Human Resource Management: Gaining a Competitive Advantage Chapter 12 Recognizing Employee Contributions with Pay Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

Pay Influences Individual Employees 3 Theories Explain Compensation’s Effects: 12-2

How Pay Influences Individual Employees  Reinforcement Theory – a response followed by a reward is more likely to recur in the future.  Expectancy Theory - motivation is a function of valence, instrumentality and expectancy.  Agency Theory- interests of principals (owners) and their agents (managers) may no longer converge. 12-3

Agency Costs  Agency costs may be minimized by principal choosing a contracting scheme that aligns agent’s interests with principal's interests.  6 Factors that Influence Type ofContract: 1. risk aversion 2. outcome uncertainty 3. job programmability 4. measurable job outcomes 5. ability to pay 6. tradition 12-4

Programs Recognizing Contributions  Programs differ by payment method,payout frequency and ways of measuring performance.  Potential consequences include employees’ performance motivation and attraction, culture and costs.  Management style and type of work influence whether a pay program fits the situation. 12-5

Merit Pay  Merit pay programs link performance- appraisal ratings to annual pay increases.  A merit increase grid combines an employee’s performance rating with employee’s position in a pay range to determine size and frequency of his or her pay increases.  Some organizations provide guidelines regarding percentage of employees who should fall into each performance category. 12-6

Individual Incentives  Individual incentives reward individual performance but payments are not rolled into base pay and performance is usually measured as physical output rather than by subjective ratings.  Individual incentives are rare because:  Most jobs have no physical output measure.  Many potential administrative problems.  Employees may do what they get paid for and nothing else.  Typically do not fit in with team approach.  May be inconsistent with organizational goals.  Some incentive plans reward output at the expense of quality or customer service. 12-7

Profit Sharing  Under profit sharing, payments are based on a measure of organization performance (profits), and payments do not become a part of base pay.  Advantage- profit sharing may encourage employees to think more like owners.  Disadvantage-workers may perceive their performance haslessto do with profitthan top management decisions over which they have little control. 12-8

Ownership  Ownership encourages employees to focus onorganization’s success, butmay be less motivational the larger the organization.  One method to achieve employee ownership is through stock options, which give employees the opportunity to buy company stock at a previously fixed price.  Employee stock ownership plans (ESOPs) give employers certain tax and financial advantages when stock is granted to employees. ESOPs can carry significant risk for employees. 12-9

8 Conditions for Effective Gainsharing 1. management commitment 2. need and commitment to change and continuous improvement 3. management's acceptance and encouragement of employee input 4. high cooperation and interaction 5. employment security 6. information sharing on productivity and costs 7. goal setting 8. agreement on a performance standard and calculation that is undesirable, seen as fair and closely related to managerial objectives 12-10

Group Incentives and Team Awards  Group incentivesmeasure performace in terms of physical output.  Team award plans may use a broader range of performance measures.  Individual competition may be replaced by competition between groups or teams

Balanced Scorecard  Some companies design a mix of pay programs.  4 Categories of a Balanced Scorecard: 1. financial 2. customer 3. internal 4. learning and growth 12-12

Managerial and Executive Pay  Top managers and executives are a strategically important group whose compensation warrants special attention.  Some companies rewards for executives are high regardless of profitability or stock market performance.  Executive pay can be linked to organizational performance (agency theory).  Increased pressure from regulators and shareholders to better link pay and performance Securities and Exchange Commission (SEC) 12-13

Process and Context Issues 3 issues represent areas of significant company discretion and pose opportunities to compete effectively: 12-14

Summary  There are potential advantages and disadvantages of different types of incentive or pay for performance plans.  Pay plans can have both intended and unintended consequences.  Designing a pay for performance strategy typically seeks to balance the pros and cons of different plans and reduce the chance of unintended consequences.  Pay strategy will depend on the particular goals and strategy of the organization and its units. Many organizations are working to link pay to performance and reduce fixed labor costs, although sometimes executives appear slow to reduce what are supposed to be performance-based bonuses when firm performance declines