Pay for Performance and Financial Incentives

Pay for Performance and Financial Incentives

Lecture Outline:

Money’s Role in Motivation

Incentive Pay Terminology 

Linking Strategy, Performance, and Incentive Pay

Motivation and Incentives 

Individual Employee Incentive and Recognition Programs

Piecework 

Merit Pay as an Incentive

Incentives for Professional Employees

Nonfinancial and Recognition-Based Awards

Social Media and HR

Job Design 

Incentives for Salespeople

Salary Plan

Commission Plan

Combination Plan

Maximizing Sales Results

Sales Incentives in Action

Improving Performance through HRIS 

Incentives for Managers and Executives

Strategy and the Executive’s Long-Term & Total Rewards Package

Short-Term Incentives: The Annual Bonus 

Strategic Long-Term Incentives

Other Executive Incentives

Team and Organization-Wide Incentive Plans

How to Design Team Incentives

Evidence-Based HR

Profit-Sharing Plans

Scanlon Plans 

Other Gainsharing Plans

At-Risk Pay Plans

Employee Stock Ownership Plans

Incentive Plans in Practice: Nucor

In Brief:  

This chapter gives an overview of money and motivation, and then outlines different incentive programs that are used for different types of employees.  It also discusses organization-wide incentive plans.

Interesting Issues:  

There is tension between the concept of providing employees with a secure, stable income (which some feel allows them the ability to be entrepreneurial and take appropriate risks for the company), and the idea of linking pay directly to performance.  Improved employee performance must be linked to improved organizational performance if incentive pay is to be more than just another labor cost.

Learning Objectives:

1. Explain how you would apply four motivation theories in formulating an incentive plan.

2. Discuss the main incentives for individual employees.

3. Discuss the pros and cons of commissions versus straight pay for salespeople.

4. Describe the main incentives for managers and executives.

5. Name and describe the most popular organization-wide incentive plans.

Annotated Outline:

I. Money’s Role in Motivation - Frederick Taylor made three contributions in the late 1800s: standards of output defining a fair day’s work, the scientific management approach, which emphasized improvement of work methods and the use of financial incentives for those whose output exceeded standards.

A.  Incentive Pay Terminology – Variable pay is usually an incentive plan that ties pay to some measure of the firm’s overall profitbaility. 

B.  Linking Strategy, Performance, and Incentive Pay – Compensation, shareholder value, and turbulence are factors that characterize business today, and they have produced a renaissance for financial incentive/pay-for-performance plans.

C. Motivation and Incentives – The law of individual differences means that people differ in personality, abilities, values, and needs. They therefore react to different incentives in different ways. Several theorists have contributed relevance to designing incentive plans.

1. Motivators and Frederick Herzberg – Hygiene-motivator theory divides needs into two factors. Hygiene factors include such things as working conditions, salary, and incentives. Motivators include those factors that make the job more intrinsically motivating, like challenge, feedback, and recognition.

2. Demotivators and Edward Deci – Deci found that extrinsic rewards could at times actually detract from a person’s intrinsic motivation.

3.   Expectancy Theory and Victor Vroom – The theory suggests that a person’s motivation to exert some level of effort is a function of three things: the person’s expectancy (in terms of probability) that his or her effort will lead to performance; instrumentality, or the perceived connection (if any) between successful performance and actually obtaining the rewards; and valence, which represents the perceived value the person attaches to the reward.

4. Behavior Modification/Reinforcement and B. F. Skinner – Psychologist B.F. Skinner proposed that to understand behavior, one must understand the consequences of that behavior. Behavior modification means changing behavior through rewards or punishments that are contingent upon performance. 

II. Individual Employee Incentive and Recognition Programs

A. Piecework - Piecework involves paying the worker a sum (piece rate) for each unit he/she produces.  Straight piecework entails a strict proportionality between results and rewards regardless of output.  With a standard hour plan, the worker gets a premium equal to the percent by which his/her performance exceeds the standard.

B. Merit Pay as an Incentive - Merit pay or a merit raise is any salary increase the firm awards to an employee based on his/her individual performance.  It is different from a bonus in that it usually becomes part of the employee’s base salary, whereas a bonus is a one-time payment.

C. Incentives for Professional Employees - Professional employees are those whose work involves the application of learned knowledge to the solution of the employer’s problems, such as lawyers, doctors, economists, and engineers.  Making incentive pay decisions for professional employees can be challenging because such employees are usually paid well anyway.

D. Nonfinancial and Recognition-Based Awards - Recognition programs usually refer to formal programs such as employee-of-the-month programs. Social recognition programs are more informal manager-employee exchanges, including praise and approval. Performance feedback is similar but provides quantitative or qualitative information on performance in order to change the performance or maintain it. Most employers combine both financial and non-financial incentives to motivate employees.

E. Social Media and HR - There are many reasons to use Internet sites to manage awards programs.  The sites can offer a much broader range of products than most employers could catalog and offer by themselves.  And perhaps most importantly, the whole process is expedited, so it’s much easier to bestow and deliver the awards.

F. Job Design - Research has shown that job design is a primary driver of employee                 engagement.  

III. Incentives for Salespeople

A. Salary Plan - Fixed salaries are offered by some firms. Straight salary makes it simple to switch territories or to reassign salespeople, and it can foster loyalty among the sales staff.  A disadvantage is that it can constrict sales and de-motivate potentially high-performing salespeople.

B. Commission Plan - Salespeople are paid for results, and only for results; thus, such plans tend to attract high-performing salespeople who see that effort clearly leads to rewards. But, it may cause them to neglect non-selling duties like servicing small accounts, cultivating dedicated customers, and pushing hard-to-sell items.

C. Combination Plan ¬- Most companies pay salespeople a combination of salary and commissions, usually with a sizable salary component.  Combination plans give salespeople a floor to their earnings and still provide an incentive for superior performance. But, they can become complicated, and misunderstandings can result.

D. Maximizing Sales Results - Setting effective quotas is an art.  In today’s fast-changing business scene, sales quotas must become more flexible than they have been in the past.  There is a tendency to set commission rates informally, without considering how much each sale must contribute to covering expenses.

E. Sales Incentives in Action - Car salespersons’ compensation ranges from 100% commission to a small base salary with commission accounting for most of total compensation. This approach encourages the salesperson to hold firm on the retail price, and to push “after sale products” like floor mats and side moldings. There may also be extra incentives to sell packages such as rustproofing. Commission plans like these still dominate, but not as much. Many dealerships are substituting salary plus bonus plans for commissions. This reflects the growing emphasis on “one price no hassle” pricing.

F. Improving Performance through HRIS - Somewhat astonishingly, given the amount of money employers pay out in commissions, about 60% of employers track sales performance and sales commissions much as they did decades ago, using spreadsheets. But to maximize performance, the sales manager typically needs evidence, and the best way to do this is using HRIS software systems such as VUE. VUE can analyze compensation and performance data, conduct “what-if” analyses and reports, and do trend analyses.

IV. Incentives for Managers and Executives

A. Strategy and the Executive’s Long-Term and Total Rewards Package – Few HR practices have as profound or obvious an impact on strategic success as the company’s long-term incentives.  In creating the compensation package, you should: 1) define the strategic context for the executive compensation program, including the internal and external issues that face the company, and the firm’s business objectives; 2) shape each component of the executive compensation package based on your strategic aims, and then group the components into a balanced plan that makes sense in terms of these aims; 3) create a stock option plan that gives the executive compensation package the special character it needs to meet the unique needs of the executives, the company, and the firm’s strategy; 4) check the executive compensation plan for compliance with all legal and regulatory requirements and for tax effectiveness; and 5) install a process for reviewing and evaluating the executive compensation plan whenever a major business change occurs.

1. Sarbanes-Oxley – The law affects how employers formulate their executive incentive programs and injects a higher level of responsibility into executives’ and board members’ decisions. 

B.  Short-Term Incentives:  The Annual Bonus – Is aimed at motivating the short-term performance of managers and executives.

     1.    Eligibility usually includes both top and lower-level managers.

     2. Fund size refers to the total amount of bonus money the firm makes available.  A nondeductible formula is where employers use a straight percentage (usually of the company’s net income) to create the short-term incentive fund.  A deductible formula assumes that the fund should start to accumulate only after the firm has met a specified level of earnings.

3. Individual Rewards – Typically, a target bonus (as well as maximum amount) is set for each eligible position, and the actual award reflects the person’s performance.

C. Strategic Long-Term Incentives – These are used to inject a long-term perspective into executives’ decisions. 

      1. Stock Options – These account for over half of executives’ compensation.  A stock option is the right to purchase a specific number of shares of company stock at a specific price during a specific period of time; the executive thus hopes to profit by exercising his/her option to buy the shares in the future but at today’s price.

2. Stock Option Problems – There are several issues with stock options: they can reward managers who experience a less than stellar performance and can encourage executives to take riskier ventures to increase profits.

3. Other Stock Plans – Stock appreciation rights permit the recipient to exercise the stock option (by buying the stock) or to take any appreciation in the stock price in cash, stock, or some combination of these.  A performance achievement plan awards shares of stock for the achievement of predetermined financial targets. In a restricted stock plan, shares are usually awarded without cost to the executive, but selling the stock is restricted for a specified time period.

4. Ethics and Incentives - Simplistic, financial-performance-oriented incentives, in the absence of strong ethical standards may breed unethical behavior. The solution is to foster an ethical culture.      

D. Other Executive Incentives – Companies provide various incentives to persuade executives to remain with the firm, such as golden parachutes and loans.

V. Team and Organization-Wide Incentive Plans

A. How to Design Team Incentives - Members are paid based on one of three formulas – all members receive the pay (a) earned by the highest producer, (b) earned by the lowest producer, or (c) equal to the average pay earned by the group.

B. Evidence-Based HR - HR Inequities that Undercut Team Incentives – Research suggests that team incentives are often counterproductive.

C.  Profit-Sharing Plans - Involve employees receiving a share of the company’s annual profits.  There are several types of profit-sharing plans: cash plans, Lincoln Incentive system, and deferred profit-sharing plans.

D. Scanlon Plans - This is an incentive plan developed in 1937 by Joseph Scanlon.  The basic features of the plan include: philosophy of cooperation, identity, competence, involvement system, and sharing of benefits formula.

E.  Other Gainsharing Plans - are incentive plans that engage many or all employees in a common effort to achieve a company’s productivity objectives, with any resulting cost-savings gains shared among employees and the company.

F. At-Risk Pay Plans - put some portion of the employee’s weekly pay at risk, subject to the firm meeting its financial goals.

 G. Employee Stock Ownership Plans (ESOP) - are company-wide plans in which a firm contributes shares of its own stock (or cash to purchase the stock) to a trust established to purchase shares of the firm’s stock for employees.

 H.  Incentive Plans in Practice: Nucor - Nucor Corp. is the largest steel producer in the United States. It also has the highest productivity and lowest labor cost per ton.122 Employees can earn bonuses of 100% or more of base salary, and all Nucor employees participate in one of four performance-based incentive plans.

Improving Performance Questions:

12-1: You have decided to verify that recognition does in fact improve performance. To that end, you will use an honest observation to praise someone’s performance today. What was the effect of your experiment?

12-2: The dean has asked you to design an incentive plan for your professor. How would you apply what you learned in this feature to do so?

12-3: Given these findings, would it make sense for managers in government-controlled companies to receive stock options tied to something other than profitability, such as “no employees lose their jobs in this company”? Why?

Discussion Questions:

12-4: Compare and contrast six types of incentive plans.

Various types of incentive plans were presented in the text, including piecework plans, straight and guaranteed plans, standard hour plans, plans for salespersons (commissions and combination plans), and group incentive plans.  With the piecework plans, earnings are tied directly to what the individual worker produces and are more appropriate in a manufacturing organization.  Commissions are more appropriate for salespeople in situations where they are largely unsupervised.  In group incentive plans like the Scanlon Plan, all workers involved in developing and implementing cost savings share in the benefits of the suggestions.  

12-5: Explain five reasons why incentive plans fail.

When incentive plans fail, it can be for a variety of reasons like:  employees do not believe that effort will obtain the reward, bad management overrides the plan, rewards are tied to the wrong measures, the plan is complicated and difficult for employees to understand, or standards are too high or too low.

12-6: Describe the nature of some important management incentives.

Two widely used management incentive plans are merit pay and profit-sharing plans.  Merit pay is any salary increase that is awarded to an employee on his or her individual performance.  Advocates argue that only pay tied directly to performance can motivate improved performance.  Profit-sharing plans distribute a portion of the company's profits to employees in the form of a bonus.  Research shows that benefits are more subtle than increased productivity—benefits are possibly in the form of better worker commitment.  There might also include long-term incentives.

12-7: You are applying for a job as a manager and are at the point of negotiating salary and incentives. What questions would you ask your prospective employer concerning incentives? Describe the incentives package you would try to negotiate for yourself.

Student’s answers will vary but should include discussion on long term and total rewards incentive including the advantages and disadvantages of both. 

12-8: In this chapter, we listed a number of guidelines for instituting a pay-for-performance plan. Do you think these points make sense in terms of motivation theory? Why or why not?

Student’s answers will vary but should include discussion on piecework and standard hour plans including the advantages and disadvantages of each. 

12-9: What is merit pay? Do you think it’s a good idea to award employees merit raises? Why or why not?

Merit pay is a salary increase that is awarded to an employee based on his or her individual performance.  It is a good idea to award merit raises when you have a good performance appraisal system and employees' individual effort can be fairly and accurately evaluated or measured.

12-10: Give four examples of when you would suggest using team or group incentive programs rather than individual incentive programs.

Students should review the sections in the chapter on team or group incentive programs and individual incentive programs, and think about situations where they would prefer one incentive plan over the other.

Individual and Group Activities:

12-11: Working individually or in groups, create an incentive plan for the following positions: chemical engineer, plant manager, used-car salesperson. What factors did you have to consider in reaching your conclusions?

I would give the chemical engineer a merit raise system because he or she has little perceived control or impact over the production or profitability of the company.  The plant manager should receive an annual bonus tied to the profitability of the plant, as well as a stock option plan to encourage long-term planning as well.  The used-car salesperson would likely receive a straight commission plan because sales are more directly dependent on his or her ability to sell those cars to prospective customers.

12-12: A state university system in the Southeast instituted a “Teacher Incentive Program” (TIP) for its faculty. Faculty committees within each university’s colleges were told to award $5,000 raises (not bonuses) to about 40% of their faculty members based on how good a job they did teaching undergraduates, and how many courses they taught per year. What are the potential advantages and pitfalls of such an incentive program? How well do you think it was accepted by the faculty? Do you think it had the desired effect?

This program would put a premium on undergraduate teaching as opposed to research or graduate teaching.  If it were to work, the best teachers would be motivated to teach at the undergraduate level in order to increase their earnings.  The pitfalls are many.  Some research or graduate faculty may actually earn more through consulting or other outside means, thus they will not be motivated by this system.  If research is important to this organization, or the graduate programs are vital, this incentive plan could damage those programs.  The awarding of the moneys is likely to be inconsistent because specific guidelines have not been spelled out.  More likely, the rewarding of the raises may become more political as the committees who have other values determine the awards.  It is very likely that the system was met with great opposition by the faculty.  

12-13: Appendix A, PHR and SPHR Knowledge Base at the end of this book lists the knowledge someone studying for the HRCI certification exam needs to have in each area of human resource management (such as in Strategic Management, Workforce Planning, and Human Resource Development). In groups of four to five students, do four things: (1) review Appendix A; (2) identify the material in this chapter that relates to the required knowledge Appendix A lists; (3) write four multiple choice exam questions on this material that you believe would be suitable for inclusion in the HRCI exam; and (4) if time permits, have someone from your team post your team’s questions in front of the class, so that students in all teams can answer the exam questions created by the other teams.

12-14: Several years ago, the pension plan of the Utility Workers Union of America proposed that shareholders change the corporate bylaws of Dominion Resources, Inc., so that in the future management had to get shareholder approval of executive pay exceeding $1 million, as well as detailed information about the firm’s executive incentive plans. Many unions—most of which have pension funds with huge investments in U.S. companies—are taking similar steps. They point out that, usually, under Internal Revenue Service regulations; corporations can’t deduct more than $1 million in pay for any of a company’s top five paid executives. Under the new rules the unions are pushing, boards of directors will no longer be able to approve executive pay above $1 million; instead, shareholders would have to vote on it. In terms of effectively running a company, what do you think are the pros and cons of the unions’ recommendations? Would you vote for or against the unions’ recommendation? Why?

Most students may support this recommendation, but they need to be able to clearly state rational reasoning as to why.  Hopefully, you will have some students who oppose it in order to clearly give both sides to the argument.  You may want to make sure both sides are well represented.

Experiential Exercise: Motivating the Sales Force at Express Auto

Purpose: The purpose of this exercise is to give you practice developing an incentive plan.

Required Understanding: Be thoroughly familiar with this chapter, and read the following:

Express Auto, an automobile mega-dealership with more than 600 employees that represents 22 brands, has just received a very discouraging set of survey results. Customer satisfaction scores have fallen for the ninth straight quarter. Customer complaints include:

• It was hard to get prompt feedback from mechanics by phone.

• Salespeople often did not return phone calls.

• The finance people seemed “pushy.”

• New cars were often not properly cleaned or had minor items that needed immediate repair or adjustment.

• Cars often had to be returned to have repair work redone. Table 12-3 describes Express Auto’s current compensation system.

How to Set up the Exercise/Instructions:  Divide the class into groups of four to five students. One or more groups should analyze each of the five teams in column one. Each student group should analyze the compensation package for its Express Auto team. Each group should address these questions:

12-15: In what ways might your team’s compensation plan contribute to the customer service problems?  

Sales force:  pay is based almost entirely on commission.  The salesperson has no motivation to assist customers who they do not believe will result in a sale.  Finance office:  bonuses for getting customers to use the company financing encourage finance employees to coerce customers into making that choice.  Detailing:  pay is based entirely on the number of cars detailed per day.  There is no measure of quality, nor requirement of it regarding pay.  Mechanics:  pay is based almost entirely on number of cars serviced as well as servicing them faster than the standard estimated repair time.  There is no measurement of quality or accuracy of repairs.  Receptionist/phone service people:  straight hourly rate does not have any performance rewards.

12-16: What recommendations would you make to improve the compensation system in a way that would likely improve customer satisfaction?

The dealership already has a customer satisfaction survey in place.  They need to link results from quality measures to the incentives that their employees receive.  Examples are: Sales force:  one might decrease the commission somewhat and place that amount in a pool that is distributed based on customer comments about specific sales personnel.  Finance office:  bonuses for using company financing should be no more than bonuses based on customer satisfaction ratings.  Detailing:  there must be a measure of quality and detailers should be docked for any problem that results from their lack of attention to detail.  Mechanics:  re-works should dock a mechanics pay and mechanics whose work results in no complaints should receive a significant bonus.  Receptionist/phone service people:  those who answer the phone should be able to gain either performance increases in pay, or bonuses based on customer satisfaction ratings.  In general, the approach should be like “teaching to the test.”  If you want test scores to improve, you teach what will be on the test.  If you want measures of customer satisfaction to improve, you reward (or punish) people for those measures.  

Video Case Appendix:

Video Title: Motivation (TWZ Role-Play)

Synopsis:

During a rough economy, companies struggle with rewarding employees when they can’t afford to give raises. This video examines some incentives that employees may accept in lieu of money, at least temporarily. In this video, David is meeting with his supervisor, Linda, to discuss a potential raise. Their company could not afford to give raises the previous year and David understood that since it was a bad economy; as a company, they needed to pull together. Since the company has seemed to be doing better, David feels the time is right to ask for a raise. While Linda agrees that David is a valuable employee and she appreciates everything he has done for the company, she is not able to increase his salary. Linda does suggest some other options to David other than a raise, such as a flexible schedule, being a leader of a new project, or some training that he has been interested in taking. This video conveys the importance of communicating openly and equitably with each employee and knowing each employee as an individual in order to provide options of interest and value to him or her. It also discusses ways to create a collective spirit among workers.

Discussion Questions:

12-17: What do you think Dr. Fred Herzberg would tell Linda about the potential problem of not giving David his well-earned raise?

12-18: How effective do you think the incentives Linda suggested will be? What other suggestions would you make to Linda for keeping David motivated? Why?

12-19: On the whole, how good a job do you think Linda has done in dealing with David’s concerns to this point? Why do you say that?

Video Title: Motivating Employees through Company Culture (Zappos)

Synopsis:

Zappos is an online store that sells shoes, clothing, accessories, housewares, and beauty products. They are known throughout the industry for excellent customer service. Zappos CEO Tony Hsieh is also committed to making Zappos a fun loving and energetic place to work. Hsieh’s passion is to create a culture where he would be excited about going to work every day. He aims to motivate and inspire his employees with a commitment to 10 Core Values, including create fun and a little weirdness; be adventurous, creative, and open-minded; and build positive and family spirit.

Discussion Questions:

12-20: Motivation is fine, but what companies need is performance. How does the Zappos approach seem to be doing in terms of improving employee performance? Make a list of five specific financial and nonfinancial rewards you would recommend for Zappos. Next to each, indicate why you chose it, analyze each of the five teams in column one. Each student group should analyze the compensation package for its Express Auto team. Each group should address these questions.

12-21: In what ways might your team’s compensation plan contribute to the customer service problems? What recommendations would you make to improve the compensation system in a way that would likely improve customer satisfaction?

Application Case: Inserting the Team Concept into Compensation—or Not

Sandy Caldwell, the new Human Resources Manager for Hathaway Manufacturing, wanted to improve teamwork at every level of the organization. As part of the process of implementing cultural change, Sandy introduced a new pay-for-performance system.  The reaction to the change was immediate and “100% negative.”

12-22: Does the pay-for-performance plan seem like a good idea?  Why or why not? 

Management wants to provide incentive for team performance.  Their motives are fine.  Properly crafted (and with employee involvement), a pay-for-performance system may add value at Hathaway.  

12-23: What advice would you give Regina and Sandy as they consider their decision? 

Most scholars suggest that pay-for-performance works best (in the U.S.), when it has both an individual and a team component. Further, Regina and Sandy need to consider ways of engaging the workforce in the design/decision process. This involvement will likely provide better ideas, identify potential problem areas with proposed systems before they are implemented, and aid in the implementation process. 

12-24: What mistakes did they make in adopting and communicating the new salary plan? How might Sandy have approached this major compensation change a little differently? 

Sandy failed to involve significant stakeholders in the process.  Their input would likely have identified potential weaknesses in her system.  Further, by not involving others, the change in pay came largely as a surprise.  Employees take their pay seriously; surprises are not welcome.  Sandy already had agreement on some issues, like the mission and the vision.  She could have used that agreement to begin a dialog on linking compensation more directly to effectively accomplishing the mission. 

12-25: Assuming the new pay plan was eventually accepted, how would you address the fact that in the new performance evaluation system, employees’ input affects their peers’ pay levels? 

Typically, plans have two levels a team component and an individual component.  It is important for the team to realize that the company does best when the whole team succeeds, and that team success also requires individual performance. 

Continuing Case: Carter Cleaning Company - The Incentive Plan

12-26: Should this plan be extended to pressers in the other stores?  

No, not in its present form. While the piece-rate plan does make more effective use of Walt’s time and saves the company energy money, the quality control issue is a problem.  An incentive for quality needs to be included. 

12-27: Should other employees (cleaner/spotters, counter people) be put on a similar plan?  Why?  Why not?  If so, how exactly?  

It makes sense for some positions but not for others.  Cleaner-spotters are production employees who could also benefit from a similar plan.  It would have to have a quality incentive that makes sure they actually get the garments cleaned correctly!  An incentive plan that focuses on customer satisfaction makes more sense for the counter people. 

12-28: Is there another incentive plan you think would work better for the pressers?  Describe it. 

Some ideas might include combination plans (salary plus piece-rate), profit-sharing, or merit pay (higher pay for those who produce more). 

12-29: A store manager’s job is to keep total wages to no more than 30% of sales and to maintain the fuel bill and the supply bill at about 9% of sales each. Managers can also directly affect sales by ensuring courteous customer service and by ensuring that the work is done properly.  What suggestions would you make to Jennifer and her father for an incentive plan for store managers or front-desk clerks?  

Profit-sharing, gain sharing, performance plans, annual bonus, recognition, and merit pay are all options. 

Hotel Paris: Improving Performance at the Hotel Paris - The New Incentive Plan

12-30: Discuss what you think of the measurable criteria Lisa and the CFO set for their new incentive plan. 

Having a large percentage of employees eligible for merit increases or incentive pay is good, but will also be expensive. A 10% difference in reward level will likely motivate improved performance. In order to justify the expense there should be some proof that the behaviors which will be rewarded are linked to improved organizational financial performance. Lisa will need to track and communicate these connections. It is also important that the Hotel Paris find ways to measure what they plan to reward. 

12-31: Given what you know about the Hotel Paris’ strategic goals, list 3-4 specific behaviors you would incentivize for each of the following groups of employees: front desk clerks, hotel managers, valets, and housekeepers.

Answers will vary but may include:

• Front desk clerks – speed of check-in, number of positive comments by guests, decrease in number of complaints

• Hotel managers – decrease in absenteeism, process improvements

• Valets – time taken to deliver luggage from curb to room, decrease in number of wrong deliveries, positive feedback received

• Housekeepers – decrease in number of complaints, decrease in number of deliveries to room of forgotten items, increase in number of rooms available for early check-in

12-32: Lay out a complete incentive plan (including all long- and short-term incentives) for the Hotel Paris’ hotel managers. 

The Hotel Paris has placed outstanding customer service as a major goal for all employees especially the management staff.  Unfortunately, the current pay plan does not link pay to performance.  Therefore, both short and long term incentives should be considered to help support management staff who modeling the importance of provide outstanding customer service to the entire hotel staff.  Also an incentive plan should be implemented to recognize and reward the accomplishment of organizational goals.  Short-term incentives should include periodic recognition and reward programs to all staff who demonstrate outstanding customer service on a routine basis.  In addition, an annual bonus based on performance and goal accomplishments could be implemented to those key staff responsible for front line customer service as well as the accomplishment of other goals which advance the mission of the organization.  The organization should also consider implementing a merit pay program that would link pay to effective job performance.  Long-term bonuses could include profit sharing based on hotel occupancy and customer service reviews. 

Key Terms:

Financial Incentives - Financial rewards paid to workers whose production exceeds some predetermined standard.

Productivity - The ratio of outputs (goods and services) divided by the inputs (resources such as labor and capital).

Fair Day’s Work - Standards of output which employers should devise for each job based on careful, scientific analysis.

Scientific Management Movement - A management approach that emphasizes improving work methods through observation and analysis.

Variable Pay - Any plan that ties pay to productivity or profitability, usually as one-time lump payments.

Intrinsic Motivation - Motivation that derives from the pleasure someone gets from doing the job or task.

Expectancy - A person’s expectation that his or her efforts will lead to performance.

Instrumentality - The perceived relationship between successful performance and obtaining the reward.

Valence - The perceived value a person attaches to the reward.

Behavior Modification - Changing behavior through rewards or punishments that are contingent upon performance.

Piecework - A system of pay based on the number of items processed by each individual worker in a unit of time, such as items per hour or items per day.

Straight Piecework - An incentive plan in which a person is paid a sum for each item he or she makes or sells, with a strict proportionality between results and rewards.

Standard Hour Plan - A plan by which a worker is paid a basic hourly rate, but is paid an extra percentage of his or her base rate for production exceeding the standard per hour or per day.  This is similar to piecework payment but based on a percent premium.

Merit Pay (merit raise) - Any salary increase awarded to an employee based on his or her individual performance. 

Annual Bonus - Plans that are designed to motivate short-term performance of managers and are tied to company profitability.

Stock Option - The right to purchase a stated number of shares of a company stock at today's price at some time in the future.

Golden Parachutes - Payments companies make in connection with a change in ownership or control of a company.

Team or Group Incentive - A plan in which a production standard is set for a specific work group, and its members are paid incentives if the group exceeds the production standard.

Organization-Wide Incentive Plans - Plans in which all or most employees can participate, and which generally tie the reward to some measure of company-wide performance.

Profit-Sharing Plan - A plan whereby most employees share in the company's profits.

Scanlon Plan - An incentive plan developed in 1937 by Joseph Scanlon and designed to encourage cooperation, involvement, and sharing of benefits.

Gainsharing Plan - An incentive plan that engages employees in a common effort to achieve productivity objectives and share the gains.

Earnings At-Risk Variable Pay Plans - Plans that put some portion of the employees’ weekly  pay at risk, subject to the firm meeting its financial goals.

Employee Stock Ownership Plan (ESOP) - A corporation contributes shares of its own stock to a trust in which additional contributions are made annually.  The trust distributes the stock to employees on retirement or separation from service.

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