Compensation and employee behaviour Part II

1. Compensation and Employee
Behaviour: Part II
Dr. G C Mohanta, BE(Mech), MSc(Engg), MBA, PhD(Mgt)
Professor
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2. Payment by Result (PBR)
PBR incentive schemes are:
➢Individual time saving – incentive paid for time saved
in performing a task
➢Measured Day work – a fixed amount paid for
predetermined & agreed level of working
➢Group and plant-wide incentives - employees in
plant/organisation share bonus linked to output
➢Commission - a Bonus paid linked to sales, reward
pre-determined or percentage of total sales
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3. Disadvantages of PBR schemes
Operational inefficiencies affect incentive
Quality of work may be put on the line to achieve
high levels of outputs
Quality of working life may start to diminish, de-
motivating employees
Obscurity of payment arrangement, employees
unable to comprehend their incentive schemes
properly
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4. Plant/Enterprise Based Schemes
Focus on whole of organisation
It comprises schemes like Gain-sharing and
Productivity bonus.
PRP Individuals receive incentive as percentage
increase to basic salary linked to performance
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5. Modern Pay Schemes
Share option schemes permit companies to grant
share to directors and employees in tax- effective
manner
They are given opportunity to buy shares in their
companies at a future date, but at the current price
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6. Types of shares schemes
Employee share ownership plan (ESOP) - an
employee benefit trust linked to share participation
scheme.
Trust receives contributions from company or
borrows money and then buys shares in company and
allocate to employees
All employee share schemes
Executive share incentive scheme
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7. Advantages
These are common and these are well understood by
executive /employee and shareholders
In some tax regimes, these enjoyed significant tax
advantage
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8. Disadvantages
These are often unsuitable for well established
companies
These tend to use up shares more quickly than other
types of scheme, creating dilution difficulties for
smaller capital base company
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9. Cash-Based awards
Most common profit-sharing arrangement - to pay
employees cash bonus
 Paid as a proportion of annual profits
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10. Advantages
Increases identification with the firm,
Recognises that everyone contributes to creating
profit.
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11. Disadvantage
Does not provide an individual incentive
Amounts distributed are taken for granted
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12. Individual Performance Related Pay
Individuals receive incentive as increases to basic pay
or cash bonuses, linked to performance
Scope provided for a joined pay progression within
the pay bracket
High level of achievement may be rewarded by cash
bonuses that are not consolidated
Individuals are eligible for such bonuses when they
have reached top of pay bracket and completely
progressed along their learning curve
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13. Advantages
acts as a monitor
encourages and supports desired behaviour
delivers message that performance, competence and
skill important
provides means for defining and agreeing
performance and competence expectation
can reinforce the organisation value
can help to achieve culture change
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14. Problems with Individual Performance
Related Pay
Extent to which IPRP motivates questionable
Requirements for success difficult to achieve
Money by itself not result in motivation
Cannot be assumed that money motivate everyone
equally
Financial rewards may motivate them who receive it
but it may also de-motivate those who haven’t
IPRP can create more dissatisfaction than satisfaction
if they are perceived to be unfair
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15. Problems with Individual Performance
Related Pay
Depends on the existence of accurate and reliable
methods of measuring performance
Employees can be suspicious and may fear that
performance standards will be raised continuously
IPRP decisions depend on judgement of managers, in
absence of reliable criteria could be unfair
IPRP is based on assumption that performance
completely under control of individuals but it can be
affected by system in which they work
IPRP proved difficult to manage
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16. Rewarding Team Performance
Aim of team incentive :
- to reinforce behaviours that lead and sustain effective
teamwork
- to encourage group endeavour and cooperation, rather
than to concentrate only on individual performance
- Research showed that most common method of
providing team pay was to distribute bonus to team
members.
- Design for team pay will be contingent on
requirements and circumstances of organisation, and
these will always differ 16

17. Advantages of team pay
Team pay can:
➢Encourage team-working and co-operative behaviour
➢Act as a lever for cultural change in the direction of quality
and customer focus
➢Enhance flexible working within teams and encourage
multi-skilling
➢Provides an incentive for group collectively to improve
performance and team process
➢Encourage less effective performers to improve in order to
meet standards
➢Serve as a means of developing self-managed or directed
teams. 17

18. Disadvantages of team pay
Effectiveness depends on well defined teams, difficult
to identify and they need to be motivated by a purely
financial reward
Team pay may seem inappropriate to individuals
whose feelings of self-worth could be diminished
Distinguishing what individual team would be
rewarded may be difficult to identify
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19. Merit Pay
These programs assume that employees’
compensation over time should be determined, at
least in part, by differences in job performance
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20. Who participates?
Merit pay programs most often introduced in private
sector ‘for profit’ of the economy rather than in
public sector organisations
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21. Elements of Merit Pay
Managers rely on objective as well as subjective
performance indicators to determine whether an
employee will receive a merit increase and the
amount of increase warranted
Employees must know that their efforts in meeting
production quotas or quality standards will lead to
pay raises
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22. Elements of Merit Pay
Companies that use merit programs must ensure that
the funds needed to fulfil these promises to
compensate employees are available
Organisations should make adjustments to base pay
according to changes in the cost of living or inflation
before awarding merit pay raise
Effective performance appraisals drive effective merit
pay programs
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23. Thank you