Incentive Pay and Benefits

Incentive Pay and Benefits MGTO 231Human Resources Management Dr. Jeroen KUILMAN

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 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

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

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

Elements of Compensation

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)

Incentive Pay and Benefits