Chapter 15.6 - Using Reward Systems to Motivate Performance

What is the most general form of merit pay?

Annual salary increases - The most general form of merit pay plan is to provide annual salary increases to employees based on their relative merit. Merit, in turn, is usually determined or defined based on the person's performance and overall contributions to the organization.

Which type of executive compensation is determined by the performance of the organization with the board of directors sometimes determining distribution?

Bonuses - The traditional method of incentive pay for executives is in the form of bonuses. Bonuses, in turn, are usually determined by the performance of the organization.

Sabine's company allows all employees to become meaningful stakeholders in the organization. What type of group-level reward system does Sabine's company use?

Employee stock ownership plans - employee stock ownership plans (ESOPs) also represent a group-level reward system that some companies use. Under the employee stock ownership plan, employees are gradually given a meaningful stake in ownership of a corporation.

In what way is a Scanlon plan different from other gainsharing plans?

Employees receive the majority of the cost savings that the plan achieves. - The Scanlon plan has the same basic strategy as gainsharing plans, in that teams or groups of employees are encouraged to suggest strategies for reducing costs. However, the distribution of these gains is usually tilted much more heavily toward employees, with employees usually receiving between two-thirds and three-fourths of the total cost savings that the plan achieves.

Jolanta's department using a reward system. When employees offer ideas that save the company money, the group will receive up to 20 percent of the money the company saves. Which type of reward system does Jolanta's department use?

Gainsharing - This type of group reward system is a gainsharing program. Gainsharing programs distribute costs savings associated with gains in productivity that are achieved by employees.

Which of the following is not part of a typical compensation plan for senior executives?

Hourly wages - Most senior executives receive compensation through base pay, stock option plans, and bonuses, not through hourly wages.

Which of the following compensation plans formally base at least some meaningful portion of compensation on the relative value of the contributions of employees?

Merit pay plans - Merit pay plans are compensation plans that formally base at least some meaningful portion of compensation on merit. Merit pay generally refers to pay awarded to employees on the basis of the relative value of their contributions to the organization.

Why are piece-rate incentive plans prone to fail?

Performance is not always under the worker's control - Such simplistic systems fail to account for such facts as minimum-wage levels and rely very heavily on the assumptions that performance is totally under a worker's control and that the employee does a single task continuously throughout his or her work time. Thus, most organizations today that try to use incentive compensation systems use more sophisticated

Which plan is a reward system where an organization pays an employee a certain amount of money for every unit he or she produces?

Piece-rate incentive - Under a piece-rate incentive plan, the organization pays an employee a certain amount of money for every unit he or she produces.

Stitches, Inc. is a specialty clothing manufacturer. Clothing is produced in bulk quantities and then customized with monograms and other unique embellishments before final shipment. Employees on the custom stitching line are compensated for each individual item completed. What type of reward system is used in the custom stitching department?

Piece-rate incentive plan - Piece-rate incentives are used in the custom stitching department. Piece-rate incentive plans pay individuals a certain rate for each unit produced.

What is the most common form of individual incentive?

Sales commissions - Perhaps the most common form of individual incentive is sales commissions that are paid to people engaged in sales work. In general, the person might receive a percentage of the total volume of attained sales as his or her commission for a period of time.

For many executives, which type of incentive makes up the largest share of their salary mix?

Stock options - A recent study by KPMG Peat Marwick indicates that for senior management whose salary exceeds $250,000, stock options represent the largest share of the salary mix (relative to salary and other incentives). Furthermore, when we consider all of top management (annual salary over $750,000), stock options comprise a full 60 percent of their total compensation.

What is the underlying assumption of a gainsharing program?

The employer and the employees all have the same goal - Gainsharing programs are designed to share the cost savings from productivity improvements with employees. The underlying assumption of gainsharing is that employees and the employer have the same goals and thus should appropriately share in incremental economic gains.

When are individual incentive pay plans most effective?

When rewards occur on a real-time basis - This reward system is most effective when rewards occur on a real-time basis. A piece-rate incentive plan issues rewards relatively close to when the performance occurred.

TruTech wants to reward employees for outstanding performance, however the reward needs to be a one-time reward based on the specific level of performance. TruTech should consider using ____.

incentives - A major advantage of incentives relative to merit systems is that incentives are typically a one-time reward and do not accumulate by becoming part of the individual's base salary.

New approaches to performance-based rewards include _____.

individualizing the reward system - Individualizing the reward system is a new approach to performance-based rewards. A new approach is to have employees and groups have a say in how rewards are distributed, not top managers.

To have the best chance of encouraging employees to work harder or better, rewards need to be tied specifically to _____.

performance - rewards that are tied specifically to performance, have the greatest impact on enhancing both motivation and actual performance.

Destani's company just instituted an organization-wide incentive in which a certain amount of money, based on the company's earnings, is placed into a pool. At the end of the year, that money is evenly divided and distributed to all employees. This type of reward system is an example of _____.

profit sharing - In a profit-sharing approach, at the end of the year, some portion of the company's profits is paid into a profit-sharing pool that is then distributed to all employees.