HRM textbook

392 PART 4 COMPENSATION
MONEY AND MOTIVATION
Frederick Taylor popularized using financial incentives financial rewards paid to
workers whose production exceeds some predetermined standard in the late
1800s. As a supervisor at the Midvale Steel Company, Taylor was concerned with
what he called systematic soldiering the tendency of employees to work at the
slowest pace possible and to produce at the minimum acceptable level. What especially
intrigued him was the fact that some of these workers had the energy to run
home and work on their houses, even after a 12-hour day. Taylor knew that if he
could harness this energy at work, Midvale could achieve huge productivity gains.
Productivity is the ratio of outputs (goods and services) divided by the inputs
(resources such as labor and capital). 1
In pursuing that aim, Taylor turned to financial incentives. At the time, primitive
incentive plans were in use, but were generally ineffective (because employers arbitrarily
changed incentive rates). Taylor made three contributions. He saw the need for
formulating what he called a fair day s work, namely standards of output for a job,
which he devised for each job based on careful, scientific analysis. He spearheaded the
scientific management movement, a management approach that emphasized
improving work methods through observation and analysis. And he popularized the
use of incentive pay as a way to reward employees who produced over standard.
Graphically, we can summarize Taylor s aims as follows:
Financial Incentives * Boost Employee Performance * Productivity Gains.
Linking Strategy, Performance, and Incentive Pay
Today, incentive pay tying workers pay to their performance is widely popular. 2
The problem is that doing so is easier said than done. Many such programs are ineffective,
and some are disastrous. (One plan, at Levi Strauss, is widely assumed to have been
the last nail in the coffin of Levi s U.S.-based production.) As logical as it seems to link
pay to performance, about 83% of companies with such programs say their programs
are at best somewhat successful. One study found that just 28% of the 2,600 U.S. workers
it surveyed said their companies incentive plans motivated them. Employees don t
see a strong connection between pay and performance, and their performance is
not particularly influenced by the company s incentive plan, said one expert. 3,4
Equally problematical is the fact that some incentives incentivize the wrong behavior
and performance. Thus, simply incentivizing number of cars sold in a dealership
might produce high performance (in numbers of cars sold) but a low per-car profit.
The accompanying Strategic Context feature illustrates this.
THE STRATEGIC CONTEXT
The Car Sales Commission
Strategic human resource management means formulating and executing human
resource policies and practices that produce the employee competencies and
behaviors the company needs to achieve its strategic aims.
Few HR practices illustrate this better than designing car sales incentive plans.
Car salespersons compensation ranges from 100% commission to a small base
salary with commission accounting for most of total compensation. Traditionally, the
car salesperson s commission is based on a percentage of the difference between
the dealer s invoice cost and the amount the car is sold for, minus an amount to
cover the pack or dealer overhead (the pack being perhaps $300 for a new car
to $800 for a used car, and rising for pricier cars). 5 This promotes precisely the sorts
of behaviors the car dealer wants to encourage. For example, it encourages the
salesperson to hold firm on the retail price, and to push after-sale products like
floor mats and side moldings. There may also be extra incentives to sell packages
such as rustproofing. For selling slow-moving vehicles, the salesperson may get a
spiff a car dealer term for an extra incentive bonus over commission. And there