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PartPart

IIIIII

Chapter 9 PayChapter 9 Pay--forfor--Performance: The EvidencePerformance: The EvidenceChapter 10 PayChapter 10 Pay--forfor--Performance PlansPerformance PlansChapter 11 Performance AppraisalsChapter 11 Performance Appraisals

Employee Contributions: Determining Employee Contributions: Determining Individual PayIndividual Pay

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STRATEGICPOLICIES TECHNIQUES STRATEGIC

OBJECTIVES

EFFICIENCY• Performance • Quality • Customers • Stockholders • Costs

FAIRNESS

COMPLIANCE

ALIGNMENTALIGNMENT

COMPETITIVENESSCOMPETITIVENESS

CONTRIBUTORSCONTRIBUTORS

ADMINISTRATIONADMINISTRATION

Work Descriptions Evaluation/ INTERNAL Analysis Certification STRUCTURE

Market Surveys Policy PAY Definitions Lines STRUCTURE

Seniority Performance Merit INCENTIVE Based Based Guidelines PROGRAMS

Planning Budgeting Communication EVALUATION

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Chapter

99

PayPay--forfor--Performance:Performance:The EvidenceThe Evidence

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Learning ObjectivesLearning ObjectivesAfter studying Chapter 9, students should be able to:After studying Chapter 9, students should be able to:

1.1. Discuss the relation of the content, process, and Discuss the relation of the content, process, and reinforcement theories of motivation to reinforcement theories of motivation to compensation.compensation.

2.2. Discuss the important design issues in creating a Discuss the important design issues in creating a pay for performance program.pay for performance program.

3.3. Discuss why a pay for performance program Discuss why a pay for performance program might not work in an organization.might not work in an organization.

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Employee performance depends on Employee performance depends on three general factors:three general factors:

Employee performance = Employee performance = ff (S,K,M)(S,K,M)where:where:

S = Skill and ability to perform taskS = Skill and ability to perform taskK = Knowledge of facts, rules, K = Knowledge of facts, rules,

principles, and proceduresprinciples, and proceduresM = Motivation to performM = Motivation to perform

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Performance Measurement Relates to Performance Measurement Relates to Compensation StrategyCompensation Strategy

Variability in Organizational Performance

Low Variability: few swings in overall corporate performance

High Variability: regular and large swings in overall corporate performance.

Cell A – provide wide range of rewards beyond just money. Include significant incentive component.

Cell B – provide wide range of rewards beyond just money. Emphasize base pay with low incentive portion.

Cell C – emphasize monetary rewards with large incentive component.

Cell D – emphasize monetary rewards. Large base pay with low incentive portion.

Stable and easily measured

Unstable, unclear, and changing objectives

Variability and ease of measurement in individual performance

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What Behaviors Do EmployersWhat Behaviors Do EmployersCare About?Care About?

!!How do we get good employment prospects to How do we get good employment prospects to joinjoin our company?our company?

!!How do we How do we retainretain these good employees once these good employees once they join?they join?

!!How do we get employees to How do we get employees to develop skillsdevelop skills for for current and future jobs?current and future jobs?

!!How do we get employees to How do we get employees to perform wellperform well on on their current job?their current job?

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What Motivates Employees?What Motivates Employees?

In the simplest sense, motivation involves three In the simplest sense, motivation involves three elements:elements:1. what is important to a person, and1. what is important to a person, and2. offering it in exchange for some 2. offering it in exchange for some 3. desired behavior3. desired behavior

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What Motivation Theories SayWhat Motivation Theories Say!!Content Theories (what is important to a person)Content Theories (what is important to a person)

!!Maslow’s Need HierarchyMaslow’s Need Hierarchy!!Herzberg’s 2Herzberg’s 2--Factor TheoryFactor Theory

!!Process Theories (the nature of the exchange)Process Theories (the nature of the exchange)!!Expectancy TheoryExpectancy Theory!!Equity TheoryEquity Theory!!Agency TheoryAgency Theory

!!Reinforcement Theories (desired behavior)Reinforcement Theories (desired behavior)!!Goal SettingGoal Setting!!ReinforcementReinforcement

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Components of a Total Reward SystemComponents of a Total Reward System1. Compensation Wages, Commissions and Bonuses

2.. Benefits Vacations, Health Insurance

3. Social Interaction Friendly Workplace

4. Security Stable, Consistent Position and Rewards

5. Status / Recognition Respect, Prominence Due to Work

6. Work Variety Opportunity to Experience Different Things

7. Workload Right Amount of Work (not too much, not too little)

8. Work Importance Is Work Valued by Society

9. Authority / Control / Autonomy Ability to Influence Others; Control Own Destiny

10. Advancement Chance to Get Ahead

11. Feedback Receive Information Helping to Improve Performance

12. Work Conditions Hazard Free

13. Development Opportunity Training to Learn New Knowledge / Skills / Abilities

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WageComponents

WageComponents

Across the BoardAcross the BoardCost of Living

IncreaseCost of Living

IncreaseBase PayBase Pay

Merit PayMerit Pay Lump SumBonus

Lump SumBonus

IndividualIncentiveIndividualIncentive

SuccessSharing Plans

SuccessSharing Plans

Gain SharingGain Sharing Profit SharingProfit SharingRisk

Sharing PlansRisk

Sharing Plans`

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Performance Depends on the Performance Depends on the Employee’s Perception of: Employee’s Perception of: (1 of 2)(1 of 2)

!!The probability the performance will meet or The probability the performance will meet or exceed manager’s objective.exceed manager’s objective.

!!The probability that if the objective is met, the The probability that if the objective is met, the manager will give extrinsic rewards.manager will give extrinsic rewards.

!!The probability the extrinsic rewards will satisfy The probability the extrinsic rewards will satisfy some needs.some needs.

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Performance Depends on the Performance Depends on the Employee’s Perception of: Employee’s Perception of: (2 of 2)(2 of 2)

!!The probability that doing the task will provide The probability that doing the task will provide intrinsic rewards.intrinsic rewards.

!!The probability the intrinsic rewards will satisfy The probability the intrinsic rewards will satisfy needs.needs.

!!How much satisfaction of these needs is How much satisfaction of these needs is important or valued.important or valued.

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Does Compensation Motivate Behavior: Does Compensation Motivate Behavior: Specific CommentsSpecific Comments

!!Do people join a firm because of pay?Do people join a firm because of pay?!!Do people stay in a firm (or leave) because of Do people stay in a firm (or leave) because of

pay?pay?!!Do employees more readily agree to develop job Do employees more readily agree to develop job

skills because of pay?skills because of pay?!!Do employees perform better on their jobs Do employees perform better on their jobs

because of pay?because of pay?

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The Fit Between People and RewardsThe Fit Between People and Rewards

Want pay plans based on individual Want pay plans based on individual performance, not group performanceperformance, not group performance

IndividualistsIndividualists(“I control my destiny”)(“I control my destiny”)

Want more pay based on performanceWant more pay based on performanceRisk TakersRisk Takers

Low selfLow self--esteem individuals want large, esteem individuals want large, decentralized organization with little pay for decentralized organization with little pay for performanceperformance

Low SelfLow Self--EsteemEsteem

Relatively more concerned about pay levelRelatively more concerned about pay levelMaterialisticMaterialisticPreferred Reward CharacteristicsPreferred Reward CharacteristicsPerson CharacteristicsPerson Characteristics

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Examples of Group Incentive Plans

CompanyCompanyCompanyCompany Pay ComponentPay ComponentPay ComponentPay Component

Corning Competitive Base Pay. Group Bonus based on meeting certain quality measures, customer satisfaction measures, and protection targets.

Plant Manager base pay 25 percent below market. Five percent of excess over target goes to bonus. Bonus often equals base pay in amount.

Competitive Base Pay. All employees get stock options equal to 10 percent of base pay. Employees share in corporate triumphs and failures as stock prices rise or fall.

Nucor

PepsiCo

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Overall Effectiveness of Alternative Overall Effectiveness of Alternative Reward PlansReward Plans

29Project incentive

20Individual incentive

31Team/small group incentive

30Gainsharing

% of companies reporting significant business result

impact

Type of Plan

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Designing A PayDesigning A Pay--ForFor--Performance PlanPerformance Plan

!!EfficiencyEfficiency!!StrategyStrategy!!StructureStructure!!StandardsStandards

"Objectives"Measures"Eligibility"Funding

!!Equity or FairnessEquity or Fairness!!Distributive justiceDistributive justice!!Procedural justiceProcedural justice

!!ComplianceCompliance!!Comply with existing Comply with existing

lawslaws!!Enhance and Enhance and

maintain firm’s maintain firm’s reputationreputation

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SummarySummary!! Employee performance depends upon some blend of Employee performance depends upon some blend of

skill, knowledge, and motivation.skill, knowledge, and motivation.!! Absent any of these three ingredients, performance is Absent any of these three ingredients, performance is

likely to be sublikely to be sub--optimal.optimal.!! Rewards must:Rewards must:

!!Help organizations attract and retain employeesHelp organizations attract and retain employees!!Make high performance an attractive option for Make high performance an attractive option for

employeesemployees!!Encourage employees to build new skills and Encourage employees to build new skills and

gradually foster commitment to the organizationgradually foster commitment to the organization

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Review QuestionsReview Questions

1.1. Do you think incentive pay will motivate faster Do you think incentive pay will motivate faster performance? Is this desirable?performance? Is this desirable?

2.2. Should rewards focus mostly on money, or Should rewards focus mostly on money, or should employers work hard to incorporate the should employers work hard to incorporate the other 12 rewards discussed in this chapter?other 12 rewards discussed in this chapter?

3.3. If you wanted workers to perceive their If you wanted workers to perceive their compensation package as secure, what compensation package as secure, what components would you include and which components would you include and which would you avoid?would you avoid?

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Review Questions Review Questions (continued)(continued)

4.4. How does procedural justice differ from How does procedural justice differ from distributive justice?distributive justice?

a.a. Defend the position that supervisors have Defend the position that supervisors have considerable control over procedural justice in their considerable control over procedural justice in their departments but little control over distributive departments but little control over distributive justice.justice.

b.b. How might you use the principles of procedural How might you use the principles of procedural justice to avoid having an employee quit because justice to avoid having an employee quit because she believes her boss gave her an unfair evaluation?she believes her boss gave her an unfair evaluation?