Unit 4.6 - Incentive Compensation Systems

Question 1

What are the 5 money & motivation theories?

Answer 1

• Need Theory
• Self-determination Theory
• Expectancy Theory
• Equity Theory
• Goal Setting Theory

Question 2

What are Maslow’s Hierarchy of Needs?

Answer 2

1. Physiology
2. Safety
3. Love/belonging
4. Esteem
5. Self-actualization

A need theory

Question 3

What is McClelland’s Need Theory?

Answer 3

Need for achievement is a learned need

3 needs:

Achievement - tasks of moderate difficulty, effort over luck, desire more feedback; High achievers are characterized by personal responsibility, moderate risk, and desire for strong feedback

Affiliation - focus on relationships, avoid conflict

Power - desire to influence/lead, teach, and coach; focus on accomplishing group goals

Question 4

What is Herzberg’s Motivator-Hygiene Theory?

Answer 4

Motivator variables contributing to satisfaction and productivity are completely separate from the hygiene factors that determine levels of dissatisfaction

Job satisfaction - Motivation Factors
* Promotion opportunities, recognition, responsibility, achievement

Job dissatisfaction (if not met, no satisfaction) - Hygiene
* Quality of supervision, pay, company policies, physical working conditions, relations with others, job security

2 Factor Theory

Question 5

What is Attribution Theory?

Answer 5

Individual behavior is attributed to feelings, beliefs, and intentions

Stable vs. unstable (does cause change over time)
Internal vs. external (locus of control)

Stable, internal - ability (I have the talent)
Stable, external - Task difficulty (This is hard)
Unstable, internal - Effort (I worked hard)
Unstable, external - Luck (I got lucky)

Attributing causes to behavior

Question 6

What is Self-Determination Theory?

Answer 6

Examines the effects of extrinsic rewards on intrinsic satisfaction.

Extrinsic Rewards:
* Money
* Recognition
* Awards

Intrinsic Satisfaction:
* Personal gratification
* Motivation
* Confidence

Research suggests the controlling nature of extrinsic rewards destroys intrinsic satisfaction

Question 7

What is Expectancy Theory (Vroom)? *could show up on exam

Answer 7

Explains the relationship between effort, performance, and rewards.

Expectancy - Can I achieve the desired level of task performance?
Instrumentality - What work outcomes will be received as a result of the performance?
Valence - How highly do I value work outcomes?

Basis for performance management
Perceived efforts should be matched to rewards

Question 8

What is Equity Theory?

Answer 8

People evaluate their inputs to the job relative to the outputs they receive and they compare what they receive for their inputs to what others receive for theirs.

Attempts to reduce inequity:
* Alter their inputs,
* Alter their outcomes,
* Distort inputs or outcomes of self and/or others,
* Change objects of comparison, or
* Leave the org.

Question 9

What is Goal Setting Theory?

Answer 9

People perform best with a particular goal in sight.

The goal setting theory is especially effective when it is combined with feedback and incentives.

Premise:
* Specificity
* Difficulty
* Acceptance
* Commitment

Question 10

What is Incentive Compensation?

Answer 10

One of the most popular recommendations of rejuvenating productivity is to offer financial incentives that are directly tied to productivity, know as pay-for performance plans.

3 kinds:
* Individual
* Group
* Company-wide

Question 11

What is Merit Pay?

Answer 11

Increases in an employee’s wage level is based upon performance.

Contributors:
* Productivity
* Incentive
* Positive work attitude
* Attendance

Question 12

What is a piece-rate incentive?

Answer 12

Standard piece-rate plan - specific amount of payment per piece

Differential piece-rate plan - different amounts based on above standard vs. below standard work

Question 13

What is the Halsey Premium Plan?

Answer 13

Workers receive a guaranteed hourly wage plus a percentage (33 percent is recommended) of the wage for any time saved.

The actual production standards are determined by past performance rather than by time-and-motion studies.

Question 14

What is skills & knowledge based pay?

Answer 14

Reward employees for their ability to perform an array of related tasks or skills rather than for the actual work performed

Models:

Stair Step Model - ex. attorneys

Building Blocks Model - as you acquire skills, you get paid more

Job-point Accrual Model - similar to building blocks, but weighted based on values of skills added

Question 15

What is differential pay?

Answer 15

• overtime
• shift pay
• hazard pay
• on-call pay
• call-back pay
• geographic differentials
• weekend and holiday pay

Question 16

What are group/team incentives?

Answer 16

Ideal when….
* Individual performance is difficult to measure
* Coordinated effort is required
* The group is small enough that all members can discern that their individual effort makes a difference.

Question 17

What is profit sharing?

Answer 17

Philosophy: Those who contributed to creating the profits should participate in receiving them.

Types of profit-sharing plans:
- Cash (paid at end of each period)
- Deferred (held for a later period, typically retirement)

Distribution percentage:
* Constant percentage
* Discretionary
* Ascending/descending scale formula

Allocation formula - determines how money is divided among participants

Question 18

What is Gainsharing?

Answer 18

Company-wide incentive program similar to profit-sharing; but the bonuses are based on improved productivity rather than a percent of the profit; performance-based

Types of profit-sharing plans:
* Scanlon Plans
* Rucker Plans
* Improshare

Question 19

What is the Scanlon Plan?

Answer 19

Combination of gainsharing plan and an employee suggestion system

• Labor cost ratio = Labor costs divided by revenue (averaged over the previous seven years)
• Suggestion system
• Distribution of savings to employees

Question 20

What is the Rucker Share-of-Production Plan?

Answer 20

Labor cost ratio is based on the “value added” rather than on total revenues.

Question 21

What is an Improshare Plan?

Answer 21

Improved productivity through sharing
Pay and bonuses are tied directly to performance measures

Question 22

What is ESOP & ESOT?

Answer 22

An Employee Stock Ownership Plan is an employee benefit plan that gives workers ownership interest in the company.

An Employee Stock Ownership Trust is a stock program that allows for the acquisition of a company’s shares by its employees.

Question 23

What is the Strategic Alignment of Base Pay & Incentive Pay?

Answer 23

In designing a compensation system, companies need to make a strategic decision regarding the best balance between base pay and incentive pay.

Considers security & motivation