Pay-for

-performance
 Why Incentives?

People join a firm because of Pay

People stay in a firm (or leave) because of Pay

Employees more readily agree to develop job

skills because of Pay

Employees perform better on their jobs because

of Pay
Pay-for-performance
 Designing a pay-for-
performance plan
The effectiveness of a pay model depends upon three
things- efficiency, equity and compliance.

1.Efficiency: it involves three general areas of

concern.

(i) Strategy:
. Does the pay-for-performance plan support corporate
objectives?
. The plan should link well with HR strategy and objectives.
. The reward should not be on the basis of status quo.
. Finally, management has to address the most difficult
question like- How much of an increase makes a difference?
 (ii) Structure:
Structure of the organization should be sufficiently decentralized
to allow different operating units to create flexible variations on a
general pay for performance plan.
Different operating units may have different competences and
different competitive advantages, so the organization should not
have a rigid pay-for-performance system that detracts from these
advantages.

(iii) Standards:
The key to designing a pay-for-performance system rests on
standards:
Objectives
Measures
Eligibility
2. Equity/Fairness :
The second design objective is to ensure that the system is
fair to employees. Two types of fairness are concerns of
employees:
Distributive justice: Fairness in the amount that is
distributed to the employees. Managers have little influence
over the size of employees pay check. It is influenced more
by external market conditions, pay policy decisions of
organization and occupational choices.
Procedural justice: Fairness of the procedure used to
determine the amount of reward employee receives.
Managers have control over this type and the organizations
that use fair procedures and supervisors are perceived as
more trustworthy and command higher levels of
3. Compliance:
The pay for performance system should comply with existing
laws as a good reward system enhances the reputation of the
firm.
 Types of Pay-for-
performance
1) Shop-floor incentive: Shop-floor incentive
schemes are based on the principle of payment-by-
performance(PBR).

F. W. Taylor(1911), stated that the object of shop-floor incentive

scheme was to reward the input of labor within closely-defined
tasks and by so doing, to stimulate people to work at a faster pace
and increase their output.

This is in accordance with the instrumentalist view of motivation

which is closely associated with Taylorism.

The view that employees will only work harder if they get more
money still dominates thinking about shop-floor incentive
schemes, although the advent of high technology in the shape of
computer-integrated manufacture has meant that what were
 2) Sales force incentive:

Any company with a consumer-facing (or, indeed, a business-to-

business) aspect will constantly be looking to increase their sales
figures.
Targets are set for sales people, but there is frequently little
incentive to push beyond these targets once an employee is
drawing a salary.
Developing effective incentive schemes to encourage your sales
people to perform to the best of their abilities is an important
aspect of running a successful consumer facing business.
The major benefits here are two-fold; in the first instance your
turnover obviously increases as your sales go up. Secondly, a
good sales incentive scheme that goes beyond the regular bonus
 3) Excutive pay

Executive payisfinancial compensationreceived by an

officer of a firm, often as a mixture of salary, bonuses, shares
of and/or call options on the company stock, etc.

Over the past three decades, executive pay has risen

dramatically beyond the rising levels of anaverage worker's
wage.Executive pay is an important part ofcorporate
governance, and is often determined by a company'sboard of
directors.
 4) Team based Pay

It is one of the incentive plans which has lot of attributes to

be a failure reports many companies.
First, team comes in many varieties such as, full-time
teams(work group organized as a team), part-time
teams(that cut across functional departments) and full-time
teams which are temporary. With so many varieties. It is
hard to have a consistent type of compensation plan.
A second problem with rewarding teams is called the level
problem.
Third problem is the complexity of a plan which varies from
organization to organization.
Company makes sure that all its team pay comes from
performance measures under the control of the team but
there are uncontrolled elements factored into the process of
setting performance standards.
Types of team based
Pay
Profit-sharing

Gain-sharing

Employees Stock Ownership

Plan(ESOP)
(a) Profit-sharing plan
Profit sharing, when used as a special term,
refers to variousincentiveplans introduced
bybusinessesthat provide direct or indirect
payments toemployeesthat depend on
company's profitability in addition to
employees' regularsalary andbonuses.
The profit sharing plans are based on
predeterminedeconomicsharing rules that
define the split of gains between the
company as a principal and the employee as
an agent.
For example, suppose the profits are x, which
might be a random variable.Before knowing
the profits, the principal and agent might
agree on a sharing rule s(x).Here, the agent
will receive s(x) and the principal will receive
the residual gain x-s(x).
b) Gain-sharing plan:
Gain-sharing is best described as a system of
management in which an organization seeks
higher levels of performance through the
involvement and participation of its people.
As performance improves, employees share
financially in the gain. It is a team approach;
generally all the employees at a site or
operation are included.
Gain-sharing measures are typically based on
operational measures i.e., productivity,
spending, quality, customer service.
Gain-sharing applies to all types of business
that require employee collaboration and is
found in manufacturing, health care,
distribution, and service, as well as the public
sector and non-profit organizations.
(c) Employee Stock
Ownership
Plan(ESOP):
Some companies believe that employees can
be linked to the success or failure of the
company through ESOP.

Companies like PepsiCo, Lincoln Electric,

Coca-Cola and others goals to increase
employee involvement in the organization
which may increase the performance.

ESOPs dont make sense as an incentive

since the effects are generally long-term.
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