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PSY 6450 Unit 8 Performance and Pay.

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1 PSY 6450 Unit 8 Performance and Pay

2 Schedule Exam (35 points) on Monday, 11/26
Monday after Thanksgiving break Reminder - if you want your project grade before ME2, projects are due Monday, 12/03 Otherwise, final due date during final exam week, Monday, 12/10

3 A Little Introduction My main thematic line of research has been the effects of individual and small group monetary incentives on employee performance and satisfaction Most of that work has been “bridge” research

4 Bridge Research Bridge research The main advantage of bridge research
Laboratory simulations that address practical questions from organizational settings The main advantage of bridge research Isolation of the effects of incentives from administrative and organizational changes The main disadvantage of bridge research Relevancy to actual work settings

5 Relevancy to Work Settings
Caution is good (and recommended) Reviews, though few in number, have indicated that the results of field studies and laboratory studies are similar Jenkins (1986), Jenkins, Mitra, Gupta & Shaw (1998) Hantula (2001) Bucklin & Dickinson (2001) We have found similarities as well Frisch & Dickinson (1990) LaMere, Dickinson, Henry, Henry & Poling (2000)

6 How I Got My Start: The Practical Beginning
Union National Bank, Little Rock, AR Individual monetary incentive systems implemented in early 1980s William B. Abernathy, H. Hall McAdams, Wayne Dierks, Kathleen McNally By the late 1980s, 75 systems had been installed, covering 70% of the bank’s 485 employees Productivity increases of 200%-300% Net profit per employee $11,000 compared to $4,950 for other Little Rock banks Program committee for ABA While scheduling, call from someone important

7 How I Got My Start: The Academic Beginning
The role of financial compensation in industrial motivation Opsahl & Dunnette (1966) Appealed to researchers to conduct controlled laboratory studies because:

8 Opsahl & Dunnette, 1966 “Strangely, in spite of the large amounts of money spent and the obvious relevance of behavioral theory for industrial compensation practices, there is probably less solid research in this area than in any other field related to worker performance.” (p. 94)

9 Individual Monetary Incentives: Research Since 1966*
20 years later: 28 systematic studies of individual monetary incentives Jenkins (1986) 12 years after that: 39 systematic studies of individual monetary incentives Jenkins et al. (1998) Meta-analytic review Individual incentives had an overall effect size of .34 *excludes survey studies

10 Group Incentive Research*
~13 published studies Honeywell-Johnson et al., 2002; Culig, 2005 Only 8 have compared the effects of individual incentives and small group incentives (N = 2-12 group members) My students and I have done 3 of those * excludes survey studies

11 Prevalence in Business: Individual Monetary Incentives
90% of Fortune 1000 companies have some type of individual incentive plan Ledford, Lawler, & Mohrman (1995) 47% of 1045 companies surveyed by Hewitt had individual incentive plans Rewards were based on specific employee performance criteria Hewitt Associates (2005)

12 Prevalence in Business: Group Monetary Incentives
87% of Fortune 1000 companies have work group or team incentives Lawler, Mohrman, & Ledford (1998) Fortune 1000 companies increased their use of work group or team incentives by 50% between 1987 and 1996 Ledford & Hawk (2000)

13 About The Beginning Again
My students and I began this research In the late 1980s when only about 20 systematic studies had been conducted We began with questions raised by both Union National Bank and Opsahl & Dunnette What relationship is there between the % of incentive pay and performance? What relationship is there between the absolute amount of the incentive offered and performance? Are small group incentives just as effective as individual incentives? Do small group incentives decrease the performance of high performers? Up to this point, most studies were designed simply to determine whether Monetary incentives affected performance.

14 Caveat: Quote of the Day
“A careful examination of criticisms of monetary pay-for-performance systems indicates not that they are ineffective, but that they are too effective.” (p. 597) Baker, Jensen, & Murphy (1988)

15 Finally, SO1: Three goals and three types of equity related to each
To attract and retain good employees - External equity Are the salaries/pay of employees competitive with what other companies are offering, both in the local community as well as in the particular industry To insure that the salary attached to a particular job is fair in terms of the importance of the job to the organization - Internal equity This goal has nothing to do with how well a particular individual performs the job - it only relates to the relative worth of the job to the organization (but influenced by supply and demand) To motivate and reward employees - Individual equity Does the pay system encourage high performers? Are higher performers paid more than lower performers? (computer programmers vs. secretaries, Business and engineering profs vs psychology vs English, behavior analysts tend only to focus on 3) )

16 SO2: The Motivation Problem with Hourly and Salary Pay
You get what you pay for If you pay for hours, you get hours, not performance. Economically it makes more sense for employees to take as much time as possible to complete their work. And, if you can finagle overtime, all the better (Overtime = 150% or 200% of base) Consequences In hourly wage systems, there are clear consequences for performing below a minimally acceptable performance level (criticism, threats of dismissal), but there are no clear consequences for performing above that level. Thus, hourly wage systems tend to support minimally acceptable performance

17 SO2: The Motivation Problem with Hourly and Salary Pay
Merit pay hourly increases Even if companies adopt a “merit pay” policy, there is still a weak link between performance and pay. Why? Merit pay is almost always based on annual subjective performance appraisals. And, as indicated in previous units, self-assessments often do not agree with supervisory assessments (we rate ourselves higher than our supervisors rate us); hence employees do not believe their pay is related to their performance in a meaningful way

18 SO3: Skinner on Incentives
We know, without a doubt that monetary incentives will increase performance but They have been given a bad rap - perhaps for good reasons - many object to them Primary reason - they are exploitative And they can be, but they don’t have to be - don’t throw the baby out with the bath water! Skinner maintained that incentive systems may, in fact, be less aversive than hourly pay systems

19 SO3A: According to Skinner, what maintains performance under hourly wage systems?
No one works on Monday morning because he is reinforced by a paycheck on Friday afternoon. The employee who is paid by the week works during the week to avoid losing a standard of living which depends upon a weekly wage. A supervisor who can discharge him is an essential part of the system. Rate of work is determined by the supervisor (with or without the pacing stimuli of a production line), and special aversive contingencies maintain quality. The pattern is therefore still aversive. Somewhat better contingencies are available under schedules of reinforcement based on counters rather than clocks. (ratio schedules of reinforcement) (what Skinner is pointing out here is that hourly wage systems control behavior via aversive contingencies - use this as a defense of reward systems in general, by the way)

20 SO3B: Skinner on incentive systems
Skinner readily acknowledges that incentive systems can and have been misused, but notes that incentive systems: May evoke feelings of confidence, certainty of success, and enjoyment arising from a sense of mastery and effectiveness, and interest in the job as occurs when behaviors are frequently reinforced. Note that Skinner is not addressing performance issues here, but rather addressing the fact that incentive systems may be less aversive emotionally. Also, note the italicized section - this is important Incentive systems are no different in this respect than any type of reinforcement system where individuals are frequently reinforced Respondent behavior interpretation: R (work) ––> Sr (incentives) CS (incentives) ––> CR (feelings of confidence, etc.) (anectodal - MI disposal aunt, happier, loyal, improved marriage; UNB proof operators, Kate acousted in grocery store - don’t hire anyone else))

21 SO4: Bucklin & Dickinson, intro, NFE
Bucklin and I were interested in determining whether different types of monetary incentive systems affected behavior differently (not whether incentives were effective, we knew they were) We discovered, as did Jenkins et al., simply was not a lot of research Only three thematic lines of research that have investigated/manipulated parameters of incentive systems Percentage of incentive earned: 5 studies Schedules of reinforcement: 8 studies Per piece amount: 2 studies

22 SO4: Bucklin & Dickinson intro, cont, NFE Three Thematic Lines
The percentage of total pay or base pay earned in incentive pay 3%-100% of total wages or base pay wages earned in incentive pay Schedules of reinforcement Incentives delivered on different fixed and variable ratio schedules (CRF, FR2, VR2, VR4) Linear, accelerating and decelerating piece rate pay systems Piece rate amount remains constant, increases or decreases as the number of pieces completed increases

23 SO4A: Conclusions Will be provided in lecture

24 SO4B: Implications It appears that you don’t have to worry a lot about the details of how incentives/consequences are related to performance - as long as they ARE related in some type of ratio schedule, delivered fairly frequently, and supported by some type of on-going feedback system.

25 SO5: Three reasons why it is not surprising that profit sharing has not been shown to increase performance (intro, NFE) In the study objectives I describe some popular types of “nontraditional” pay systems Profit sharing Gain sharing Bonus or lump sum payments Group incentive plans Individual incentive plans Pay for skill and knowledge Employee stock ownership plans

26 SO5: Three reasons why it is not surprising that profit sharing has not been shown to increase performance (still intro, nfe) First, note that I have not referred to all of these as “incentive” systems or pay-for-performance plans In order for me (Abernathy agrees) to classify a pay system as an incentive or pay-for-performance system it must use a predetermined formula to tie compensation to objective performance, operational or economic measures. This eliminates: Bonus and lump sum payments, pay for skill and knowledge, and employee stock ownership plans

27 Of these, profit sharing is the most prevalent
SO5: Three reasons why it is not surprising that profit sharing has not been shown to increase performance (still intro, nfe) Of these, profit sharing is the most prevalent Also represents the “other end of the continuum” from individual incentives with respect to two very important variables that affect performance Number of individuals whose performance contributes to the determination of how much money each employee gets Disbursement system - how frequently the money is disbursed So I am going to analyze this system, and you can do similar analyses for the ones “in between” (in any event, back to profit sharing)

28 SO5: Essential features of profit sharing (NFE)
When annual profits are above a predetermined level, part of those profits are distributed to employees Formulas for distribution are quite complicated, but usually the amount of money that is distributed to any one employee is based on a percentage of the employee’s salary, thus employees do NOT get the same amount The money is usually distributed annually, or more commonly, placed directly into the employee’s retirement account (tax benefits)

29 SO5: The first reason why profit sharing often does not increase employee performance
Profits are based on the aggregate performance of all members of the organization. Thus (depending upon the size of the company) one person’s performance contributes only a very small proportion to the total performance of the organization. Hence a person’s performance is not strongly related to his/her pay. Even with only 100 employees, any one individual’s performance contributes only 1% to the total performance of the organization In small companies, however, profit sharing might just affect performance (in sos, but not explained adequately for the exam; mistake - it’s not that everyone gets a small $$)

30 SO5: The second reason why profit sharing often does not increase employee performance
Profits are often affected by factors that (a) have little to do with the performance of individuals and (b) are outside of their control such as - include following in answer: Mergers, acquisitions, building a new factory or plant, investment of funds in research (bonuses highly uncertain and unpredictable) Union National Bank - the performance of the proof operators actually had little to do with the overall profitability of UNB (in sos but not explained adequately; what is the main factor that influences bank profits?)

31 SO5: The third reason why profit sharing often does not increase employee performance
Annual distribution of profit-sharing bonuses or distribution of money into retirement accounts Simply too delayed to have much effect on performance

32 Percentage of Base Pay or Total Pay Earned in Incentive Pay
(next several SOs relate to the incentive percentage studies)

33 Percentage of Incentive
In many incentive systems employees receive a base pay and can earn additional money in incentives when performance exceeds a specified standard Given that the total amount that can be earned remains constant, as the percentage increases, more of a person’s pay becomes dependent upon performance

34 Incentives as a Percentage of Total Pay
Percentage of Incentive Hourly Pay Incentive Pay $10.00 0% $0.00 25% $7.50 $2.50 50% $5.00 75% 100%

35 Percentage of Incentive Studies: Main Research Questions (NFE)
What is the lowest percentage of incentive pay that affects performance? Do different percentages of incentive pay affect performance differently?

36 SO9: What’s the “magic” percentage of incentive according to compensation experts?
Will be provided in lecture (based on tradition - WWII, war labor relations board)

37 Percent of total or base pay
Authors Subjects Task Percent of total or base pay Riedel et al. (1988) College students Forms coded 0%, 25%, 50% 75%, 100%, 125% of base pay Frisch & Dickinson (1990) Parts assembled 0%, 3%, 11%, 20%, 35% of total pay (0%, 10%, 30%, 60%, 100% of base pay) Dickinson & Gillette (1993) Data entry, computer 27%, 100% of total pay LaMere et al. (1996) Truck drivers Job points earned 0%, 3%, 6%, 9% Matthews & (2000) Quality inspection, 0%, 10%, 100%

38 SO10 : Employee perceptions of fairness of incentive percentages
If employees do not have a high degree of control over their performance, why are they likely to perceive high percentages of incentive to be unfair? A sizable portion of their total earnings will be based on factors outside of their control (i.e., can’t control their own earnings much), and further, If those factors fluctuate from day to day or week to week, their earnings will not be predictable People have fixed living expenses: Apt rent or home mortgage Car payments Expenses for kids

39 SO11: Employee perceptions of fairness of incentive percentages
If employees do have a high degree of control over their performance, why are they likely to perceive low percentages of incentive to be unfair? With low percentages of incentives, base pay constitutes a relatively high portion of their total earnings and the incentive earnings constitute a relatively low portion, thus: Differences in performance between individuals will not be adequately reflected in differences in earnings That is, low performers will earn just about as much as high performers Not related to the fact that individuals won’t make a lot more money if they perform better - that is a satisfaction issue, not a fairness issue: This is a common error by students on the exam! (some have had trouble with this in the past)

40 Frisch & Dickinson, 1990 Participants: 75 college students
Five conditions Hourly pay: (0% of pay) Incentives: Planned: 10%, 30%, 60%, or 100% of base pay Actual: 3%, 13%, 25%, 54% of base pay (can’t calculate this until after the study is over and you know how much participants actually earned - we assumed participants would perform better than they did) Sessions: Fifteen 45-minute sessions Task: Simple assembly task Assembling parts from bolts, nuts and washers Measure: Number of correctly assembled parts

41 25% 54% 3% 13% Incentive pay Hourly pay Hourly pay

42 Summary of Results: Frisch & Dickinson
Participants who were paid incentives performed significantly better than those who were paid hourly Participants who were paid incentives performed comparably, regardless of the percentage 3%, 13%, 25%, and 54%

43 SO13A: The relationship between the amount of pay earned and the percentage of incentive
Most $$ 0% 3% 13% 25% 54% Least $$ Inverse relationship between the amount earned and incentive percentage

44 SO13B: Why is that relationship important?
It helps answer the following two questions: Did people perform better because they earned more money? In other words, does the total amount of money earned affect performance? Is that a critical determinant of performance? Did people perform better because they received more money per piece (per part assembled?) In other words, does the amount of the per piece incentive affect performance? (students have had trouble with this so in the past, so I want to start with this material - the actual answers are on the next slide)

45 SO13B: So, why is that relationship important?
Participants who earned incentives made less money than those who were paid hourly, but performed significantly better; thus the total amount of money earned cannot account for the higher performance Participants in the four incentive groups received different per piece incentives, yet they performed the same, thus the per piece incentive did not affect performance

46 SO 14: Frisch & Dickinson: Particularly Interesting Results
Those who received only 3% of their base pay in incentives - only 11¢ per 45-minute session - performed significantly better than those paid hourly Higher percentages of incentives did not result in better performance - rather participants who earned different percentages of incentives performed the same

47 LaMere et al. Field Study, 1996, intro
There is actually only one study objective for the exam over this study, but it was a very important study from our perspective We had found that a very low incentive percentage (3%) significantly increased performance and higher incentive percentages did not increase performance Was that an artifact of the study being conducted in the laboratory? In the LaMere et al. field study we were able to examine the effects of three incentive percentages (3%, 6%, and 9%) on the performance of actual workers SO15: Lowest and highest incentive percentage examined?

48 LaMere et al. Field Study, 1996, intro
Participants: 22 roll-off truck drivers Deliver large waste disposal dumpsters to commercial and construction sites Multiple baseline design across 2 groups Hourly pay: G1, 20 weeks; G2 34 weeks 3% incentive: G1, 28 weeks, G2: 15 weeks 6% incentive: Both groups, 39 weeks 9% incentive: Both groups, 107 weeks (collected data for almost 4 years!)

49 LaMere et al. Field Study
Incentive pay Per job incentive for above average weekly performance Controlled for different types of jobs and the number of miles driven Lost incentives for the week for a chargeable accident Received as part of weekly paycheck, but the amount of incentives was listed separately on the pay stub Feedback Daily self-recorded feedback Group performance was graphed weekly and publicly posted

50 Results: LaMere et al. Both groups significantly increased their performance when the incentive system was introduced Both groups maintained their high performance for the rest of the study (almost 3 years) Both groups performed comparably when paid 3%, 6% and 9% incentives

51 Conclusions: LaMere et al.
Results supported our laboratory study Small percentages of incentives, as low as 3% of total pay, can significantly increase performance Higher percentages do not result in incrementally better performance Small percentages of incentives can sustain performance over time (3%-9%)

52 SO17: Conclusions: Percentage of Incentive Studies
Results of all five studies have been consistent (3% - 100% of total pay) Different incentive percentages resulted in the same level of performance: that is, higher incentive percentages have not increased performance more Low percentages of incentive, as low as 3%, have significantly increased performance (I realize this is basically the same answer as the answer to SO14: why the results of Frisch & Dickinson were particularly interesting - but I wanted you to note those results before we got to this point in the article.)

53 SO20: What is the major question with respect to this research?
Feedback was readily available in every study but one, thus the major question: Did performance feedback sustain performance across the incentive percentages? That is, if feedback was not provided, would performance differ as a function of different incentive percentages? (skipping sos 18&19 - you can do those on your own)

54 Schedules of Reinforcement, intro
Results of comparisons of different schedules of delivery (reinforcement) are ambiguous at best Although incentive pay increased performance in 7 of 8 studies, no uniform differences emerged as a function of the schedule of delivery The preponderance of data from well controlled laboratory studies, absent implementation problems in the field, suggest that different ratio schedules of delivery result in comparable performance

55 What are the two factors?
SO21: Two factors that could account for the performance differences in applied studies of ratio schedules (give example) Although the data suggest that performance does not differ under different schedules of delivery, sometimes performance has been better under one schedule than another These differences have occurred only in applied settings, not well controlled laboratory studies What are the two factors? Rule statements Social contingencies

56 Example Results were very different in two very similar studies that compared hourly pay with a VR schedules In one workers performed better when paid hourly than when they received the incentives (Yukl & Latham, 1975) In the other workers performed much better when they received the incentives than when they were paid hourly (Latham & Dossett, 1978)

57 Yukl & Latham: Hourly pay better
Participants were tree planters Received a base pay $4.00 on a VR2 for planting a bag of trees VR2 was achieved by tossing a coin and having workers guess “heads” or “tails” Workers had a one-in-two (50%) chance of getting the $4.00 each time, which probabilistically equals a VR2 schedule

58 Yukl & Latham: Hourly pay better
Several workers believed that the coin toss was gambling and the “devil’s doing” and sinful One of the supervisors was a part-time minister who also believed the above, and thus did not always implement the coin toss as planned One worker believed management had cheated her on her taxes with respect to the incentives and told others Management had made a mistake but by the time it was discovered and fixed, the study was over What the workers said about the incentives: The VR schedule was “unfair” “Too much of a risk” “ A real let-down to lose after you have planted 1,000 trees” (one bag = 1,000 seedlings) (study conducted in the Bible belt in the south; yet in the other study…..)

59 Latham & Dossett: Incentives better
Participants were from the same company, but were beaver trappers Received a base pay $4.00 on a VR4 schedule for each beaver trapped VR4 was achieved by placing four different colored marbles in a bag and having workers guess the color of the marble before they drew one Workers had a one-in-four (25%) chance to be correct, which probabilistically equals a VR4

60 Latham & Dossett: VR Incentives better
All workers gathered around while a worker “guessed” the color of the marble and cheered when he guessed correctly What the supervisor said about the variable schedule The guys want to get on the variable schedule. The men are inspired by it. They get a real kick out of it. What the workers said about the schedule: We really get psyched out by the variable, man Like the variable, it adds something to the job It makes the job more exciting and fun; there is real excitement

61 SO22: Oah & Dickinson: Linear vs Accelerated Piece Rate Pay
Does accelerated incentive pay affect performance differently than linear incentive pay? Linear incentive pay: The employee earns the same incentive pay regardless of how productive he/she is Accelerated incentive pay: The employee earns more and more incentive pay the more productive he/she is (SO: results - introduce the article)

62 Accelerated vs. Linear Pay, intro
Reward magnitude question: The harder you run the harder it is to run faster, therefore, Do employees perform better when they receive increasingly more incentive pay for higher and higher levels of performance? (more technically, as response effort increases, is more and more money required to increase performance?)

63 Oah & Dickinson, 1992, intro Modeled after the proof operator incentive system at Union National Bank Participants: 40 college students Task: Data entry task Checks of different cash values were presented on the computer screen and Ps entered the cash values

64 Oah & Dickinson, 1992, intro Two conditions
Linear relation between performance and pay Incentive amount remained the same 1.5 exponentially-increasing relation between performance and pay Sessions: Fifteen 45-minute sessions Measure: Number of correctly completed checks

65

66 SO22: Answer Results Conclusions
Participants in the two groups performed comparably Participants in the 1.5 exponential group earned significantly more money Conclusions Linear and accelerated incentive pay did not affect performance differently (more piece rate pay was not better) The amount of incentive pay did not affect performance differently Only two other studies, one published, one unpublished has examined this Question, to my knowledge - the results support our results. Amount of money issue supports prior studies.

67 SO26: Two factors that influence satisfaction ratings with different types of incentive pay plans
Exposure to all of the pay systems you are going to ask employees about (behavioral choice is the best method to obtain satisfaction data) If you use a between group design and each participant is exposed to only one pay system and then asked to rate his/her satisfaction with it, you get different ratings than if each participant is exposed to all pay systems before rating his/her satisfaction with it Makes sense - participants can only make meaningful ratings and comparisons after exposure to the different pay systems Probably true for other types of interventions as well - not just pay systems, so it is a good thing to keep in mind when doing research (no consistent data with respect to employee satisfaction with different types of pay systems - fixed vs incentive or different types of incentive pay)

68 SO26: Two factors that influence satisfaction ratings with different types of incentive pay plans
The amount of money employees earn under the different pay systems - not surprisingly, “The pay system I like best is the one where I earn the most money.” It is VERY difficult to equalize the amount of money individuals earn under various pay conditions and systems The optimal situation would be where a person earns, let’s say, $6.00 an hour when paid hourly and $6.00 an hour when paid incentives With incentive systems, however, a person’s performance determines how much he or she will earn, and it is very hard to predict how well a person will perform when you are setting up the incentive rates at the beginning of a study (this is very influential factor and one that makes it difficult to assess employee satisfaction with different pay systems)

69 SO24: Do results from the lab generalize to actual work settings?
Reviews of incentive studies, though few in number, have indicated that the results of field studies and laboratory studies are similar Jenkins (1986), Jenkins, Mitra, Gupta & Shaw (1998) Hantula (2001) We have found similarities as well Frisch & Dickinson (1990) LaMere, Dickinson, Henry, Henry & Poling (2000) In both, performance increased significantly when participants received only 3% of their total or base pay in incentives In both, higher percentages of incentives did not increase performance further (as I indicated earlier - important!!)

70 SO24: Also true for other IVs
Locke, E. A. (1986) (Ed.). Generalizing from laboratory to field settings. Lexington, MA: D.C. Heath & Company Each article in the book analyzed the extent to which the results of laboratory and field studies were similar for a particular performance improvement intervention When there was sufficient data to make the comparison, every review reported that the results in laboratory and field settings were similar True for monetary incentives, feedback, goal setting, training, participation (among others) Interestingly, the author who reviewed feedback (Kopelman) reported that while the general effects of feedback were the same in both settings, the effects of feedback were actually less in lab studies; that is, the results from the laboratory underestimated the extent to which feedback affected performance in actual work settings This makes sense - why, based on what you learned about feedback in U6? (next slide, quote from Locke)

71 SO24: Quote from Locke, p. 6 (NFE)
Both college students and employees appear to respond similarly to goals, feedback, incentives, participation, and so forth, perhaps because the similarities among these subjects (such as in values) are more crucial than their differences. Task differences do not seem to be overwhelmingly important. Perhaps all that is needed is that the participants in either setting become involved in what they are doing. (handy book to know about)

72 SO25: Honeywell-Johnson et al. article
Purpose of the study (NFE) To compare the effects of individual and small group monetary incentives on the performance and satisfaction of high performers Secondary purpose To assess the feasibility of using simulated groups to examine the effects of small group incentives on performance (we examined small group incentives, but results may well generalize to any type of performance consequence that is dependent upon the group’s performance: grade on a project or in a class??)

73 SO25A: Conceptually why might individual incentives control performance more effectively than small group incentives? When individuals are paid individual incentives, the amount of pay they earn is directly dependent on their own performance. Thus, they have complete control over what they earn With small group incentives, the amount of pay workers receive is not only dependent on their own performance, but on the performance of others in the group. Thus, they can’t influence their earnings to the same extent as they can when they are paid individual incentives (both points are important)

74 SO25B: On the other hand, why might small group incentives control performance just as well as individual incentives? When the group is small, certainly when the group is only 2 – 3 members, the individual can still greatly influence the performance of the group, and hence his or her pay. There is still a pretty tight contingency between performance and pay (Malott’s certainty factor?). But, as the group size increases, the individual’s contribution to the group’s performance becomes less and less, and earnings are not as dependent upon their own performance

75 SO26: Summarize the results of studies that have compared individual incentives and equally-divided small group incentives, intro Equally-divided small group incentives are the most common type of small group incentives in business and industry The incentives that a person gets depends upon how well the entire group performs Each individual in the group gets the same amount of incentive, regardless of his or her contribution For example, if a group completes an average of 100 widgets per hour during the week, each member earns an additional $ per week in incentives ($1.00 per widget in the average) If one worker averages only 90 widgets per hour and another averages 110, they both get the same amount of incentive (include range of participants in the small groups in these studies - this is important)

76 Groups have ranged in size from 2 - 12 members
SO26: Summarize the results of studies that have compared individual incentives and equally-divided small group incentives, intro Only five studies have compared performance when individuals were paid individual incentives and when they were paid small group incentives Groups have ranged in size from members In 4 of the 5 studies, equally-divided small group incentives sustained performance as well as individual monetary incentives While there are not a lot of satisfaction data available, when satisfaction was examined, participants reported that they were equally satisfied with the individual and small group incentives (include range of participants in the small groups in these studies - this is important)

77 SO27A: When would an individual be expected to perform the same when paid individual incentives and small group incentives and why? When all members of the small group, including the individual, perform at approximately the same level Why? If all group members perform at approximately the same level, then their pay would not differ much when they were paid individual incentives and when they were paid small group incentives (this seems to be a difficult notion for students to understand: example on next slide)

78 SO27A: When would an individual be expected to perform the same when paid individual incentives and small group incentives and why? If all group members perform at approximately the same level, then their pay would not differ much when they were paid individual incentives and when they were paid small group incentives Assume: under the individual incentive condition, a person is paid 10¢ per widget assembled. If the individual assembled 50 widgets, he or she would earn $5.00 in incentive pay Assume: under the group incentive condition, each individual gets paid 10¢ per widget based on the average performance of the members of the group. If each individual in a 5-person group assembled 50 widgets the total number of widgets assembled by the group would be 250, and the individual would still earn $5.00 in incentive pay 250/5 = 50, 50 X 10¢ = $5.00 Essentially, the pay contingency is the same for the above individual whether or not he or she is paid individual or small group monetary incentives. We analyze contingencies from the perspective of the behaver. (we know, as does the individual of course, that they are being paid either individual or small group incentives, but if they get paid the same, the contingency between their performance and pay is the same under both pay systems)

79 SO27B: When would an individual be expected to perform better when paid individual incentives and perform worse (decrease performance) when small group incentives? Why? When an individual was a high performer in comparison to the other members in the group Why? A top performer would earn less money when he or she was paid small group incentives than when she or she was paid individual incentives because of the lower performance of the other members of the group Hence, over time, the high performer may decrease his or her performance because his or her earnings decrease (example on the next page)

80 The individual would only earn $3.80 in incentive pay.
SO27B: When would an individual be expected to perform better when paid individual incentives and perform worse (decrease performance) when small group incentives? Why? Assume: under the individual incentive condition, a person is paid 10¢ per widget assembled. If the individual assembled 50 widgets, he or she would earn $5.00 in incentive pay Assume: under the group incentive condition, each individual gets paid 10¢ per widget based on the average performance of the members of the group. Also, now assume each of the other individuals in a 5-person group assembled 35 widgets. The total number of widgets assembled by the group would be 190 (4 members X 35 = 140, plus the 50 widgets assembled by the top performer). The individual would only earn $3.80 in incentive pay. 190/5 = 38, 38 X 10¢ = $3.80 Our top performer thus may perform lower when paid small group incentives than when paid individual monetary incentives Recognizing of course that if he or she did increase performance, he or she would earn even less money in incentives. For example, if our top performer now only assembled 35 widgets, he or she would earn only $3.50 in incentive pay - however, the small difference between $3.50 and $3.80 might not be sufficient to keep our top performer making 50 widgets

81 Anyone want to share his or her thoughts on this?
SO27: Thought question (NFE) - what are the implications of this analysis for team/group projects in classes or business settings? Anyone want to share his or her thoughts on this?

82 Honeywell-Johnson et al., intro (NFE)
Participants were 4 college students Task was a computerized task with four sub-tasks presented simultaneously Memory task, arithmetic task, visual monitoring task and an auditory monitoring task DV: points earned for correct responses Design: ABCB, hour sessions per phase A = hourly pay with feedback B = individual incentives with feedback C = small group monetary incentives

83 Honeywell-Johnson et al., intro (NFE)
Group incentive condition Participants were told that they were members of a 10-person group and their data would be combined with the point scores of the other nine members to determine the amount of incentive Worked on networked computers to increase “believability” of this deception At the end of the study, each participant was asked how many members were in their group, and all responded “10” Their comments (some rather nasty and hostile) during the group incentive condition indicated they believed they were in a group of 10 The group’s average performance was contrived/calculated in a manner that insured that the participant’s performance was always quite a bit higher than the group’s average performance

84 SO28: Results of the study and what they indicate
Three of the four participants performed an average of 14% lower (12%, 14%, and 16%) when they were paid small group monetary incentives than when they were paid individual incentives The data suggest that high performers are indeed likely to decrease their performance when paid small group monetary incentives (with N=10 members)

85 SO29 29A: Which of the three pay systems did all four high performers prefer? All preferred the individual monetary incentive system Even though they found the individual incentive system to be more stressful than the hourly pay condition (which was the least stressful of all three) All four said they preferred the individual monetary incentive system because they earned the most money While this is a confound - it is also the case that in actual work settings high performers would always earn more when they were paid individual incentives than when they were paid small group incentives, so I am not overly concerned about this confound 29B: Which of the three pay systems did the majority of performers (3 of 4) find to be the most stressful? The small group monetary incentive system

86 SO29, NFE, but interesting…
The preference data are interesting Most people would probably assume that the individual incentive pay would be the most stressful of the three pay systems, yet three of the four reported that the group incentive system was the most stressful Also, in spite of the fact that three of the four participants found the hourly pay to be the least stressful, all four preferred the individual incentive pay We have confirmed the effects of group incentives on high performers in a subsequent study conducted by Dr. McGee as her doctoral dissertation. It has been published in the Performance Improvement Quarterly (ISPI funded the research)

87 QUESTIONS OR COMMENTS?

88 Theory behind profit-sharing
Profit-sharing was not originally developed to increase employee performance; rather it is based on “macro-economic theory” (good of the company and the society) Profit-sharing would increase the flexibility of labor costs for organizations (not decrease labor costs) When profits went up, labor costs would go up When profits went down, labor costs would go down When profits were down, profit-sharing was supposed to protect the company by automatically decreasing labor costs Protect the employees because the company could afford to keep more employees rather than lay them off Ultimately, both of the above would protect the country’s economy Fewer people would lose their jobs and prevent the economy from a deeper recession

89 However, the catch…. Cost savings to companies was based on the notion that the base wages of employees would be below market value. When profits were high, employee wages would be above market value; when profits were low, employee wages would be below market value. It has not worked out that way - rather predictably, perhaps, profit-sharing has become “gravy.” Base salaries are at market value, so companies do pay out more when profits are good, but don’t recoup sufficient labor costs when profits go down.


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