Piecework is the oldest and most popular individual incentive plan. Here you pay the worker a sum (called a piece rate) for each unit he or she produces. (Of course, the worker must make at least the minimum wage, so the plan should guarantee at least that.) The crucial issue is the production standard. Industrial engineers often set this—for instance, in terms of a standard number of units per hour. But in practice, most employers set the piece rates more informally.

Straight piecework entails a strict proportionality between results and rewards regardless of output. The standard hour plan allows for sharing exceptional productivity gains between employer and worker; here the worker receives extra income (such as more per piece) for some above-normal production. 4

There are legal considerations with piecework and other incentive plans. For example, under the Fair Labor Standards Act, if the incentive is in the form of a prize or cash award, the employer generally must include the value of that award when calculating the worker’s overtime pay for that pay period. 5 Suppose an employee who earns $10 per hour for 40 hours also got an incentive payment of $60 last week. Then his actual hourly pay last week was $460/40 or $11.50 per hour. If so, the employee would have to be paid one-and-one-half times $11.50 (not times $10) for any overtime hours worked.

Certain bonuses are excludable from overtime pay calculations. For example, discretionary Christmas and gift bonuses that are not based on hours worked, or are so substantial that employees don’t consider them a part of their wages, do not have to be included.

Merit pay, or a merit raise, is any salary increase the firm awards to an individual employee based on his or 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. The term merit pay is more often used for white-collar employees, particularly professional, office, and clerical employees.

Merit pay is the subject of much debate. Advocates argue that just awarding pay raises across the board (without regard to individual merit) may actually detract from performance, by showing employees they’ll be rewarded regardless of their performance. Detractors argue, for instance, that because many appraisals are unfair, so too is the merit pay you base them on. 6 Merit plan effectiveness depends on differentiating among employees. Base pay increases by U.S. employers for their highest-ranked employees recently were 5.6%, compared with only 0.6% for the lowest-rated employees. 7

One version ties merit awards to both individual and organizational performance. In Table 11.1, an outstanding performer would receive 70% of his or her maximum lump-sum award even if the organization’s performance were marginal. However, employees with marginal or unacceptable performance would get no lump-sum awards even when the firm’s performance was outstanding.

Professional employees are those whose work involves the application of learned knowledge to the solution of the employer’s problems, such as lawyers and engineers.

Making incentive pay decisions for professional employees is challenging. For one thing, firms usually pay professionals well anyway. For another, they’re already driven to produce high-caliber work.

However, it is unrealistic to assume that people like Google engineers work only for professional gratification. So, for example, Google pays higher incentives to engineers working on important projects. 8 And of course, such professionals also receive potentially millionaire-making stock option grants.

Dual-career ladders are another way to manage professionals’ pay. At many employers, a bigger salary requires rerouting from engineering to management, but not all professionals want this. Therefore, many employers have one path for managers and another for technical experts, allowing the latter to earn higher pay without switching to management. 9

As mentioned in Chapter 10, employers often supplement financial incentives with various nonfinancial and recognition-based awards. The term recognition program usually refers to formal programs, such as employee-of-the-month programs. Social recognition program generally refers to informal manager–employee exchanges such as praise, approval, or expressions of appreciation for a job well done. Performance feedback means providing quantitative or qualitative information on task performance so as to change or maintain performance; showing workers a graph of how their performance is trending is an example. 10

One survey of 235 managers found that the most-used rewards to motivate employees (top–down, from most used to least) were: 15

• Employee recognition

• Gift certificates

• Special events

• Cash rewards

• Merchandise incentives

• E-mail/print communications

• Training programs

• Work/life benefits

• Variable pay

• Group travel

• Individual travel

• Sweepstakes

The HR Tools feature elaborates.

HR Tools for Line Managers and Small Businesses: Goals and Recognition

The individual line manager should not rely just on the employer’s financial incentive plans for motivating subordinates; there are simply too many opportunities to motivate employees every day to let those opportunities pass. What to do?

First, the best option for motivating an employee is also the simplest—make sure the employee has a doable goal and that he or she agrees with it. It makes little sense to try to motivate employees with financial incentives if they don’t know their goals or don’t agree with them.

Second, recognizing an employee’s contribution is a powerful motivation tool. Studies show that recognition has a positive impact on performance, either alone or in combination with financial rewards. For example, in one study, combining financial rewards with recognition produced a 30% performance improvement in service firms, almost twice the effect of using each reward alone.

Third, use social recognition (such as compliments) as positive reinforcement on a day-to-day basis. Figure 11.1 presents a list. 16

Figure 11.1 Full Alternative Text

Talk About It – 1

• If your professor has chosen to assign this, go to www.pearson.com/mylab/management to discuss the following question. 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?

Job design (which we discussed more fully in Chapter 4) can affect employee motivation and retention. A study concluded that job design is a primary driver of employee engagement. A study by Towers Watson concluded that challenging work ranked as the seventh most important driver for attracting employees. 17 Job design is thus a useful part of an employer’s total rewards program.

The HR in Practice feature illustrates how employers combine incentives to boost profits.

Sales compensation plans may focus on salary, commissions, or some combination. 24

An executive’s reward package elements—base salary, short- and long-term incentives, and perks—should align with each other and with the company’s strategic aims. The employer should first ask, “What is our strategy and what are our strategic goals?” Then decide what long-term behaviors (boosting sales, cutting costs, and so on) the executives must exhibit to achieve the firm’s strategic goals. Then shape each component of the executive compensation package (base salary, short- and long-term incentives, and perks) and group them into a balanced plan that makes sense in terms of motivating the executive to achieve these aims. The rule is this: each pay component should help focus the manager’s attention on the behaviors required to achieve the company’s strategic goals. 38 Using multiple, strategy-based performance criteria is best. These include financial performance, number of strategic goals met, performance assessment by the board, employee productivity measures, and employee morale surveys.

One expert estimates that the typical CEO’s salary accounts for about one-fifth of his or her pay. A bonus based on explicit performance standards accounts for another fifth, and long-term incentive awards such as stock options and long-term performance plans account for the remaining three-fifths. 39

Employers are shifting from long-term incentives to put more emphasis on short-term performance and incentives. 41 Most firms have annual bonus plans for motivating managers’ short-term performance. Such short-term incentives can easily produce plus or minus adjustments of 25% or more to total pay. Four factors influence one’s bonus: eligibility, fund size, individual performance, and formula.

The employer wants to avoid managers boosting short-term profits by, for instance, delaying required maintenance. They therefore use long-term incentives to inject a long-term perspective into executives’ decisions. Popular long-term incentives include cash, stock options, stock, stock appreciation rights, and phantom stock. PepsiCo’s CEO was paid $26.4 million for 2015, including a base salary of $1.6 million, stock awards of $6.25 million and a performance-based cash bonus of $13.9 million, a $4.26 million adjustment to her pension, plus perks such as air travel. 46