Week 2 D2

Week 2 D2

Discuss how incentive pay plans – both individual and group – motivate employees to achieve high levels of performance.  Identify potential weaknesses of these plans and suggest steps that can be taken to make these plans highly effective.  Then, choose one industry that either an individual or group incentive pay plan would work best providing support for your reasoning (using personal examples to illustrate your point if possible).  Explain your answer. Respond to at least two of your fellow students’ postings.

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4-2 Describe the differences between incentive pay methods and traditional pay methods.

In traditional pay plans, employees receive compensation based on a fixed hourly pay rate or annual salary. Some companies use incentive pay programs that replace all or a portion of base pay in order to control payroll expenditures and to link pay to performance. Since 1998, there has been a 47 percent increase in the use of incentive pay programs. Companies use incentive pay programs in varying degrees for different kinds of positions.

Nowadays, most companies use a mix of traditional and incentive pay methods. The mix has steadily changed. In 1998, traditional pay increases totaled 4.2 percent of payroll while incentive pay increases amounted to 8.0 percent. In 2014, the amounts were 2.9 percent and 12.7 percent, respectively.

As we discussed in Chapter 3 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch03#ch03) , employees under traditional pay structures earn raises according to their length of service in the organization or to supervisors’ subjective appraisals of employees’ job performance. Again, both merit pay raises and seniority pay raises are permanent increases to base pay. Annual merit pay increase amounts usually total no more than a small percentage of base pay (approximately 3 percent), but the dollar impact represents a significant cost to employers over time. Table 4-1 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch04lev1sec2#ch04tab01) shows the contrast in rate of compensation increase between a traditional merit compensation plan and an incentive plan.

Companies use incentive pay to reward individual employees, teams of employees, or whole companies based on their performance. Incentive pay plans are not limited solely to production or nonsupervisory workers. Many incentive plans apply to such categories of employees as sales professionals, managers, and executives. Management typically relies on business objectives to determine incentive pay levels such as company profits and sales growth. Management then communicates these planned incentive levels and performance goals to managers. Although merit pay performance standards aim to be measurable and objective, incentive levels tend to be based on even more objective criteria, such as quantity of items an employee produces per production period or market indicators of a company’s performance (e.g., an increase in market share for the fiscal year). Moreover, supervisors communicate the incentive award amounts in advance that correspond to objective performance levels. On the other hand, supervisors generally do not communicate the merit award amounts until after they offer subjective assessments of employees’ performance.

TABLE 4-1 Permanent Annual Merit Increases versus Incentive Awards: A Comparison



8 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch04lev1sec11#ch04end8)

4.2 Contrasting Incentive Pay with Tradi…

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(At the end of 2015, John Smith earned an annual salary of $35,000.)

Total Salary under


Cost of Increase (Total Current Salary—2015 Annual Salary equals

$35,000) Permanent Merit Increase (Percent

Increase × Previous Year

Annual Salary) + Previous Annual

Salary ($)

Incentive Award ($) (Percent

Increase × 2015 Salary) +

Fixed Base Pay ($35,000)


Increase Amount


Permanent Merit

Increase ($)

Incentive Award


2016 3 1,050 1,050 36,050 36,050

2017 5 2,853 1,750 37,853 36,750

2018 4 4,367 1,400 39,367 36,400

2019 7 7,122 2,450 42,122 37,450

2020 6 9,649 2,100 44,649 37,100

Incentive pay plans can be broadly classified into three categories:

Individual incentive plans (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/bm01#bm01goss218) . These plans reward employees whose work is performed independently. Some companies have piecework plans, typically for their production employees. Under piecework plans, an employee’s compensation depends on the number of units she or he produces over a given period.

Group incentive plans. These plans promote supportive, collaborative behavior among employees. Group incentives work well in manufacturing and service delivery environments that rely on interdependent teams. In gain sharing programs, group improvements in productivity, cost savings, or product quality are shared by employees within the group.

Company-wide incentive plans. These plans tie employee compensation to a company’s performance over a short time frame, usually from a one-month period to a five-year period.

Table 4-2 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch04lev1sec3#ch04tab02) lists common performance measures used in individual, group, and company-wide incentive

9 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch04lev1sec11#ch04end9)

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plans .9 (http://content.thuzelearning.com/books/Martocchio.7916.16.1/sections/ch04lev1sec11#ch04end9)

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