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Incentive Pay and Benefits. MGTO 231 Human Resources Management Dr. Jeroen KUILMAN. Elements of Compensation. At the End of this Session, You will be Able to Answer the Following Questions:.
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Incentive Pay and Benefits MGTO 231Human Resources Management Dr. Jeroen KUILMAN
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 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
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
Individual-Based Plans • 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.
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. • Merit pay, individual bonus • Sales commissions; merit pay • Piecework, merit pay • 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 sharing Group 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. • Director of Marketing, Pepsi • Recruiter, HSBC • Cashier, Park n Shop • 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?
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
Potential Drawbacks • 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
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)