Matakuliah
Tahun
: J0124 – Manajemen Sumber Daya Manusia
: 2010
Incentive Rewards
19
Learning Outcomes
After studying this chapter, the students should be able to :
• Identify the types of incentive plans
• Identify the reasons for implementing incentive plans
• Identify basic requirements for successful implementation of
incentive programs
Bina Nusantara University
3
Strategic Reasons for Incentive Plans
• Variable Pay
 Tying pay to some measure of individual, group, or
organizational performance.
• Incentive Pay Programs
 Establish a performance “threshold” to qualify for
incentive payments.
 Emphasize a shared focus on organizational
objectives.
 Create shared commitment in that every individual
contributes to organizational performance and
success.
© 2010 South-Western, a part of Cengage Learning. All rights reserved
Types of Incentive Plans
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Administering Incentive Plans
• Incentive systems are effective:
 When incentives are based on actual differences in
individual, team, or organizational performance and
not seen as entitlements.
 When annual incentive budgets are large enough to
reward and reinforce exceptional performance.
 When overhead costs associated with plan
implementation and administration are properly
considered beforehand and are controllable.
© 2010 South-Western, a part of Cengage Learning. All rights reserved
Successful Incentive Plans
• Employees have a desire for an incentive plan.
• Employees are encouraged to participate.
• Employees see a clear connection between the
incentive payments they receive and their job
performance.
• Employees are committed to meeting the
standards.
• Standards are challenging but achievable.
• Payout formulas are simple and
© 2010 South-Western, a part of Cengage Learning. All rights reserved
understandable.
Individual Incentive Plans
• Straight Piecework
 An incentive plan under which employees receive a
certain rate for each unit produced.
• Differential Piece Rate
 A compensation rate under which employees whose
production exceeds the standard amount of output
receive a higher rate for all of their work than the
rate paid to those who do not exceed the standard
amount.
© 2010 South-Western, a part of Cengage Learning. All rights reserved
Computing the Piece Rate
60 minutes (per hour)
12 minutes(standard time per unit)
$12.75 (hourly rate)
= 5 units per hour
= $2.55 per unit
5 units (per hour)
© 2010 South-Western, a part of Cengage Learning. All rights reserved
Piecework: The Drawbacks
• Problems with piecework systems:
 Is not always an effective motivator
 Piecework standards can be difficult to develop.
 Individual contributions can be difficult measure.
 Not easily applied to work that is highly mechanized
with little employee control over output.
 Piecework may conflict with organizational culture
(teamwork) and/or group norms (“rate busting”).
 When quality is more important than quantity.
 When technology changes are frequent.
© 2010 South-Western, a part of Cengage Learning. All rights reserved
Individual Incentive Plans (cont’d)
• Standard Hour Plan
 An incentive plan that sets pay rates based on
the completion of a job in a predetermined
“standard time.”
 If employees finish the work in less than the
expected time, their pay is still based on the
standard time for the job multiplied by their
hourly rate.
© 2010 South-Western, a part of Cengage Learning. All rights reserved
Individual Incentive Plans (cont’d)
• Bonus
 Incentive payment that is supplemental to the
base wage for cost reduction, quality
improvement, or other performance criteria.
• Spot bonus
 Unplanned bonus given for employee effort
unrelated to an established performance
measure.
© 2010 South-Western, a part of Cengage Learning. All rights reserved
Merit Pay
• Merit Pay Program (Merit Raise)
 Links an increase in base pay to how successfully an
employee achieved some objective performance
standard.
• Merit Guidelines
 Guidelines for awarding merit raises that are tied
to performance objectives.
© 2010 South-Western, a part of Cengage Learning. All rights reserved
Motivation Through Merit Raises
• Develop employee confidence and trust in
performance appraisal.
• Establish job-related performance criteria.
• Separate merit pay from regular pay.
• Distinguish merit raises from cost-of-living
raises.
• Withhold merit payments when performance
declines.
© 2010 South-Western, a part of Cengage Learning. All rights reserved
Lump-Sum Merit Pay
• Lump-Sum Merit Program
 Program under which employees receive a year-end
merit payment, which is not added to base pay.
 Advantages:

Provides financial control by maintaining annual salary
expenses and not escalating base salary levels.

Contains employee benefit costs for levels of benefits
normally calculated from current salary levels.

Provides a clear link between pay and performance.
© 2010 South-Western, a part of Cengage Learning. All rights reserved
Sales Incentives
Sales Incentive Plans
Straight Salary
Straight Commission
Salary and Commission
Combinations
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Incentives for Professional Employees
Managerial and Executive Incentives
Bonuses and merit increases
Double-track wage systems
Performance incentive bonuses
Profit sharing and stock ownership
Executive perquisites (perks)
© 2010 South-Western, a part of Cengage Learning. All rights reserved
Executive Compensation
• The Executive Pay Package
 Base salary
 Short-term incentives or bonuses
 Long-term incentives or stock plans
 Benefits
 Perquisites (perks)
© 2010 South-Western, a part of Cengage Learning. All rights reserved
Group Incentive Plans
• Team Incentive Plans
 Compensation plans where all team members
receive an incentive bonus payment when
production or service standards are met or
exceeded.
• Establishing Team Incentive Payments
 Set performance measures upon which incentive
payments are based
 Determine the size of the incentive bonus.
 Create a payout formula and fully explain to
employees how payouts will be distributed.
© 2010 South-Western, a part of Cengage Learning. All rights reserved
Group Incentive Plans (cont’d)
• Gainsharing Plans
 Programs under which both employees and the
organization share the financial gains according to a
predetermined formula that reflects improved
productivity and profitability.
© 2010 South-Western, a part of Cengage Learning. All rights reserved
Enterprise Incentive Plans
• Profit Sharing
 Any procedure by which an employer pays, or
makes available to all regular employees, in
addition to their base pay, current or deferred
sums based upon the profits of the enterprise.
 Challenges:

Agreement over the percentages of shared of profits and the
forms of distribution (cash or deferred) of profits between
company and employees

Annual variations and possibility of no payout due to
financial condition of company

Maintaining motivational connection of profit-sharing to
performance of employees
© 2010 South-Western, a part of Cengage Learning. All rights reserved
Enterprise Incentive Plans (cont’d)
• Stock Options
 Granting employees the right to purchase a specific
number of shares of the company’s stock at a
guaranteed price (the option price) during a
designated time period.
 The value of an option is subject to stock market
conditions at the time that option is exercised.
© 2010 South-Western, a part of Cengage Learning. All rights reserved