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Chapter 9

Pay for Performance: The Evidence FastCat Phase III. Chapter 9. Exhibit 9.2: The Big Picture, or Compensation Can't Do It Alone!. What Behaviors Do Employers Care About?. Behaviors that compensation needs to reinforce

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Chapter 9

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  1. Pay for Performance: The Evidence FastCat Phase III Chapter 9

  2. Exhibit 9.2: The Big Picture, or Compensation Can't Do It Alone!

  3. What Behaviors Do Employers Care About? • Behaviors that compensation needs to reinforce • Compensation should be sufficiently attractive to make recruiting and hiring good potential employees possible (attraction) • Need to make sure the good employees stay with the company (retention) • Need to find ways to motivate employees to perform well on their jobs—to take their knowledge and abilities and apply them in ways that contribute to organizational performance

  4. What Behaviors Do Employers Care About? (cont.) • 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?

  5. What Motivates Employees? • In the simplest sense, motivation involves three elements: 1. What is important to a person? 2. Offering it in exchange for some 3. Desired behavior

  6. Exhibit 9.4: Motivation Theories

  7. Exhibit 9.4: Motivation Theories (con’t)

  8. Exhibit 9.4: Motivation Theories (con’t)

  9. Exhibit 9.5: Components of aTotal Reward System

  10. Exhibit 9.6: Wage Components

  11. Exhibit 9.6: Wage Components (con’t)

  12. Does Compensation Motivate Behavior?General Comments • Organizations with “high-performance work practices” had annual sales that averaged $27,000 more per employee.

  13. Do People Join a Firm Because of Pay? • Key factors affecting a person’s decision to join a firm • Level of pay • Pay system characteristics • Job candidates look for organizations that “fit” their personalities • Reward systems should be designed to attract people with desired • Personalities • Values

  14. Do People Stay in a Firm (Or Leave) Because of Pay? • Factors impacting turnover • Pay based on individual performance results in higher turnover of poor performers • Group incentive plans may lead to higher turnover of better performers • Level of employee satisfaction with pay

  15. Do People Stay in a Firm (Or Leave) Because of Pay? (cont.) • Other rewards affect the decision to stay • Work variety and challenge • Development opportunity • Social • Status recognition • Work importance • Benefits

  16. Do Employees More Readily Agree to Develop Job Skills Because of Pay? • Evidence is unclear • Relevance of skill-based pay

  17. Do Employees Perform Better on Their Jobs Because of Pay? • Not clear if performance of individuals can be increased by tying it to pay • If the incentive depends on individual performance, applicants find the company more attractive • Team-based incentives, in contrast, are less attractive • A number of recent studies provide strong evidence that pay for performance has a direct and, at times, substantial impact on firm performance • Evidence indicates, however, that ees don’t notice incentive payouts unless they are at least 10%, w/ 15-20 % more likely to evoke desired response • Some research indicates ee satisfaction w/ pay may depend more on procedures used to determine pay than level

  18. Where’s the Merit Pay Payoff? • Jeffrey Pfeffer (Stanford) argues that idea that individual pay for performance will enhance org performance rests on set of assumptions that do not hold in vast majority of orgs • “Merit pay is not based on merit” • Perf appraisals biased • Pay increases not enough to motivate ees, but are enough to irritate them • In effect, for vast majority of ees, merit increases are unevenly distributed cost-of-living and market-adjustment increases couched in language of performance rewards • But, high levels of differentiation destroy engagement, breed distrust, and undermine teamwork • Higher turnover, lower quality, serious ethical breaches • “Effective management is a system, not a pay plan. The mistake is that companies try to solve all their problems with pay.” • Evidence suggests group bonuses, profit sharing, and gain sharing are more effective forms of performance-based pay than merit pay or individual incentives • Source: Workforce Management, 11/3/08

  19. Exhibit 9.7: Examples of Group Incentive Plans

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