Incentive Pay and BenefitsMGTO 231Human Resources Management

Dr. Jeroen KUILMAN

Total CompensationTotal Compensation

Base CompensationBase Compensation

Incentive PayIncentive Pay

BenefitsBenefits

Elements of Compensation

At the End of this Session, You will be Able to Answer the Following Questions:

Why don’t we design a compensation system that totally follows the incentive pay notion, i.e. “paying for performance”? Any potential drawbacks of the idea of “pay of

performance”?

What are the considerations in designing a benefit package?

Incentive Pay: Paying for Performance

Incentive Pay

Some basic concepts

Types of pay-for-performance plans

Potential drawbacks

Incentive Pay and System Incentive pay is specifically designed to energize,

direct, or control employees' behavior

An incentive system specifies the regulations to execute the rewards

A component of a compensation system

Basic Assumptions Individual employees and work teams differ in

how much they contribute to the firm A large degree of the firm’s overall performance

depends on the performance of individuals and groups within the firm

To attract, retain, and motivate high performers and to be fair to all employees, the firm needs to reward employees on the basis of their relative performance

Incentive Pay: Paying for Performance

Incentive Pay

Some basic concepts

Types of pay-for-performance plans

Potential drawbacks

Three Basic Types Individual-based plans Group-based plans Organization wide plans

Three Basic Types Individual-based plans Group-based plans Organization wide plans

Individual-Based Plans Identify and reward the contributions of

individual employees Most widely used in industry Three basic components

Merit pay Piece-rate system or standard hour plan Bonuses and sales commissions

Merit pay An increase in base pay, normally given once a

year (remember what we have discussed in Performance Appraisals)

Could take into account compa-ratio Piece-rate system

A compensation system in which employees are paid per unit produced

Individual-Based Plans

Standard hour plan Employees are paid extra if work is done in less

than standard time Bonuses and sales commissions

Often a one-time reward, not rolled into the base compensation.

Individual-Based Plans

Test Your Knowledge Julian works making baskets in a basket factory.

Yvonne works on IT systems integration at a credit card company. The best pay plans for these individuals would be ________ and _______, respectively.

a. Merit pay, individual bonus

b. Sales commissions; merit pay

c. Piecework, merit pay

d. Individual bonus, sales commissions

Advantages Performance that is rewarded is likely to be

repeated (reinforced) Expectancy theory: people tend to do those things

that are rewarded Can shape an individual’s goals over time Helps the firm achieve individual equity

Disadvantages The quantity-quality tradeoff The power of supervisors becomes very

influential For survival, employees will follow the orders of

the supervisors Doing what they think the top-management want

them to do in order to impress top-management

Individual-Based Plans are Most Likely to Succeed when

The contributions of individual employees can be accurately isolated

The job demands autonomy Cooperation is less critical to successful

performance OR competition is to be encouraged

Three Basic Types Individual-based plans Group-based plans Organization wide plans

Group-based plans Normally reward all team members equally

based on group outcomes Very common in team ballgame: soccer, basketball

(Man. United, LA Lakers, South China, etc.) Some may be allowed to decide how the bonus

will be distributed within group Can be in the form of:

Gain sharing Bonuses and awards

Gain sharingGroup incentive program

that measures improvements in productivity and effectiveness and distributes a portion of each gain to employees.

Group bonuses and team awards

Group-based plans

Advantages Foster group cohesiveness

Imagine how Man. United will be if only those who make the goal will be financially awarded

May increase the level of cooperation across workers by giving everyone a common goal

The performance measure on groups has shown to be more accurate and reliable than that on individuals

Disadvantages Problems of social loafing

The sum of individuals’ output is higher than the whole group output

Free-riding effect Inter-group competition leading to a decline in

overall performance We have important information and you are not

allowed to access it.

Disadvantages What potential disadvantages will there be for

the idea of gain sharing? Protection of low performers because they are

hardly detected Not fair for those units which have long been cost

effective

Team-based plans are most likely to succeed when

It is difficult to single out who did what or identify the relative contribution

In flat organizations where team works are common and highly emphasized

Employees are committed to their work and are intrinsically motivated Social-loafing is less likely

Three basic types Individual-based plans Group-based plans Organization wide plans

Organization Wide Plans The most macro type of incentive programs Reward employees based on the entire

corporation’s performance In the forms of

Profit sharing Employee stock ownership plan (ESOP)

Profit Sharing Uses a formula to allocate a portion of declared

profits to employees It is not to directly reward workers for productivity

improvements Some may be given in terms of retirement benefits,

other may be given in terms of bonuses

ESOP Employee stock ownership plan (ESOP)

Rewards employees with company stocks An outright grant or a favorable price that may be

below market value Next media, PCCW, etc.

Advantages Financially flexible for the firms – they can

automatically adjust the labor downward during economic downturns

Increase employee commitment The employees become part of the owners under

the concept of profit sharing and ESOP

Disadvantages Employees may have little sense of control on

their compensation Limited effect on productivity

The connection between individual goal and firm performance is not so tight

Test Your Knowledge For each of the following jobs, identify the best type

of incentive (i.e., individual, group, or organizational). Be prepared to explain your answer.

1. Director of Marketing, Pepsi

2. Recruiter, HSBC

3. Cashier, Park n Shop

4. Salesperson, G2000

Balanced Scorecard A combination of

performance measures directed toward the company’s long- and short-term goals and used as the basis for awarding incentive pay.

Balanced Scorecard

Table 12.2

At the End of this Session, You will be Able to Answer the Following Questions:

Why don’t we design a compensation system that totally follows the incentive pay notion, i.e. “paying for performance”? Any potential drawbacks of the idea of “pay of

performance”?

What are the considerations in designing a benefit package?

Incentive Pay: Paying for Performance

Incentive Pay

Some basic concepts

Types of pay-for-performance plans

Potential drawbacks

Potential Drawbacks Do only what you get paid for Decrease intrinsic motivation Decrease job satisfaction Increase stress Negative effects due to competitions between

individuals or groups

Problems of measurement Judgment bias, and not all performance can be

easily measured Sometimes difficult to disentangle individual

and group performance. Credibility gap

Some workers do not believe in the performance-reward contingency

Potential Drawbacks

Total CompensationTotal Compensation

Base CompensationBase Compensation

Incentive PayIncentive Pay

BenefitsBenefits

Elements of Compensation

At the End of this Session, You will be Able to Answer the Following Questions:

Why don’t we design a compensation system that totally follows the incentive pay notion, i.e. “paying for performance”? Any potential drawbacks of the idea of “pay of

performance”?

What are the considerations in designing a benefit package?

Which Benefits to Provide? Firms have three considerations

The organization’s goals Employee expectations (relates to min.) Cost of employee benefits (relates to max.)

Benefits in Hong Kong Usually around 15-20 % of total labor costs Common benefits

Subsidized meals/food allowances Health and dental plans Transportation allowance Mandatory Provident Fund (MPF)

5% of wage to a maximum of HKD 1,000 a month. **Note: Ocean Park spends 6% on pension costs

Communicating Benefits As was shown in the video, the value of the benefit

package is often not well communicated to employees.

Communication can be done through a variety of means (see also Figure 13.7)