Chapter 11
Establishing Rewards and Pay Plans
Introduction
• People do what they do to satisfy some
need and they look for a payoff or
reward.
• The most obvious reward is pay, but
there are many others, including:
– promotions
– desirable work assignments
– peer recognition
– work freedom
Introduction
Types of Reward Plans
Intrinsic versus Extrinsic Rewards
• Intrinsic rewards (personal
satisfactions) come from the job itself,
such as:
– pride in one’s work
– feelings of accomplishment
– being part of a work team
Types of Reward Plans
Intrinsic versus Extrinsic Rewards
• Extrinsic rewards come from a source
outside the job
– include rewards offered mainly by management
– Money
– Promotions
– Benefits
Types of Reward Plans
Financial versus Nonfinancial Rewards
• Financial rewards include:
– wages
– bonuses
– profit sharing
– pension plans
– paid leaves
– purchase discounts
• Nonfinancial rewards emphasize making life on the job
more attractive; employees vary greatly on what types they
find desirable.
Types of Reward Plans
Performance-based versus Membership-Based Rewards
• Performance-based rewards are tied to specific job
performance criteria.
– commissions
– piecework pay plans
– incentive systems
– group bonuses
– merit pay
• Membership-based rewards such as cost-of-living
increases, benefits, and salary increases are offered to all
employees.
Compensation
Administration
• The process of managing a
compensation program so that the
organization can attract, motivate and
retain competent employees who
perceive that the program is fair.
Compensation
Administration
• Job evaluation – the process used to
determine each job’s appropriate worth
within the organization.
• Based on job analysis information.
Job Evaluation and the
Pay Structure
Job Evaluation
• Use of job analysis information to determine
the relative value of each job in relation to all
jobs within the organization.
– The ranking of jobs
– Labor market conditions
– Collective bargaining
– Individual skill differences
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Job Evaluation and the Pay
Structure
Isolating Job Evaluation Criteria
• Judgment is involved in defining what factors should
be used to compare jobs.
• Typical criteria:
– mental requirements
– supervisory control
– complexity
– physical demands
– personal contacts
Job Evaluation and the
Pay Structure
Establishing the Pay Structure
• Compensation surveys
– Used to gather factual data on
pay rates for other organizations
– Information is often collected on
associated employee benefits as
well
Special Cases of
Compensation
Incentive Compensation Plans
Incentives can be added to the basic
pay structure to provide rewards for
performance.
Special Cases of
Compensation
Incentive Compensation Plans
• Individual Incentives include
– merit pay plans (annual increase,
based on performance)
– piecework plans (pay based on
number of units produced typically in a
specified time period.)
– time-savings bonuses and commissions
Special Cases of
Compensation
Incentive Compensation Plans
Individual Incentives:
– Work best where clear objectives can be set
and tasks are independent.
– Many organizations today require employees
to place a percentage of their salary “at risk”
so that merit pay does not become a substitute
for automatic cost-of-living raises.
Special Cases of
Compensation
Incentive Compensation Plans
• Group Incentives
– Incentives can be offered to groups, rather
than individuals, when employees' tasks
are interdependent and require
cooperation.
Special Cases of
Compensation
Incentive Compensation Plans:
• Plant-wide Incentives:
• Direct employee efforts toward organizational
goals (such as cost reduction)
– Scanlon Plan - supervisor and employee
committees suggest labor-saving improvements
– IMPROSHARE - formula is used to determine
bonuses based on labor cost savings
Special Cases of
Compensation
Paying for Performance
• Pay is based on some measure of performance.
• Common performance measures are:
– piece-rate plans
– gain sharing
– wage incentive plans
– profit sharing
– lump sum bonuses
Special Cases of
Compensation
Paying for Performance
• Competency-based compensation
– Rewarded for skills, knowledge and behaviors
• leadership
• problem solving
• decision making
• strategic planning
– Broad-banding - pre-set pay levels that determine
what people are paid based upon the type and level
of competencies they possess.
Special Cases of
Compensation
Team-Based Compensation
– Incentives for empowered work teams to
exceed established goals and share equally
in rewards.
– Depends on:
• clarity of team purpose and goals
• ability of the team to obtain needed resources
• effective team communication skills and trust
Executive Compensation
Programs
Salaries of Top Managers
– Executive salaries, bonuses and stock
options may seem high.
– Competition for executive talent raises
the price of hiring an executive.
– High salaries can be a motivator for
executives and lower-level managers
Executive Compensation
Programs
Supplemental Financial Compensation
– Deferred bonuses – paid to executives over
extended time periods, to encourage them to stay
with the company.
– Stock options – allow executives to purchase
stock in the future at a fixed price.
– Hiring bonuses – compensate for the deferred
compensation lost when leaving a former
company.
Executive Compensation
Programs
Supplemental No financial Compensation:
Perquisites
• Perks may include:
– paid life insurance
– club memberships
– company cars
– interest-free loans
– free financial legal and tax counseling
Executive Compensation
Programs
• Supplemental No financial
Compensation: Perquisites
– Golden parachutes protect executives
when a merger or hostile takeover occurs
by providing severance pay or a
guaranteed position.