Pay for performance

1. Chapter 10 Pay for performance

2. What behaviors do employers care about? Linking organization strategy to compensation and performance management. Organization strategy Corporate goals SBU goals Department / team goals Employee team results Individual goals Employee task behaviors Link between organization strategy and employee behavior

3. Selection Behavior = f (M, A, E) Where M=Motivation A=Ability E=Environment Ability triangle Recruitment Training Organizational design Performance management Environment al obstacle triangle Motivation triangle Organization development Compensation Culture HR planning Environmental obstacles: Unions, Economic conditions, Public policy/legislation The big picture, compensation can’t do it alone

4. Variability in Organizational Performance High Variability: Regular and large swings in overall corporate performance Low variability: Few 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 Variability /ease of measurement in individual performance Unstable, unclear, and changing objectives 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 Performance measurement relating to compensation strategy

5. Focus on…

6. What motivates employees? • Motivation involves three elements: • What’s important to a person? • Cafeteria-style/flexible compensation • Offering it in exchange for some • Desired behavior

7. Motivation theories • Maslow’s Need theory • Herzberg’s two-factor theory • Expectancy theory • Equity theory • Reinforcement theory • Goal setting theory • Agency

8. Maslow’s need hierarchy Predictions about performance-based pay So what? Performance-based pay may be de-motivating if it impinges upon employee’s capacity to meet daily living needs Incentive pay is motivating to the extent it is attached to achievement, recognition, or approval. • Base pay must be set high enough to provide individuals with the economic means to meet their basic living needs • An at-risk program will not be motivating since it restricts employee’s ability to meet lower-order needs • Success sharing plans may be motivating to the extent they help employees pursue higher order needs

9. Herzberg’s two-factor theory Predictions about performance-based pay Pay level is important-must meet minimum requirements before PBP can operate as motivator Security plans will induce minimum, but not extra, performance. Success sharing plans will be motivating. At-risk plans will be de-motivating Other conditions in the working relationship influence the effectiveness of PBP So what? • Base pay must be set high enough to provide individuals with the economic means to meet hygiene needs, but it cannot motivate performance • Performance is obtained through rewards-payments in excess of that required to meet basic needs • It is motivating to the extent it is connected with meeting employee’s needs for recognition, pleasure attainment, achievement, and the like • Interpersonal atmosphere, responsibility, type of work, and working conditions influence the efficacy of PBP

10. Expectancy theory Predictions about performance-based pay So what? Larger incentive payments are better than smaller ones Line of sight is critical-employees must believe they can influence performance targets Employees assessment of their own ability are important-organizations should be aware of training and resource needs required to perform at target levels. • Job tasks and responsibilities should be clearly defined • Pay-performance link is critical • PBP returns must be large enough to be seen as rewards • People choose the behavior that leads to the greatest reward

11. Equity theory Predictions about performance-based pay So what? Performance measures must be clearly defined, and employees must be able to affect them through work behaviors If payouts do not match expectations, employees will react negatively. Fairness and consistency of PBP across employees in an organization is important Since employees evaluate their pay effort balance in comparison to other employees, relative pay matters. • Pay-performance link is critical; increase in performance must be matched by commensurate increases in pay • Performance inputs and expected outputs must be clearly defined and identified • Employees evaluate the adequacy of their pay via comparisons with other employees

12. Reinforcement theory Predictions about performance-based pay So what? Timing of payouts is very important. • PBP must follow closely behind performance • Rewards must be tightly coupled to desired performance objectives • Withholding payouts can be a way to discourage unwanted behaviors

13. Goal Setting theory Predictions about performance-based pay So what? Line of sight is important; employees must believe they can influence performance targets. Performance targets should be communicated in terms of specific, difficult goals Feedback about performance is important PBP should be contingent upon goal achievement • PBP must be contingent upon achievement of important performance goals. • Performance goals should be challenging and specific. • The amount of the incentive reward should match the goal difficulty

14. Agency theory Predictions about performance-based pay So what? PBP is the optimal compensation choice for more complex jobs where monitoring employee’s work is difficult Performance targets should be tied to organizational goals Use of PBP will require higher total pay opportunity • PBP must be tightly linked to organizational objectives • Employees dislike risky pay and will demand a wage premium (ie higher total pay) in exchange for accepting PBP • PBP can be used to direct and induce employee performance.

15. Components of a total reward system • Compensation • Benefits • Social interaction • Security • Status/recognition • Work variety • Wages, commissions and bonuses • Vacations, health insurance • Friendly workplace • Stable, consistent position and rewards • Respect, prominence due to work • Opportunity to experience different things

16. Continued…. • Work load • Work importance • Authority/control/ autonomy • Advancement • Feedback • Work conditions • Development opportunity • Right amount of work (not too much, not too little) • Is work valued by society • Ability to influence others; control own destiny • Chances to get ahead • Receive information helping to improve performance • Hazard free • Formal and informal training to learn new knowledge skills / abilities

17. Wage components

18. Continued….

19. Continued….

20. Compensation motivates??? • Do people join a firm because of pay?

21. Continued… • 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?

22. Designing a pay-for-performance plan • Efficiency • Strategy • Structure • Standards • Objectives • Eligibility • Funding • Equity/fairness • Compliance