1. Pay for Individual Contributions © Nancy Brown Johnson, 2004

2. From the field of finance, Baker, Jensen, and Murphy (1988: p. 597) observe, We believe that careful examination of the criticisms of monetary pay-for- performance systems indicates not that they are ineffective but rather that they are too effective: strong pay-for- performance motivates people to do exactly what they are told to do. Large monetary incentives generate unintended and sometimes counterproductive results because it is difficult to adequately specify exactly what people should do and therefore how their performance should be measured.

3. MOTIVATION

4. ©a Times Mirror Higher Education Group, Inc., company, 1997 IRWI N Expectancy Theory Motivation = Expectancy X Instrumentality X Valence Expectancy - can I do the work? Instrumentality - if I work, will I be rewarded? Valence - do I value the reward?

5. Compensation & Expectancy Valence Instrumentality Perceptions

6. Agency Theory Principals: Owners Agents: Managers Agency Problem: Agents do not always act in the principal’s best interest

7. Types of Agency Costs  Agents have discretion to implement policies  Self serving behaviors  Shift risk into the future

8. ©a Times Mirror Higher Education Group, Inc., company, 1997 IRWI N Monitor  Contracts Incentive Alignment –reward behaviors in principal’s interest –pay above market wages to  cost of leaving Techniques to Align Principal & Agent Interests

9. ©a Times Mirror Higher Education Group, Inc., company, 1997 IRWI N Rewards past individual performance Pay is linked to performance appraisal results Feedback is infrequent Merit Pay Program Characteristics

10. ©a Times Mirror Higher Education Group, Inc., company, 1997 IRWI N Poor performance appraisal system Performance differences due to SYSTEM Discourages teamwork Pay increases not representative of performance Contributes to entitlement mentality Merit Pay Program Criticisms

11. ©a Times Mirror Higher Education Group, Inc., company, 1997 IRWI N Most jobs have no physical output Individuals focus only on the incentive Does not fit with team approach Rewards output at the expense of quality or service Individual Incentives Problems

12. ©a Times Mirror Higher Education Group, Inc., company, 1997 IRWI N Advantages Encourages employees to think like OWNERS Payments are not part of base pay Disadvantages Does not make instrumentality connection Few plans pay out during business downturns Profit Sharing

13. ©a Times Mirror Higher Education Group, Inc., company, 1997 IRWI N Team Goals Performance controllable by employee Distributes payouts frequently Conditions for success include: acceptance of employee input cooperation and information sharing agreement on productivity standards employment security Gainsharing

14. Source: Adapted from E.E. Lawler III, “Pay for Performance: A Strategic Analysis,” in Compensation and Benefits, ed. L. R. Gomez-Mejia (Washington, D. C.: Bureau of National Affairs, 1989). Programs Merit Pay Incentive Pay Profit Sharing Ownership Gainsharing Skill-based Organization Structure Management Style Type of Work - Independent jobs - Measurable jobs / units - Autonomous units - Any company - Most companies - Control - Participation desirable - Participation - Participation - Participation - Participation - Individual, easy to measure - Individual appraisal - All types - All types - Professional Individual Pay Programs: Contingencies

15. Pay Strategy Dimension Business Unit Strategy CostInnovation Risk Sharing (variable pay) Time Orientation Pay level (short run) Pay level (long run) Benefits Level Where Pay Decision Made Pay Unit of Analysis Low Short-term Above market Centralized Job High Long-term Below market Above market Below market Decentralized Skills Source: Adapted from L.R. Gomez-Mejia and D. B. Balkin, Compensation, Organizational Strategy, and Firm Performance (Cincinnati:South-Western), Appendix 4b. Matching Pay Strategy to Operating Strategy

16. Toyota “Community of Fate”

17. Toyota Model OrganizationRewardsCommunity of Fate Work Team Relationships Individual Efforts toward Organizational Goals

18. Summary Need to be careful not to reward undesirable behaviors Need to be concerned with the whole system Balance equity components