HRM textbook

CHAPTER 12 PAY FOR PERFORMANCE AND FINANCIAL INCENTIVES 395
behavior. 13 Psychologist B. F. Skinner s findings provide the foundation for much of
what we know about this. Managers apply Skinner s principles by using behavior
modification. Behavior modification means changing behavior through rewards or
punishments that are contingent on performance. For managers, behavior modification
boils down to two main principles. First, that behavior that appears to lead to a
positive consequence (reward) tends to be repeated, whereas behavior that appears
to lead to a negative consequence (punishment) tends not to be repeated; and
second, that, therefore, managers can get someone to change his or her behavior
by providing the properly scheduled rewards (or punishment).
Incentive Pay Terminology
Managers often use two terms synonymously with incentive plans. 14 Traditionally, all
incentive plans are pay-for-performance plans. They all tie employees pay to the
employees performance. Variable pay is more specific: It is usually an incentive plan
that ties a group or team s pay to some measure of the firm s (or the facility s) overall
profitability; 15 profit-sharing plans (discussed later) are one example. Variable pay is
advantageous insofar as it reduces an employer s fixed pay, so that if sales or performance
dips, pay declines too. 16 However, confusing as it may be, some experts have used
the term variable pay to include incentive plans for individual employees. 17
To arrange our discussion, we will organize the following sections around individual
employee incentive and recognition programs, sales compensation programs, management
and executive incentive compensation programs, and team and organization-wide
incentive programs.
Employee Incentives and the Law
Under the Fair Labor Standards Act, if the incentive is in the form of a prize or cash
award, the employer generally must include the value of that award when calculating
the worker s overtime pay for that pay period. 18 Employers pay overtime rates to
nonexempt employees based on the employees previous week s earnings. So, unless
you structure the incentive bonuses properly, the bonus itself becomes part of the
week s wages. Suppose someone earning $10 per hour for a 40-hour week also earns
performance incentive pay of $80 for the week, or $480 total. Further, assume she also
works 2 hours overtime that week. The overtime rate for the 2 hours she works
overtime that week equals 1.5 times $12 (which includes the $80/40 equals $2 per hour
incentive pay) or $18; you must include the average $2 per hour ($80 divided by
40 hours) she earned in incentive pay.
Certain bonuses are excludable from overtime pay calculations. For example,
Christmas and gift bonuses that are not based on hours worked, or are so substantial
that employees don t consider them a part of their wages, do not have to be included
in overtime pay calculations. Similarly, purely discretionary bonuses in which the
employer retains discretion over how much if anything to pay are excludable.
Other types of incentive pay must be included. Under the Fair Labor Standards
Act (FLSA), bonuses to include in overtime pay computations include those promised
to newly hired employees; those provided for in union contracts or other
agreements; and those announced to induce employees to work more productively,
steadily, rapidly, or efficiently or to induce them to remain with the company. Such
bonuses would include many of those we turn to next, such as individual and group
production bonuses.
intrinsic motivation
Motivation that derives from the pleasure
someone gets from doing the job or task.
expectancy
A person s expectation that his or her effort
will lead to performance.
instrumentality
The perceived relationship between successful
performance and obtaining the reward.
valence
The perceived value a person attaches to the
reward.
behavior modification
Using contingent rewards or punishment
to change behavior.
variable pay
Any plan that ties pay to productivity
or profitability, usually as one-time lump
payments.