1. Employee Contributions: Determining Individual Pay
Chapter 9 Pay for Performance:
The Evidence
Chapter 10 Pay for Performance Plans
Chapter 11 Performance Appraisals

2. STRATEGIC ISSUES TECHNIQUES STRATEGIC OBJECTIVES
Work Descriptions Evaluation INTERNAL analysis certification STRUCTURE
CONSISTENCY
EFFICIENCY Performance Quality Customer Cost
EQUITY
COMPLIANCE
Market Surveys Policy PAY definitions lines STRUCTURE
COMPETITIVENESS
CONTRIBUTORS
Seniority Performance Merit INCENTIVE based based guidelines PROGRAMS
ADMINISTRATION
Planning Budgeting Communication EVALUATION

3. Pay for Performance: The Evidence
Chapter 9
Pay for Performance:
The Evidence

4. Employee performance depends on three general factors:
Employee performance = f (S,K,M)
where:
S = Skill and ability to perform task
K = Knowledge of facts, rules, principles, and procedures
M = Motivation to perform

5. What Behaviors Do Employers Care About?
How do we get good employment prospects to join our company?
How do we retain these good employees once they join?
How do we get employees to develop skills for current and future jobs?
How do we get employees to perform well on their current job?

6. Performance Measurement Strategies
Low
variability
High
Unstable, unclear, changing objectives
Provide wide range of rewards beyond just money, include significant incentive components
Provide wide range of rewards beyond just money, emphasize base pay with low incentives
Stable and easily measured
Emphasize monetary rewards, with large incentive components
Emphasize monetary rewards, with large base pay with low incentives

7. What Motivation Theories Say
Three Elements Are Required:
1. Know what is important to a person
2. Offer it in exchange,
3. For some desired behavior

8. Motivational Theories
Maslow’s Need Hierarchy – since people are motivated by inner needs, base pay must be set high enough to allow individuals the economic means to meet basic living needs. At risk pay is not motivational but success sharing plans may help employees pursue higher order needs.

9. Motivational Theories
Herzberg’s 2 Factor Theory – Base pay is a hygiene factor that must be high enough to meet needs, but it is not a motivator. Performance based pay is motivating if connected to recognition, pleasure attainment, achievement, etc. Other conditions in working environment influence effectiveness of pay.

10. Motivational Theories
Expectancy – Job tasks/responsibilities should be clearly defined and the pay-performance link is critical. People choose behaviors that lead to the greatest reward. Larger incentive payments are better than smaller ones. Firms should provide training to employees to pursue targets.

11. Motivational Theories
Equity – Inputs and expected outputs must be clearly defined. Employees evaluate their pay via comparisons to others. Pay-performance link is critical.. If payouts do not match expectations, employees react negatively. Relative pay matters to the employees.

12. Motivational Theories
Reinforcement – Performance based payments must follow performance quickly. Rewards should be tightly coupled to desired performance objectives. Withholding payouts can be a way to discourage unwanted behaviors.

13. Motivational Theories
Goal Setting – Performance based pay must be contingent upon achievement of important goals. Goals should be challenging and specific. The amount of incentive reward should match goal difficulty. Feedback about performance is important. No achievement, no payouts.

14. Motivational Theories
Agency – Performance based pay must be tightly linked to organizational objectives. Employees dislike risky pay and will demand a wage premium (higher total pay) in exchange for accepting performance based pay. Performance based pay is optimal choice for complex jobs where monitoring is difficult.

15. Performance Depends on the Employee’s Perception of: (1 of 2)
The probability the performance will meet or exceed manager’s objective.
The probability that if the objective is met, the manager will give extrinsic rewards.
The probability the extrinsic rewards will satisfy some needs.

16. Performance Depends on the Employee’s Perception of: (2 of 2)
The probability that doing the task will provide intrinsic rewards.
The probability the intrinsic rewards will satisfy needs.
How much satisfaction of these needs is important or valued.

17. Components of a Total Reward System
1. 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
See text, Exhibit 9.3

18. Wage Components ` Cost of Living Increase Merit Pay Lump Sum Bonus
Base Pay
Across the Board
Increase
Cost of Living
Increase
Merit Pay
Lump Sum
Bonus
Wage
Components
Individual
Incentive Plans
Success
Sharing Plans
Profit Sharing
Risk
Sharing Plans
Gain Sharing `

19. Does Compensation Motivate Behavior: Specific Comments
Do people join a firm because of pay?
Do people stay in a firm (or leave) because of pay?
Do employees more readily agree to develop job skills because of pay?
Do employees perform better on their jobs because of pay?

20. Examples of Group Incentive Plans
Company Pay 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

21. Designing A Pay-For-Performance Plan
EFFICIENCY
Strategy
Structure
Standards
EQUITY OR FAIRNESS
COMPLIANCE