Notes of Incentives & compensation management

Incentive and compensation management written by professional professors.

1. Herman Aguinis, University of Colorado at Denver
Reward Systems: Definition
Set of mechanisms for distributing
Tangible returns
and
Intangible or relational returns As part of an
employment relationship
.

2. Herman Aguinis, University of Colorado at Denver
Definition of Reward Management
• This management discipline is concerned with
the formulation and implementation of
strategies and policies, the purposes of which
are to reward employees fairly, equitably and
consistently in accordance with their value to
the organisation.
• It deals with design, implementation and
maintenance of reward systems (processes,
practices, procedures) that aim to meet the
needs of both the organisation and its
stakeholders.

3. Herman Aguinis, University of Colorado at Denver
Reward management is concerned
with:
• the formulation and implementation of reward strategies;
• the overall design and maintenance of the reward system;
• deciding how people should be rewarded financially with
the help of job evaluation and market pricing;
• deciding what non-financial rewards such as recognition
should be provided;
• base pay management – designing and managing grade and
pay structures;

4. Herman Aguinis, University of Colorado at Denver
• contingent pay – devising and managing schemes that
reward people according to their merit or contribution; • the
provision of pensions and employee benefits;
• managing and controlling the reward system.
11/18/17

5. .
Herman Aguinis, University of Colorado at Denver
Tangible returns
pay
Hourly wages, Salary
-of-Living Adjustment (COLA)
To combat the effect of inflation in an attempt to preserve the
employee buying power

Additional pay based on employee level of performance
- and long-term )

6. .
Herman Aguinis, University of Colorado at Denver
bonuses (short term) or stock options/ownership (long term)
Tangible returns


Serve as a Backup to employee salaries in the event when employee is sick,
disabled, or no longer able to work .
E.g. Disability pay, medical insurance, pension plans, savings plans.
In fact, a recent survey including both employees in general and HR professionals in
particular showed that health care/medical insurance is the most important benefit,
followed by paid time off and retirement benefits

E.g., housing, transportation, mobile , gym facility, phone bills.

7. .
Herman Aguinis, University of Colorado at Denver

E.g., vacation time, counseling, financial planning, flexible work schedules (e.g.,
telecommuting, non-paid time off).
Intangible returns

8. Herman Aguinis, University of Colorado at Denver
The 4Ps of Reward
• Pay
– Salary, bonus, shares, etc.
• Praise
– Positive feedback, commendation, staff-of-
theyear award, etc.
• Promotion
– Status, career elevation, secondment, etc.

9. Herman Aguinis, University of Colorado at Denver
• Punishment
– Disciplinary action, withholding pay, or
criticism, etc
Returns and Their Degree of Dependency on the
Performance Management System
Returns Returns
Return
Cost of Living
Adjustment
Income Protection
Work/life Focus
Allowances
Relational Returns
Base Pay
Contingent Pay
Short-term
-
term Incentives

10. Herman Aguinis, University of Colorado at Denver
.
Degree of
DependencyDegree of
Dependency
Degree of Dependency
• Low
• Low
• Moderate •
Moderate •
Moderate
• Moderate
• High • High
• High

11. Herman Aguinis, University of Colorado at Denver
Business &
HR strategy
Reward
strategy
Total Reward
Total
Remuneration
Job evaluation
Grade &
pay structure
Market rate
analysis
Contingent pay
Employee
benefits
Non-financial
rewards
Allowances
Performance
management
Derivation
of Total

Reward

12. Herman Aguinis, University of Colorado at Denver
Components of Total Reward (Armstrong 2009)

Transactional
tangible) (
rewards
Relational
( intangible)
rewards
Base pay
Contingent pay
Employee benefits
Learning and development
The work experience
Total
remuneration
Non-financial
rewards
Recognition, achievement, growth
Total reward

13. Herman Aguinis, University of Colorado at Denver
Components of Total Remuneration
• Base pay: Base pay is the fixed compensation paid to an
employee for performing specific job responsibilities. It is
typically paid as a salary, hourly (or in some situations piece rate).
There is a tendency towards market orientation and the
increasing role of qualifications.
• Contingent pay: Individual contingent pay relates financial
rewards to the
– individual performance, organisation or team performance,
– competence,
– service,
– contribution or
– skill of individual employees.

14. Herman Aguinis, University of Colorado at Denver
Consolidated pay: built into the base pay
Variable pay: provided in the form of cash bonuses (increasing role
nowadays).
• Employee benefits: Elements of remuneration given in addition
to the various forms of cash pay.
Contingent pay
• Individual contingent pay is a good motivator
(but to what extent?) for those who receive it.
• It attracts and retains better workers.

15. Herman Aguinis, University of Colorado at Denver
• It makes labour related expenditures more
flexible.
• It can demotivate those who don’t receive it
(depends on performance measurement)
• Can act against quality and teamwork.
Types of individual contingency pays
• Performance-related: increases basic pay or
bonuses related to assessment of performance

16. Herman Aguinis, University of Colorado at Denver
• Competence-related: Pay increases related to
the level of competence
• Contribution-related: pay is related both to
inputs and outputs
• Skill-based: pay is related to acquisition of
skills
• Service-related: pay is related to service-time

17. Herman Aguinis, University of Colorado at Denver
Team based pay
• Pay is related to team performance
• It can encourages teamwork, loyalty and
cooperation
• It can be demotivating on individual level
(encourages social loafing)

18. Herman Aguinis, University of Colorado at Denver
Organisaton-wide schemes
• Profit-Sharing Plans – organization-wide
programs that distribute compensation based
on an established formula designed around
profitability
• Gain Sharing – compensation based on
sharing of gains from improved productivity

19. Herman Aguinis, University of Colorado at Denver
• Employee Stock Ownership Plans (ESOPs) –
plans in which employees acquire stock, often
at below-market prices
Employee benefits
• Attractive and competitive total remuneration
• Provide for the personal needs
• Increase commitment toward the organisation
• Tax-efficient

20. Herman Aguinis, University of Colorado at Denver
Main types of Employee benefits
• Pension schemes
• Personal (and family) security: different types of insurances
• Financial assistance: loans, house purchase schemes, discount on
company services…
• Personal needs: holidays, child care, recreation facilities, career
breaks…
• Company cars and petrol
• Intangible benfits: quality of working life…
• Other benefits: mobile phones, notebooks…

21. Herman Aguinis, University of Colorado at Denver
• Cafeteria systems
Definition of the psychological
contract
“The perceptions of both parties to the employment
relationship, organization and individual, of the
reciprocal promises and obligations implied in that
relationship”
The state of the psychological contract is concerned
with whether the promises and obligations have

22. Herman Aguinis, University of Colorado at Denver
been met, whether they are fair and their
implications for trust.

23. 23
Herman Aguinis, University of Colorado at Denver
Variable Pay: Incentives for
Variable
Pay Assumptions
Some people perform better
and are more productive than
others
Better performing employees
should receive more
compensation
Some jobs contribute more
to organizational success
than others
Part of compensation should
be tied directly to
performance and results

24. 24
Herman Aguinis, University of Colorado at Denver
Performance

25. 25
Herman Aguinis, University of Colorado at Denver

26. 26
Herman Aguinis, University of Colorado at Denver
Developing Successful Pay-for-
Performance Plans

27. 27
Herman Aguinis, University of Colorado at Denver

Pay-for-
Performance
Plans
Link strategic goals
and employee
performance
Enhance results
and reward
employees
financially
Reward and
recognize
employee
performance
Promote
achievement of
HR objectives

28. 28
Herman Aguinis, University of Colorado at Denver
Successful Variable Pay Plans

29. 29
Herman Aguinis, University of Colorado at Denver

Effective Incentive Plans
Plan Fits
the
Organizatio
n
Plan Rewards
the
Appropriate
Actions
Plan
effectively
Administere
d

30. 30
Herman Aguinis, University of Colorado at Denver
Why Variable Pay Plans Fail

31. 31
Herman Aguinis, University of Colorado at Denver

Plan incentives are
not seen as desirable
Plan doesn’t reward
doing a good job
Plan doesn’t motivate
Plan rewards
teams/groups rather
than individuals
Plan doesn’t increase
base pay
Employees’
View of Variable Pay
Plan

32. 32
Herman Aguinis, University of Colorado at Denver
Developing Successful Incentive Plans

33. 33
Herman Aguinis, University of Colorado at Denver

Develop clear, understandable plans that are
continually communicated.
Use realistic performance measures.
Keep plans current and linked to organizational
objectives.
Link results to payouts that recognize
differences.
Identify variable pay incentives separately from
base pay.
Successful
Incentive Plans

34. 34
Herman Aguinis, University of Colorado at Denver
Individual Incentives

35. 35
Herman Aguinis, University of Colorado at Denver

Necessary Conditions For
Individual Incentive Plans
Individual
performance must
be identified
Individual
competitiveness
must be desired
Individualism must
be stressed in the
organizational
culture

36. 36
Herman Aguinis, University of Colorado at Denver
Categories of Variable Pay Plans

37. 37
Herman Aguinis, University of Colorado at Denver
Individual Incentives
• Piece-Rate Systems
–Straight piece-rate system
–Differential piece-rate system
• Bonus
• “Spot” Bonuses
• Special Incentive Programs
–Performance awards

38. 38
Herman Aguinis, University of Colorado at Denver
–Recognition awards
–Service awards
Purposes of Special Incentives

39. 39
Herman Aguinis, University of Colorado at Denver

40. 40
Herman Aguinis, University of Colorado at Denver
Why Organizations Establish Variable Pay
Plans for Groups/Teams
Group/Team-
Based Variable
Pay Plans
Improve
productivity
Tie pay to team
performance
Improve
customer service
or production
quality
Increase
employee
retention

41. 41
Herman Aguinis, University of Colorado at Denver
Design of Group/Team Incentive Plans

42. 42
Herman Aguinis, University of Colorado at Denver

Group/Team Incentive Plan
Issues
Distribution
of
Group/Team
Incentives
Timing of
Group/Team
Incentives
Decisions
About
Group/Team
Incentive
Amounts

43. 43
Herman Aguinis, University of Colorado at Denver
Group/Team Incentives
• Distributing Rewards
– Same-size reward for each member
– Different-size reward for each member
• Problems with Group/Team Incentives
– Rewards in equal amounts may be perceived as “unfair” by
employees who work harder, have more capabilities, or
perform more difficult jobs.
– Group/team members may be unwilling to
handle incentive decisions for co-workers.

44. 44
Herman Aguinis, University of Colorado at Denver
– Many employees still expect to be paid according to individual
performance.

45. 45
Herman Aguinis, University of Colorado at Denver
Conditions for Successful

46. 46
Herman Aguinis, University of Colorado at Denver
Group/Team Incentives

47. 47
Herman Aguinis, University of Colorado at Denver
Types of Group/Team Incentives
• Group/Team Results
– “Self-funding” pay plans for groups/teams that reward
through improved organizational results on the basis of
group output, cost savings, or quality improvement.
• Gainsharing (Teamsharing or Goal Sharing)
– The sharing with employees of greater-than-expected
gains in productivity through increased discretionary
efforts.
• Improshare

48. 48
Herman Aguinis, University of Colorado at Denver
• Scanlon Plan

49. 49
Herman Aguinis, University of Colorado at Denver
Organizational Incentives

50. 50
Herman Aguinis, University of Colorado at Denver

Primary Objectives
• Increase productivity and
organizational performance
• Attract or retain employees
• Improve product/service
quality
• Enhance employee morale
Drawbacks
• Disclosure of financial
information
• Variability of profits from year
to year
• Profit results not strongly tied
to employee efforts
Profit Sharing

51. 51
Herman Aguinis, University of Colorado at Denver
Framework Choices for a Profit-Sharing Plan

52. 52
Herman Aguinis, University of Colorado at Denver

53. 53
Herman Aguinis, University of Colorado at Denver
Employee Stock Plans
• Stock Option Plan
– A plan that gives employees the right to
purchase a fixed number of shares of company
stock at a specified price for a limited period of
time.
• If market price of the stock is above the specified
option price, employees can purchase the stock and
sell it for a profit.

54. 54
Herman Aguinis, University of Colorado at Denver
• If the market price of the stock is below the specified
option price, the stock option is “underwater” and is
worthless to employees.

Employee Stock Plans
• Employee Stock Ownership Plan (ESOP)
– A plan whereby employees gain significant stock
ownership in the organization for which they work.
– Advantages

55. 55
Herman Aguinis, University of Colorado at Denver
• Favorable tax treatment for ESOP earnings
• Employees motivated by their ownership stake in the firm
– Disadvantages
• Retirement benefit is tied to the firm’s future
performance
• Management tool to fend off hostile takeover
attempts.

Types of Sales Compensation Plans

56. 56
Herman Aguinis, University of Colorado at Denver
• Salary-Only
– All compensation is paid as a base wage with no
incentives.
• Commission
– Straight Commission
• Compensation is computed as a percentage of sales in units or
dollars.
• The draw system make advance payments against future
commissions to salesperson.
– Salary-Plus-Commission or Bonuses
• Compensation is part salary for income stability and part
commission for incentive.
Effectiveness of Sales Incentive Plans

57. 57
Herman Aguinis, University of Colorado at Denver

Frequent changes in sales plans
An “entitlement” culture
Pay without performance
Poor quota setting
Small differences in pay for top and bottom
performers
Causes of
Ineffectiveness in
Incentive
Plans

58. 58
Herman Aguinis, University of Colorado at Denver
Executive Compensation

59. 59
Herman Aguinis, University of Colorado at Denver

Executive Salaries
Executive Benefits
Executive Perquisites
( Perks )
Annual Executive Incentives
and Bonuses
Performance Incentives:
Long Term vs. Short Term
Elements of
Executive
Compensation

60. 60
Herman Aguinis, University of Colorado at Denver
“Reasonableness” of Executive
Compensation

61. 61
Herman Aguinis, University of Colorado at Denver

Common Executive Compensation Criticisms
Executive
Compensation
Considerations
and
Concerns
Would another company hire this
person as an executive?
How does the executive’s
compensation compare with that
for executives in similar
companies?
What would an investor pay for
the level of performance of the
executive?
Is the executive’s pay consistent
with pay for other employees
within the company?

62. 62
Herman Aguinis, University of Colorado at Denver

63. Herman Aguinis, University of Colorado at Denver
Thank you for your attention!