Describe the nature of some important management incentives. (LO 11.1: Discuss
11–16. In this chapter, we listed a number of guidelines for instituting a pay–for–
performance plan. Do you think these points make sense? Why or why not? (LO
HR in Action Case Incident 1: Striking for Benefits
11–17. Assume you are mediating this dispute. Discuss five creative solutions you would
suggest for how the grocers could reduce the health insurance benefits and the
cost of their total benefits package without making any employees pay more. (LO
11.4: List and discuss the main pay for time not worked and insurance benefits.) It is
suggested that you consider giving this exercise as a group assignment. Finding five
11–18. From the grocery chains’ point of view, what is the downside of having two classes
of employees, one of which has superior health insurance benefits? How would
you suggest they handle the problem? (LO 11.7: Explain how to use benefits to
11–19. Similarly, from the point of view of the union, what are the downsides of having to
represent two classes of employees, and how would you suggest handling the
situation? (LO 11.7: Explain how to use benefits to improve engagement, productivity,
APPLICATION EXERCISES
153
154
HR in Action Case Incident 2: Carter Cleaning Company: The Incentive Plan
11–20. Should this plan be extended to pressers in the other stores? (LO 11.1: Discuss the
11–21. Should other employees (cleaner/spotters, counter people) be put on a similar
plan? Why? Why not? If so, how, exactly? (LO 11.1: Discuss the main incentives for
11–22. Is there another incentive plan you think would work better for the pressers?
Describe it. (LO 11.1: Discuss the main incentives for individual employees.) Some
11–23. 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? (LO 11.1:
Experiential Exercise: Revising the Benefits Package
Purpose: The purpose of this exercise is to provide practice in developing a benefits package for
a small business.
How to Set Up the Exercise/Instructions: Divide the class into groups of four or five students.
Your assignment is as follows: Maria Cortes runs a small personnel recruiting office in Miami and
The students should outline a complete package of benefits and explain the rationale for including
155
1. Based on sites such as www.nytimes.com/2008/06/12/nyregion/12indict.html, what
events led up to the trench collapse accident discussed in the opening scenario, and
how do you think it might have been avoided? Mr. Ortega was digging the foundation in a
2. Use sites such as
www.osha.gov/pls/oshaweb/owadisp.show_document?p_table=NEWS_RELEASES&p_
3. Con Edison supplies power to the New York metropolitan area. Using sites such as
http://www.conedison.com/ehs/, what specifically are they doing to reduce employee
accidents and improve employee safety? Con Edison’s commitment to the environment,
and to the safety and well-being of its employees and the public extends beyond its business
1. Many college graduates start their careers as salespeople. Discuss compensation
considerations for recent college graduates when accepting a job as a salesperson.
2. What are strategies that employers can engage in to reduce their overall benefit costs?
WEB-e’s (WEB EXERCISES)
Additional Assignments
