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Give a brief description of the 5 types of individual performance pay, and recommend which type of job would benefit by using which type of performance pay. Your response should be at least 75 words in length. You are required to use at least your textbook as source material for your response. All sources used, including the textbook, must be referenced; paraphrased and quoted material must have accompanying citations.
Reference
Noe, R., Hollenbeck, J., Gerhart, B., & Wright, P. (2011). fundamentals of human resource management. (4th ed., pp. 358-364). Boston, MA: McGraw-Hill.
358 PART 4 Compensating Human Resources
L*f Describe how
orga nizations
recognize individual
per{ormance.
Although most, if not all, employees vah’e pay, it is important to remember that
earning money is not the or
–
rly .”n on people try to do a good
job. As we discuss i
n
“irr”,
Jt”pr”r, (r”” Chapters 4, B, u.rd 13), people also want interesting work, appre-
ciarion for their efforts, flexibility, and a sense of belonging to the work
group-not
to menrion the inner satisfaction of work well done. There{ore, a cotnplete
plan for
motivating and compensating employees has many components, from pay to work
design to ieveloping
^urrug”ri
so they can exercise positive leadership.- -ffri,tr
regard to thL f”irr-tJrs of incentive pay, the preceding chapter described equity
,n.orv *hj.h explains how employees form judgments about the fairness of a pay
structure. The same process uppti”t to judgments about incentive pay. In general,
“*JoV”.,
compare th”i. .ffoi* a.d rewards with other employees’, considering a
;ffi ; be {air *h.rl th” rewards are distributed according to what the
employees
conrribute.
The rernainder of this chapter identifies elements of incentive pay systems’
We consider each option’s ,t .rrgth, and limitations with regard to these princi”
ples. The many kinds of incenlive pay fall into lhree broad categories: incentives
tl”f..a to inclividuai, group, or organizational performance.. Choices from these cat-
;;;;;;:h;rtd .onrid”., not o.,ly”their streng;hs and weaknesses,-,but also their fir
*-irh ,h. organizarion’s goals. The cfioice oflncentive pay ”’ay
affect not oniy the
1″rr”1 of moiivation but”also the kinds of employees who are attracted to and stay
with the organization. For example, there is some evidence that organizatiols'”vith
team-based rewards will tend to attract employees who are more team-oriented’
while rewards tied to individual performance make an organization more attrac-
rive to those who thlr-rk
“r-rd
act independently, as individuals.? Gi,rett the poten-
tial impact, organizalions not only shouid u,eigh the stlengths and li’eaknesses
in
,”i”.,i”g ,yp.r”of incentive pay but also should measure the results of these progfams
(see “Did You Know?”
).
Pay for lndividual Perfsrmane€
Organizations may reward individual performance with a variety of incentives:
o Piecework rates
o Standard hour plans
r Merit pay
. lndividual bonuses
. Sales commissions
Piecework Rates
As an incentive to work efficiently, some organizations pay production
workers a
piecework rate, a *ug. U^”a on’the. u-our’tt they produce’ The amount
paid per
lrrit o ser ar a lev.l thit rewards employees for abo’e-average production volume’
For example, suppose that on average, assemblers can finish 10 components
in an
hour. lf rhe organization wanrs to pay its average assemblers $8^p:t hour, it can
pay
”
p]”.”*”.f. .”i” of $B/hour dividea by 10 -components/hour,
o. $.80 per component’
A”-,
“rr.*bl”r
who produces the average of 10 components per hour earns an amount
e.,rral ro $8 oer tro.r., i., assernbler *Lo prod.’,.es 12 components in an hour would
;il^$.80;”:.2, o, g9.60 each hour. Thii is an example of a straight piecework
pl”i, U..””r. th” .*ployer pays the same rate per piece’ no matter how much the
r.vorker produces.
Piecework Rate
A wage based on
the amount workers
produ ce.
Straight Piecework
Plan
lncentive pay in which
the employer PaYS the
same rate Per Piece,
no matter how much
the worker Produces.
i
f
{
n
ti
itllr
!1’Ol
l]ror
e\ar
:no
Ir
l]tor(
iales
rmpl
if the
:ates
have
This
:har
iiecg,
;erfor
-‘atisfa
:ealize
ri hile
lonus
irop a
:oais r
rrhers.
:irl orgi
.,rganiz
..rlving
that
;s in
,pre-
-not
i for
vork
luity
pay
eral,
:lga
yees
lms.
nci-
ives
cat-
r fit
the
stay
vith
ted,
rac-
ten-
sin
ams
rsa
pel
me.
ran
pay
ent.
)unt
ruld
ork
the
a;
‘€
,9:
::
F,
:t:
r+:
*:
tt.
:r.t
:,ti
,9,
g
.1l
:;:’i
.t
+!
:1
,’i
i:
*
.i:
dl
i:
1;
i:;r:
:,i,
:;
.il
.i
;l
a,
:ll
:,
#:
,&
&-
:#
tr
,:’
,.:
ln a recent survey of more than
75Q organizations in 66 countries,
only one out of five said theY
measure the return on investment
{ROl} of incentive programs, but
more want to move in that direc-
tion. Companies that measure the
ROI of rewards tend to think of
pay as an investment in human
resources aimed at bringing out
top performance. ComPanies that
don’t measure ROI tyPicallY think
of pay as simplY a cost of doing
business.
Source:iom McMullen, Reward Next
Practices {Hay Group, August 2009).
http://www. haygroup. com.
ls a current
{ocus
Will be a focus
in the {uture
4020
Percentage o{ ComPanies
Measuring Rewards RO
I
A variation on straight piecework is differential piece rates (also cailed nsrng and
faltingdifferentials), in;hi;h the piece rate depends on the amount produced’ If the
*orki, pio.l.,.es more than the standard output, the piece rate is higher’ If the worker
prodr1.”, at or below the standard, the amount paid per piece is lower. in the preceding
“*”*p1”,
the differential piece rate could be $ I per component for components exceed-
ing 12 per hour and $.80 per component for up lo 12 components per hour’
In one study, the lse of piece rates incfeased production output by 30 percent-
more than any’other rnotivational device evaluated.S An obvious advantage of piece
rates is t1-re direct link between how rnuch work the employee does and the arnount lhe
employee earns. This type of pay is easy to understand and seems fair to many people,
lf they rhlnk the producrion standard is reasonable. In spite of their advantages, piece
rates are relativeiy rare for several ,”uro^r.9 Most jobs, including those of rlanagers’
have no physical output, so it is hard to develop an appropriate performance measure.
This type of incenrive is most suited for very routine, standardized jobs with output
that is easy to measllre. For con-iplex jobs or jobs lvith hard-to-measure outputs’
pieceu,ork plans do not apply very well. A1so, unless a plan is rvel1 designed to include
p”rfo.malce standards, it may not reward employees for focusing on quality or cuslomer
iatisfaction if it interferes r.vith the day’s output. In Figure 12.1, the employees quickly
realize they can earn huge bonuses by writing softu’are “bugs” and then fixing them,
lvhile rvriting bug-free sofrware affords no chance to earn bouuses. More seriously, a
bor-rus based on number of faucets produced gives production rvorkers no incenti\re to
stop a manufacturing line to correct a quality-control problem. Production’oriented
goul, ,ouy do nothing to encourage employees to iearn neiv ski1ls or cooperate with
others. Therefore, individual incentives such as these may be a pool incentive in
an organization that wants to encourage teamwofk. They rnay nor be helpful in an
-rrganization rvith compiex jobs, ernployee empowerment, and team-based problem
r,rlving.
r1::’r:r:.trL:j1il:r::1i{1f$*’i3i1!i{-qtii!.iil{!*!r,liiie{fir€{ry-€@fqiSff}SFil5$ll:l’i
Differential Piece
Rates
lncentive pay in which
the piece rate is higher
when a greater amount
is produced.
359
I
–
&
i*
g
sl
g
360 PART 4 Compensating Human Resources
|: igure 1 ?. i
How lncentives Sometintes “Work”
SOURCE: DILBERT: O Scott Adams/Dist. By United Feature Syndicate, lnc
$tandarcl llour Flan
An incentive p{an that
pays workers extra ior
work done in less than
a preset “standard
time.”
Standard Hour Plans
Another quantiry-oriented incentive for production workers is the standard hour
plan, an incentive plan that pays workers extra for work done in less than a preset
((stan-
dard time.” The organizatior-r determines a stairdard time to complete a task, such as tun-
ing up a car-engine. If the mechanic completes the work in less than the standard time,
rhe mechanic receives an amount of pay equal to the wage for the fr-rll standard tirne.
Suppose the standard time for tuning up an engine is 2 hours. If the mechanic finishes
a tlne-up in 1% hours, the rnechar-ric earns 2 hours’u’orth of pay in i% hours. \X/orking
that fast over the course of a week could add significantly ro the mechanic’s pair
In terms of their pros and cons, standard hour plans are much like piecer.vork plans.
They encourage ernployees to work as fast as they can, but not necessariiy to care
about quality or customer service. Also, they only succeed if employees want the extra
money more than they u’ant to work at a pace that feels comfortable.
Merit Pay
Alrnost all organizations have estabiished sorle program of merit PaY-a systern of
linking pay increases to ratings on performance appraisals. (Chapter B described the
content and ,”rse of performance appraisals.) To make the merit increases consistent, so
they r.vill be seen as fair, many merit pay programs use a merit ina”ease grid, such as the
sample for Merck, the giant drug company, in Table 12.1. As the table sholvs, the deci’
sioni about merit pay are based on two factors: the individual’s performance rating and
the individual’s compa-ratio (pay relative to average pay, as defined in Chapter 11)-
This s],stern gives the biggest pay increases to the best performers and to those whose
pay ls relatively lou, for their job. At the highest extreme, an exceptional employee
earning B0 percent of the average pay for his lob could receive a 15 percent merit rai
se.
An employee rated as having “room for improvement” wor,rld receive a raise only
if
that employee was earning relatively low pay for the job (compa’ratio of .95 or less).
By today’s standards, all of these raises are large, because they were created at a time
wher-r inflation rvas strong and economic forces demanded big pay increases to keep
up r.vith the cost of living. The range of percentages for a policy used today would
be
iower. Organizations establish and revise merit increase grids in light of changing eco-
nornic conditions. When organizations revtse pay fanges, employees have nerv compa-
ratios. A higher pay range would result in lower compa-ratios, car-Lsing employees to
l1ttr*rit Pay
A system of linking pay
increases to ratings
on performance
a ppra isa ls.
l,:i:ri* –
Sample l\
il
EX
WO
HS
RI
NA
SOURCE
President
become
it maker
Adn
recent y
age perf,
6 percer
amoLlnt
careef, tl
on a yea
shor.r’s, c’
ever, ext
ernploye
raises gir.
raises for
NCIO}
ffi vj$
OUR GOAL I5 TO I,JPf,’I
BOG.FREE SOFTI.JARE,
I’LL PAY A TEN-DOLLAR
SONUS FOR EVERY SUG
YO{J FIND AND FIX.
I HOPE I,A GONNA
THIS TdFtrTL I{E A
DRIVES NEU NINIVAN
THERIGHT THIS AFTER-
BEHAVIOR. NOON1\ ru,rd
Note: Experts
CHAPTER 12 Recognizing Employee Contributions with Pay 361
ii:i;ii- :,:. i
Sample Merit lncrease Grid
WD
HS
RI
NA
(Exceptional within Merck)
{Merck Standard with
Distinction)
{High Merck Standard}
{Merck Standard Boom for
lmprovement)
{Not Adequate for Merck)
EX 13-1 5%
9-i 1
7-g
5-7
1Z-140k
8-1 0
9-11%
7-9
To maximum
of range
j’ ir-1:-li’c: Li” ?.
Ratings and Raises:
Underrewardin g the Best
6-8
rour
tan-
tun-
ime,
ime.
shes
lns. SOURCE: K. J. Murphy, “Merck & Co., lnc. (B),” Boston: Harvard Business School, Case 491-0A6. Copyright @ 1990 by the becorne eligibie for bigger rnerit increases. An advantage of rnerit pa)’ is therefore that A dlarvback is that cclnditior-rs can shrink the available range of increases. During rof )se
se. Average Pay lncrease
Highest-Rated Workers
Next Highest Rated
Middle Rated
Low Rated
Lowest Rated
Note: Experts arlvise thaI the top category shou]d receive trsice as nuch as the ntiddle caleltorv.
). ne
-^p
be o- Io
di. – rof 362 PART 4 Compensating Human Resources
Another advantage of merit pay is that it provides a method for rewarding perfor- behaviors, then rhe merit pay is linked to the behaviors the organization desires. This
link seems logical, altho.,gh so far there is little research shou’ing the effectiveness of
merit pay. I2
A drawback of merit pay, from the empioyer’s standpoint, is that it can quickly p..for*ur,.. ln the top.tJo categories-(ourof four or five).I3 Therefore, the major- Chapter a. Anorh.. .or…iio., mlght be to use 360-degree per{ormance feedback pay decisions.14′ ing. Rer.varding employees for superior performance ratings assumes that those ratings
dJp.nd o., abiiity ant motivation. But performance rnay actually depend .., ah” authority, training, and resources they need. Under these conditions, employ- Qualiry guru’$U. Edwards Deming also criticizes merit pay *o.i. Ir-, b.-ing’s words, “Everyone propeis himself forward, or tries to, for his own .o.rrru.,, they negotiate, they may have little interest in the quality of the materials
they buy, ..r.r, *f,.r, the manufacturing department is having quality problems’ In alternative is for merit pay to include ratings of teamwork and cooperation’ Some
ernployers ask co-workers to provide such ratings’
Performance Bonuses es are
not roiled into tase pay. The employee must fe-earn rhem during each performance
period. In some .ur”i, ,h. bo.r’ls is a one-titne reward. Bonuses may also be linked to
Lblective performance measures’ rather than subjective ratings”Borrrrr”, zarion grear flexibility in d’eciding wfiat kinds of behavior to reward’ Examples include
th” .oi-rpur’ries descrited in the “Best Practices” box and Continental Airlines, which
puy, a quarterly bonus for ranking in the top three airlines for on-time
lrriuulr,’u measure^of ,”r,ri.” quality. In many cases, employees receive bonuses for “g” b”etter results from .”*uii.,g employees for ieaming new skills than from linking tffere invest-
ment banks, for example, really rewarding the right behaviors if bonuses were falling
{i !#
$
‘r$:.
i: .ii.
INCE
Some c, Hamr less than Addinl Sales C rfor- i job ckly ajor- lines lead- ‘el of eam- ,1e, if es are lance :gani- ry get ,apsetl
rvest- INCENTIVES FOR INNOVATION
Some companies tie bonuses to Hammond’s Candies pays work- the company paid out more than lnfosurv, a marketing research pany’s 15 employees to sug- Sou rces: feri Evans, ” Entrepreneurs 2010.
less than 50 percent or holding steady during a period rvhen govert’rment funds were Adding ro this flexibilit1,, organizations also rnay motivate employees r’vith one-tirne Sales Commissions 363 364 PART 4 Compensating Human Resources
Many car salespeople earn a straight contmission, meaning tlrat $-$3 ldentify ways &ainsharing for the periocl. Cornrnission Lates vary tremendousiy Some salespeople earn a commission in addition Paying lnost or zr11 of a salesperson’s cornpensation ir-r the form of cointnissitrirs encour- Tl-re narure of salespeople’s corrpensation also affects the kinds of people nho rvill ff*y f*r ffin*up t**rf*rm&ffie# lltllst cooperate and share knorvledge so that the entire groLrl) call lneet its performance
targets. Comrnon group incentives include gainsharing, bot-tttses, at-id team au’ards.
Gainsharing Gainsharrng addresses tl-re challenge of ider-rtifying appropriale performance mea- F: ;:i ril
t:
:t:
of irs iron, tc Gair and t Apo the stant Typic: Group 100 bonus. Given Sou rces: feri Evans, ” Entrepreneurs 364 PART 4 Compensating Human Resources
tare
rtra
President & Feliows of Harvard College. Reprinted with permission.
rt rnakes tl-re reu’ard rnore valuable by relating it to economic coirclitior-rs.
recent years, budgets fol merit Lralr irlcreascs were about 3 to 5 percent of pa1,, so aver-
age performers could receive a 4 percent raise, and top per{ormers perhaps as tnuch as
6 percent. The 2-pelcentage-point clifference, after taxes and other deductions, rvould
alrrolrllt to only a feri’ dollars a \\,eek on a salary of $40,000 per year. Over an entire
career, the biggel increases for topr perforners can grow into a major change, but vier,r’ed
on a 1,g21-ft-year basis, they are not much of an incentive to excei.10 As Figule 12.2
shc’rtt’s, cotnpauies typically spread merit raises fairly evenly across all elnployees. Ho
the
,so
,he
:ci-
nd
1).
if
a-
ever, experts advise rnaking pay ir-rcreases twice as great for top perforners as for ar.erage
etnployees-and not reu,arding the poor per{ormers with a raise at a11.11 hnagure if the
raises given to the bottorn ilvo categories in Figr-rre i2.2 ir-rstead u,ent toward 7 percent
raises for the top irerformers. Tiris t;’pe of elecision sigr-rals that excellence is ren’arded.
the
,so
,he
:ci-
nd
1).
)se
se.
if
Average Pay lncrease
Highest-Rated Workers
Next Highest Rated
Middle Rated
Low Rated
Lowest Rated
Note: Experts arlvise thaI the top category shou]d receive trsice as nuch as the ntiddle caleltorv.
).
ne
-^p
be
o-
a-
Io
di.
mance in all of the dimensions measured in the organization’s performance manage’
ment systeln. If that sysrem is appropriately designed to rleasure all the important job
become expensive. Mun”g..t at a rnajority of organizations fate most employees’
ity of employees are eligible for the biggest merit increases, and their pay rises rap-
idiy. This cost is one reason that some organizations have established guidelines
about the percentage of ernployees that may receive the top rating, as discussed in
(dlscussed in Chapter 9), but so far, organizations have not used nrultisource data for
Another c{rawback of merit pay is that it makes assumptions that may be mislead-
“*”ploy””s’
o. fo…, o.,rrid. ih” e^ploy.e’s control, such as managers’ rating biases, the level of
cooperation from co-workers, oI the degree to which the organization gives employ-
ees will likely conclude that the merit pa] syslsrn is unfair’
for discouraging team-
good, on hi, orin life preserver. ffr. organization is the 1oser.”15 For exarnple, if
E*pioy..r in the purch”ri.rg d.purt-ent afe evaluated based on the number or cost of
.”u.rlor-r’to such problems, Deining advocated rhe use of group incentives’ Another
Like merit pay, performance bonuses reward individual performance, but bonus
for individual performance can be extremely effective and give the organi’
“*pioyees
meeting SuCh routine targets as sales or production nt,mbers. Such bonuses encouf-
hur”d rvork. But an organization that focuses on growth and innovatiop may get
;;;”r”; ro masrery of existing lobs. Similarly, bonuses make up a large part of com-
pensarion pu.k”g”, in rhe fin;;cial industry, and when that industry nearly collapsed
in 2008, ,o*” obr”ryers questioned the basis for awarding the b,onuses.
‘t$l
“t!l
,:Jti
r.,1
activitier
Two gor
entirely r
making i
ers at its
for any i,
ceeds in
idea for
the comt
Schumar
of Hamr
ribbon s
idea of a
line. Sch,
people I
packed tl
best insig
ments. Ti
involve t
work, so
and invol
first year
needed tc
bonuses. .
retain cer
mon for c
incentiver
engineers.
Chattem,
Llcts, was
retention
and chief
more yean
A variatio
culated as
missions e
the period
age-
fhis
ss of
yees’
falr-
:d in
back
a for
tings
pend
ploy-
plov-
o\vn
rst of
erials
rs. In
other
iome
:ed to
clude
vhictr
.-time
es for
ICOUr-
r-rking
con-r-
alling
activities that foster innovation.
Two good examples come from
entirely different i ndustries: candy
making and survey research.
ers at its Denverfactory a $50 bonus
for any idea they provide that suc-
ceeds in driving down costs. This
idea for incentive pay occurred to
the company’s new owner, Andrew
Schuman, after he learned that one
of Hammond’s popular products,
ribbon snowflake candy, was the
idea of a worker on the assembly
line. Schuman concluded that the
people who actually made and
packed the candy would have the
best insight into possible improve-
ments. The production processes
involve a high degree of hand-
work, so employees are skilled at
and involved in their work. ln the
first year of the incentive program,
$500 in bonuses for ideas such as
reducing breakage of candy canes
with new packaging and imProv-
ing the efficiency of an assembly
line by adjusting a machine gear.
The changes have helped the
once-struggling company return to
profitability.
firm based in Atlanta, asks emPloY-
ees to offer business ideas. Once
a quarler, managers pick the best
business idea and award a $150
restaurant gift card to the emploY-
ee who submitted that idea. Jared
Heyman, lnfosurv’s founder, esti-
mates that in the Program’s first
five years, it has delivered hun-
dreds of thousands of dollars’
worth of cost savings and addi-
tional revenue. Building on this
success, lnfosurv added a grouP
incentive, a challenge to the com-
gest 100 innovative ideas in 100
days. lf they succeed, everyone
will receive a
Seek Ways to Draw Out Workers’ ldeas,”
Wall Street Journal, December 21 ,
2009, http:/lonline.wsj.com; Hammond!
Candies, “About Us,” corporate Web
site, www.hammondscandies.com,
accessed April 26, 201 0; and lnfosurv,
“About lnfosurv,” corporate Web site,
www.infosurv.com, accessed April 26,
needed to keep tl-re companies alivel16
bonuses. For example, nhen one organization acquires another, it usually wants to
retain certain valuable employees in the organization it is buying. Therefore, it is com-
mon for organizations involved in an acquisition to pay retention bonltses-oue-lime
incentives paid in exchange for remaining v,’ith the company-to top managers,
engineers, top-pe#orming salespeople, and information tecl”urology specialists. lfhen
C1-rattem, a Chattanooga, Tennessee company that makes health ar-rd bear-rt1, prod-
ucts, \\,as acquired by pharmaceutical cornpar-r)’ Sanofi-Aventis, the deal included
rerelltiolt bonuses for Chattern’s chief executive officer, presldent, general counsel,
and chief financial officer in exchange for them staying with the company for several
tnore 1’g2v5.17
A variation on piece rates and bonuses is the payn’rent of commissions, or pay cai- Cornmissitrns
culatecl as a percentage of sales. For instance, a furniture salesperson might earn corn- lncentive pay
missions equaling 6 percent times the price of the furniture the person sells during calculated as a
the period. Selling a $2,000 couch u’or-rlcl add $120 to tlie salespersonb commissions percentageof sales.
10oo/o of their pay colnes lrom contnrission instead of a salary. What
type of individual nright enjoy a job like this?
to recognize group
performance.
Group incentive
pr0gram that measures
improvements in
productivity and
effectiveness and
distributes a portion of
each gain to employees.
frorn one industri, and company to another. Exatn-
ples reported include an average rate betu’een 5.0
and 5.5 percent for real estate,30 percent up to 90
percent of first year’s premilllns on life insr-rrance
(then dropping to as lora’as 4 percent in subseqrrent
years of tl-re poiicy), and 20 to 30 percer-rt of profits
for auto sales.l8
to a base salary; others earn only comtnissions-a
pay arrangenrer-rt called a straight commission plan.
Straight commissions are common among iusur-
ance and real estate agents and car salespeople.
Other salespeople earir no commissions at all, br”it a
straight salary Paying most or all of a salesperson’s
compensation in the form of salary frees rhe sales-
person to focus on developillg clrstoner goodu’ill.
ages the salesperson to focus on closing sales. in this way, differences in salespeople’s
compensation directly ir-rfluence hou, they spend their tit-tre, hou’ they treat custom-
ers, and horv much the organization sells.
lva11r ro take ar-rd keep sales jobswith the organization. Hard-driving, arnbitior-rs, risk-
taking salespeople rnight enjoy the poteritial rewards of a straight cornmission plau.
An organization that watlts salespeo1.,le to concentrate on listening to cttstomers and
buildirrg relationships rnight ilant to attracr a differenr kind of salesperson by affer-
ing more of the pay in the forrn of a saiary. Basing part or all of a saiesperson’s pay on
commissiorrs assumes that the organization wants to attract people vi,ith some lr,illing-
ness ro take risks-probabll, a reasonable asslrnption about people u’hose job includes
talking to strangers and encotrragiirg rhem to spend money.
Empioyers may address the drawbacks of individual incentives by including group
incentives in the organization’s compensatioir p1an. To win gror,rp incetrtives, einployees
Organizatior-rs that wanr ernployees to focus on efficiency may adopt a gainsharing
program, whicl-i measures increases in productivity ancl effectiveness and clistributes
a Lrortiou of each gain to employees. For exarnple, if a factory enjoys a productivitv
gain worth $30,000, hallthe gail might be the cotnpany’s share. The other $i5,000
u,ouid be disrribured among the ernpioyees in the factory. Knowing that they can
enjoy a financial benefit from helping the compar-ry be more procluctirre, employees
supposedly will look for rvays to u’ork more efficiently and impror,e the rvay the fac-
tory operates.
sures for cornplex jobs. For exarnple, horv would a hospital measLtre the prodr-rction
}J
‘3
numbt
involv
surir-rg
focus I
later, ir
ees bel
providi
discuss
tions. I
. Man
. Nee<
. lvlan
. High
. Ernp.
r Infor
o Goal
. Com
o Perfo
o Ernpl
Joseph f
field, oL
sales vah
the bonr
possible
$1.2 mil;
frr 1
)1.1 ln1l
will get :
target an
the gain
of the gai
remainde
iosses in
rvhen cos
the organ
remaininl
the orgar-r
In contras
perforrnar
plerformal
that most of the employees are
research and information technol-
ogy experts. the one expectation
that seems certain is that great
ideas will flow. The incentives
add excitement and a sense of
urgency to the kinds of creative
thinking a companY like lnfosurv
would need as part of its dailY
business.
Seek Ways to Draw Out Workers’ ldeas,”
Wall Street Journal, December 21 ,
2009, http:/lonline.wsj.com; Hammond!
Candies, “About Us,” corporate Web
site, www.hammondscandies.com,
accessed April 26, 201 0; and lnfosurv,
“About lnfosurv,” corporate Web site,
www.infosurv.com, accessed April 26,
2010.
less than 50 percent or holding steady during a period rvhen govert’rment funds were
needed to keep tl-re companies alivel16
Adding ro this flexibilit1,, organizations also rnay motivate employees r’vith one-tirne
bonuses. For example, nhen one organization acquires another, it usually wants to
retain certain valuable employees in the organization it is buying. Therefore, it is com-
mon for organizations involved in an acquisition to pay retention bonltses-oue-lime
incentives paid in exchange for remaining v,’ith the company-to top managers,
engineers, top-pe#orming salespeople, and information tecl”urology specialists. lfhen
C1-rattem, a Chattanooga, Tennessee company that makes health ar-rd bear-rt1, prod-
ucts, \\,as acquired by pharmaceutical cornpar-r)’ Sanofi-Aventis, the deal included
rerelltiolt bonuses for Chattern’s chief executive officer, presldent, general counsel,
and chief financial officer in exchange for them staying with the company for several
tnore 1’g2v5.17
Sales Commissions
A variation on piece rates and bonuses is the payn’rent of commissions, or pay cai- Cornmissitrns
culatecl as a percentage of sales. For instance, a furniture salesperson might earn corn- lncentive pay
missions equaling 6 percent times the price of the furniture the person sells during calculated as a
the period. Selling a $2,000 couch u’or-rlcl add $120 to tlie salespersonb commissions percentageof sales.
363
Many car salespeople earn a straight contmission, meaning tlrat
10oo/o of their pay colnes lrom contnrission instead of a salary. What
type of individual nright enjoy a job like this?
$-$3 ldentify ways
to recognize group
performance.
&ainsharing
Group incentive
pr0gram that measures
improvements in
productivity and
effectiveness and
distributes a portion of
each gain to employees.
for the periocl. Cornrnission Lates vary tremendousiy
frorn one industri, and company to another. Exatn-
ples reported include an average rate betu’een 5.0
and 5.5 percent for real estate,30 percent up to 90
percent of first year’s premilllns on life insr-rrance
(then dropping to as lora’as 4 percent in subseqrrent
years of tl-re poiicy), and 20 to 30 percer-rt of profits
for auto sales.l8
Some salespeople earn a commission in addition
to a base salary; others earn only comtnissions-a
pay arrangenrer-rt called a straight commission plan.
Straight commissions are common among iusur-
ance and real estate agents and car salespeople.
Other salespeople earir no commissions at all, br”it a
straight salary Paying most or all of a salesperson’s
compensation in the form of salary frees rhe sales-
person to focus on developillg clrstoner goodu’ill.
Paying lnost or zr11 of a salesperson’s cornpensation ir-r the form of cointnissitrirs encour-
ages the salesperson to focus on closing sales. in this way, differences in salespeople’s
compensation directly ir-rfluence hou, they spend their tit-tre, hou’ they treat custom-
ers, and horv much the organization sells.
Tl-re narure of salespeople’s corrpensation also affects the kinds of people nho rvill
lva11r ro take ar-rd keep sales jobswith the organization. Hard-driving, arnbitior-rs, risk-
taking salespeople rnight enjoy the poteritial rewards of a straight cornmission plau.
An organization that watlts salespeo1.,le to concentrate on listening to cttstomers and
buildirrg relationships rnight ilant to attracr a differenr kind of salesperson by affer-
ing more of the pay in the forrn of a saiary. Basing part or all of a saiesperson’s pay on
commissiorrs assumes that the organization wants to attract people vi,ith some lr,illing-
ness ro take risks-probabll, a reasonable asslrnption about people u’hose job includes
talking to strangers and encotrragiirg rhem to spend money.
ff*y f*r ffin*up t**rf*rm&ffie#
Empioyers may address the drawbacks of individual incentives by including group
incentives in the organization’s compensatioir p1an. To win gror,rp incetrtives, einployees
lltllst cooperate and share knorvledge so that the entire groLrl) call lneet its performance
targets. Comrnon group incentives include gainsharing, bot-tttses, at-id team au’ards.
Gainsharing
Organizatior-rs that wanr ernployees to focus on efficiency may adopt a gainsharing
program, whicl-i measures increases in productivity ancl effectiveness and clistributes
a Lrortiou of each gain to employees. For exarnple, if a factory enjoys a productivitv
gain worth $30,000, hallthe gail might be the cotnpany’s share. The other $i5,000
u,ouid be disrribured among the ernpioyees in the factory. Knowing that they can
enjoy a financial benefit from helping the compar-ry be more procluctirre, employees
supposedly will look for rvays to u’ork more efficiently and impror,e the rvay the fac-
tory operates.
Gainsharrng addresses tl-re challenge of ider-rtifying appropriale performance mea-
sures for cornplex jobs. For exarnple, horv would a hospital measLtre the prodr-rction
F:
}J
;:i
‘3
ril
t:
:t:
of irs
numbt
involv
surir-rg
iron, tc
focus I
later, ir
ees bel
providi
discuss
Gair
tions. I
. Man
. Nee<
. lvlan
. High
. Ernp.
r Infor
o Goal
. Com
o Perfo
and t
o Ernpl
Apo
Joseph f
field, oL
sales vah
the bonr
possible
the stant
$1.2 mil;
frr 1
)1.1 ln1l
will get :
target an
Typic:
the gain
of the gai
remainde
iosses in
rvhen cos
the organ
remaininl
the orgar-r
Group
In contras
perforrnar
plerformal
