Effective Incentive Plans
Types of Variable Pay Plans
Types of Sales Compensation Plans
Ø Straight Commission
v Compensation is computed as a percentage of sales in units
v The draw system make advance payments against future
commissions to salesperson.
Ø Salary-Plus-Commission or Bonuses
v Compensation is part salary for income stability and part
commission for incentive.
Determining Sales Effectiveness
Special Incentive Programs
• Performance Awards
• Recognition Awards
• Service Awards
• Spot Bonus
Other Types of Organizational/Team
• Profit Sharing
• Gainsharing (Teamsharing or Goal
• Stock Option Plan
• Employee Stock Ownership Plan (ESOP)
Types of Benefits
Ø A system to distribute a portion of the profits of the
organization to employees.
Ø Primary objectives:
v Increase productivity and organizational performance
v Attract or retain employees
v Improve product/service quality
v Enhance employee morale
v Disclosure of financial information
v Variability of profits from year to year
v Profit results not strongly tied to employee efforts
Timing of Design of
Incentives Incentive Plans
Developing Successful Pay-for-Performance
• Reasons for Adopting Pay or Incentive Plans:
Ø Link more directly strategic business goals and
Ø Enhance organizational results and reward
employees financially for their contributions.
Ø Reward employees to recognize different levels of
Ø Achieve HR objectives, such as increasing retention,
reducing turnover, recognizing training, or rewarding
safety and attendance.
Successes and Failures of
Variable Pay Plans
Successful incentive plans require:
Ø Clearly communicated.
Ø Realistic performance measures.
Ø Current plans and linked to organizational objectives.
Ø Strong links among performance results and payouts.
Ø Clear identification of variable pay incentives
separately from base pay.
Ø Define variable pay and identify three elements of successful
Ø Discuss three types of individual incentives.
Ø Explain three ways that sales employees are typically
Ø Identify key concerns that must be addressed when designing
group/team variable pay plans.
Ø Discuss why profit sharing and employee stock ownership are
common organizational incentive plans.
Ø Identify the components of executive compensation and discuss
criticisms of executive compensation levels.
Purposes of Special Incentives
Group/Team Incentives (cont’d)
• Problems with Group/Team Incentives
Ø Rewards in equal amounts may be perceived as
“unfair” by employees who work harder, have more
capabilities, or perform more difficult jobs.
Ø Group/team members may be unwilling to handle
incentive decisions for co-workers.
Ø Many employees still expect to be paid according to
Employee Stock Plans
Ø A plan that gives employees the right to purchase a
fixed number of shares of company stock at a
specified price for a limited period of time.
v If market price of the stock is above the specified option
price, employees can purchase the stock and sell it for a
v If the market price of the stock is below the specified option
price, the stock option is “underwater” and is worthless to
Employee Stock Plans
Ø A plan whereby employees gain significant stock
ownership in the organization for which they work.
v Favorable tax treatment for ESOP earnings
v Employees motivated by their ownership stake in the firm
v Retirement benefit is tied to the firm’s future performance
v Management tool to fend off hostile takeover attempts.
Components of Executive
Common Executive Compensation Issues