types

  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;

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,9:

::

F,
:t:
r+:

*:
tt.
:r.t
:,ti

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g

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,’i

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i:;r:

:,i,

:;
.il

.i

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a,
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:,

#:

,&
&-
:#
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.
tare
rtra

SOURCE: K. J. Murphy, “Merck & Co., lnc. (B),” Boston: Harvard Business School, Case 491-0A6. Copyright @ 1990 by the
President & Feliows of Harvard College. Reprinted with permission.

becorne eligibie for bigger rnerit increases. An advantage of rnerit pa)’ is therefore that
rt rnakes tl-re reu’ard rnore valuable by relating it to economic coirclitior-rs.

A dlarvback is that cclnditior-rs can shrink the available range of increases. During
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

rof
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.

–
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.

rof
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.

362 PART 4 Compensating Human Resources

Another advantage of merit pay is that it provides a method for rewarding perfor-
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

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
become expensive. Mun”g..t at a rnajority of organizations fate most employees’

p..for*ur,.. ln the top.tJo categories-(ourof four or five).I3 Therefore, the major-
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

Chapter a. Anorh.. .or…iio., mlght be to use 360-degree per{ormance feedback
(dlscussed in Chapter 9), but so far, organizations have not used nrultisource data for

pay decisions.14′
Another c{rawback of merit pay is that it makes assumptions that may be mislead-

ing. Rer.varding employees for superior performance ratings assumes that those ratings

dJp.nd o.,
“*”ploy””s’

abiiity ant motivation. But performance rnay actually depend
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-

.., ah” authority, training, and resources they need. Under these conditions, employ-
ees will likely conclude that the merit pa] syslsrn is unfair’

Qualiry guru’$U. Edwards Deming also criticizes merit pay
for discouraging team-

*o.i. Ir-, b.-ing’s words, “Everyone propeis himself forward, or tries to, for his own
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

.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
.”u.rlor-r’to such problems, Deining advocated rhe use of group incentives’ Another

alternative is for merit pay to include ratings of teamwork and cooperation’ Some

ernployers ask co-workers to provide such ratings’

Performance Bonuses
Like merit pay, performance bonuses reward individual performance, but bonus

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”,
for individual performance can be extremely effective and give the organi’

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,
“*pioyees

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
meeting SuCh routine targets as sales or production nt,mbers. Such bonuses encouf-

“g”
hur”d rvork. But an organization that focuses on growth and innovatiop may get

b”etter results from .”*uii.,g employees for ieaming new skills than from linking
;;;”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.

tffere invest-

ment banks, for example, really rewarding the right behaviors if bonuses were falling

{i
‘t$l
“t!l
,:Jti

!#

$

‘r$:.

i:
r.,1

.ii.

INCE

Some c,
activitier
Two gor
entirely r
making i

Hamr
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

less than
needed tc

Addinl
bonuses. .
retain cer
mon for c
incentiver
engineers.
Chattem,
Llcts, was
retention
and chief
more yean

Sales C
A variatio
culated as
missions e
the period

rfor-
age-

i job
fhis
ss of

ckly
yees’

ajor-
falr-

lines
:d in
back
a for

lead-
tings
pend

‘el of
ploy-
plov-

eam-
o\vn

,1e, if
rst of
erials
rs. In
other
iome

es are

lance
:ed to

:gani-
clude
vhictr
.-time
es for
ICOUr-

ry get
r-rking
con-r-

,apsetl

rvest-
alling

INCENTIVES FOR INNOVATION

Some companies tie bonuses to
activities that foster innovation.
Two good examples come from
entirely different i ndustries: candy
making and survey research.

Hammond’s Candies pays work-
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,

the company paid out more than
$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.

lnfosurv, a marketing research
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-

pany’s 15 employees to sug-
gest 100 innovative ideas in 100
days. lf they succeed, everyone
will receive a

Sou rces: feri Evans, ” Entrepreneurs
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

364 PART 4 Compensating Human Resources

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

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‘3

ril

t:

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of irs
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iron, tc
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later, ir
ees bel
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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

100 bonus. Given
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.

Sou rces: feri Evans, ” Entrepreneurs
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

364 PART 4 Compensating Human Resources
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