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Tangible Rewards

1. cash compensation (base pay, seniority-based pay raises, contingent pay)
2. benefits
-insurance & retirement protection
-pay for time not worked
-work/life services

Contingent Pay (definition)

pay and salary increases that are based on job performance
-pay for performance
-incentive pay

Contingent Pay (examples)

1. merit-based pay raises
2. individual or team bonuses
3. commission-based pay
4. piece-rate pay
5. profit sharing plans
6. skill-based pay (or competency-based)
7. gainsharing plans
8. employee stock ownership plans

Profit-Sharing Plans

higher paid EEs get more of the profit share
*you as an EE don't necessarily have to do anything to receive this, company overall just must reach its profit goal

Gainsharing Plans

-typically 'plant-wide' incentive system
-rejects the premise that money is the primary motivator of improved performance
*relies on EE involvement to drive improved productivity
-EEs contribute ideas on how to make productivity higher and costs lower
-improve EE cooperation and plant productivity

Most popular type of gainsharing plan:

Scanlon Plan
-EEs get bonus as long as they reach their target ratio (payroll/sales)

Reasons for introducing contingent pay:

1. performance mgmt is more effective when financial rewards are tied to results
2. contingent pay plans force orgs to:
-clearly define effective performance
-determine which behaviors/results are most important
3. contingent pay plans help to recruit and retain top performers (sorting effect)
*hardworking/motivated EEs would rather have pay-for-performance systems

Performance Management systems are more effective when...

1. performance ratings linked to salary raise (merit-based pay raises)
2. performance ratings linked to bonuses
3. performance ratings linked to stock options
4. performance ratings linked to termination of lowest performers
*no effect on forced distribution systems

Selecting a CP Plan:Issues to consider

1. culture (structure) of organization
a. traditional
b. involvement
2. strategic direction of organization

Traditional Culture

-top-down decision making
-vertical communication
-jobs that are clearly defined

Involvement Culture

-shared decision making
-lateral communications
-loosely defined roles

CP Plans for different organizational cultures (or structures)

1. Traditional Organizations
-piece rate
-sales commissions
-group incentives
2. Involvement Organizations
-profit sharing
-skill-based pay
-team-based bonuses

What plan should we have (based on strategic direction): employee development?

skill-based pay

Customer service:

competency-based pay or gainsharing

overall profit:

executive pay or profit/stock sharing


indivudual: piece-rate, sales commissions
group: gainsharing, group incentives


-team sales commissions
-competency based pay

Designing contingent pay plans (how do we design it):

follow expectancy theory (expectancy x instrumentality x valence)

Expectancy Theory

EE effort => performance level => reward (valence)
^ ^
(expectancy) (instrumentality)

Reasons why you might have low expectancy?

1. lack of skills
2. circumstances out of EE control
3. lack of resources
4. unclear goals

Reasons why instrumentality might be low?

1. financial problems
2. team doesn't reach goal
3. biases/political motives by supervisor (if merit based)

Possible problems with contingent pay plans:

1. poor performance management system (expectancy/instrumentality problems)
2. manager's not accountable for developing EE's performance goals (expectancy problem)
3. insignificant rewards (no valence)
4. may reward counterproductive behavior (ex. reward sales not customer service)
5. extrinsic replaces intrinsic motivation
6. disproportionately large rewards for executives

CP design considerations:

1. expectancy theory
2. define & measure performance first and then allocate rewards
3. only use rewards that are available
4. make sure all EEs are eligible
5. rewards should include both financial and non-financial

Rewards should be:

1. visible
2. contingent
3. timely
4. reversible (to some extent)

quarterly bonuses are more effective than annual bonuses (T/F).


Lincoln Electric

-guaranteed employment for those with 1+ years of service
-profit-sharing bonus plan (avg EE bonus is 40% of base wage)
-standard hourly piece-rate pay

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