Chapter 10: Incentives

Chapter Overview

Incentives can give organizations a competitive advantage by aligning employees’ goals and behaviors with the company’s strategy and goals. Incentives link rewards to factors identified as valuable, including performance, skills, competence, and contribution.

Learning Objectives

1. Explain why organizations might choose to tie pay to performance.
2. Describe when it is appropriate to have a high level of reward differentiation across employees.
3. Describe some of the criticisms of stock options as an incentive tool.
4. Explain how pay for performance improves employee motivation and performance.
5. Describe the golden rule of pay for performance plans.
6. Explain the difference between errors of commission and errors of omission in incentive pay and their impacts on organizations.
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Incentive Plans
Real World Challenge: Incentive Compensation at Sprint

Sprint Nextel wants its incentive pay to be linked to employees’ performance but also wants to be fair during the volatile economy. They want to create a compensation system that ties employee rewards to the key pillars of its corporate strategy.

Chapter Outline

I. DESIGNING INCENTIVE PLANS
A. The top four reasons organizations give for tying pay to performance are to:
1. Recognize and reward high performers
2. Increase the likelihood of achieving corporate goals
3. Improve productivity
4. Move away from an entitlement culture
B. Before designing an incentive pay plan to motivate performance, it is important to consider:
1. Preference of individual employees
2. Size of the rewards for high performance
3. Method of motivating individual job performance
4. Objectivity of the evaluation process that determines the rewards Global Issues Feature: Global Recognition Programs

To be most effective, organizational rewards must be consistent with employees’ cultural values about work. This feature provides examples of how appropriate forms of recognition differ across countries.

C. Identify Goals for the Incentive Plan: Determine what the organization really wants people to do such as safety, performance, productivity, customer service, or skill building.

HR Flexibility Feature: Motivating Different Behaviors through Incentives

This table shows the different incentive plans that can be used to help motivate different employee behaviors.

D. Budgeting: Determining the amount for the incentive pay program is important to ensure that it motivates employees and also creates a positive return on investment for the organization
E. Differentiating Rewards: Differentiating rewards based on performance rather than giving all employees the same reward
F. Setting Goals and Identifying Performance Measures: Focusing on assessing outcomes related to business strategy execution and business performance with fair rewards based on multiple measures that capture employees’ actual contributions to organizational success

Strategic Impact Feature: Success through Incentives at WD-40

When an employee survey found that employees at lubricant maker WD-40 wanted their incentive compensation to be better linked to measures within their control, the company listened. The HR team now works with the finance department to give quarterly reports on earnings and sales performance to every employee so that they know where they stand and what they need to do.

G. Providing Incentives for Short- and Long-Term Performance
1. Short-term incentives are one-time variable rewards used to motivate short-term employee behavior and performance (typically one year or less).
2. Long-term incentives are intended to motivate employee behaviors and performance that support company value (e.g., share price) and long-term organizational health.

H. The Pay Mix: To prevent competition or a narrow focus on earning incentives from undermining organizational performance, it is essential to balance the mix of individual, group, and team rewards.