Managing Employee Performance and Reward

1. Managing Employee Performance and Reward Concepts, Practices, Strategies 2nd edition

2. Rewarding individual performance • What is performance-related pay (PRP)? • PRP – for and against • Merit raises/increments • Merit bonuses • Discretionary bonuses • Non-cash recognition

3. CAPACITY TO PERFORM (KSAs/Competencies) BEHAVIOUR RESULTS EMPLOYEE PERFORMANCE BASE PAY PERFORMANCE-RELATED PAY What is performance-related pay (PRP)? A performance-based pay plan is one where part or all of employee remuneration is based directly and explicitly on employees’ assessed work behaviour and/or measured results. Note: Pay-for-personal-skill and competency-base pay are NOT forms of PRP, but are alternative ways to configure base pay.

4. Who (= performance entity/unit) and when (= time frame for payout)? How? (= behaviour) How much? (= results) Individual • Merit raises/increments • Merit bonuses • Piece rates • Sales commissions • Goal-based bonuses • Discretionary bonuses • Individual non-cash recognition awards Large group short-term incentives (STIs) • Profit-sharing • Gainsharing • Goal-sharing Small group short-term incentives (STIs) • Team incentives • Team non-cash recognition awards Organisation-wide long-term incentives (LTIs) • Share bonus plans • Share purchase plans • Share option plans • Share appreciation and other rights plans Performance-related reward options

5. Performance-related rewards/incentives: how do they work? Incentive effect: • Extrinsic motivation • Reinforcement theory • Expectancy theory (V x I x E) • Goal-setting theory • Social cognition (learned self-efficacy) theory

6. Performance-related rewards/incentives: how do they work? Sorting effect: • Self-selection • Extrinsically vs intrinsically motivated • Transactional vs relational psychological contracts • Risk-takers vs uncertainty avoiders • Individualists vs team players

7. Performance-related rewards/incentives: why do they (often) fail? Cognitive evaluation (intrinsic motivation)theory (Deci & Ryan): • Extrinsic control/reward/punishment extinguishes intrinsic motivation Alfie Kohn – why incentives fail: • Incentives only motivate employees to get the reward • Incentives undermine interest in the job • Incentives punish: withholding of a reward is tantamount to punishment • Incentives rupture cooperative work relationships • Incentives ignore underlying reasons for work problems • Incentives discourage risk-taking But: • Are intrinsic and extrinsic motivation antithetical – or are they additive? • Is work behaviour impulsive rather than calculative? • Not all jobs are intrinsically rewarding

8. Performance grade: Base pay increment (%): Exceptional Outstanding Qualified Developing Minimal 8% 6% 4% 2% 0% Straight merit increments by performance grade

9. Straight merit increments by performance grade Advantages: • Simple to understand • Easy to communicate and administer • Clear ‘line of sight’ between performance grade and pay outcomes Disadvantages: • Takes no account of individual’s position in base pay range • Those at the high end of their base pay range receive larger dollar increments, irrespective of performance grade • Reinforces/rewards seniority • May demotivate younger, developing performers • Increments become annuities, thereby inflating total payroll costs over the long term

10. Merit increments – the annuity problem Case: • 5% flat merit increment paid each year to an employee on a commencing salary of $50,000 and who consistently achieves a ‘proficient’ performance grading over five consecutive years Consequences: • $2,500 increment paid for performance in Year 1 multiplies to $12,500 over five years • Employee receives cumulative merit increment payments totalling $40,097 over five years, equivalent to 13.8% of accumulated five-year salary payments of $290,097

11. Annual increments Year 1 (start salary =$50,000) Year 2 Year 3 Year 4 Year 5 Cumulative payments over 5 years +5% Year 1 $2,500 $2,500 $2,500 $2,500 $2,500 $12,500 +5% Year 2 $2,625 $2,625 $2,625 $2,625 $10,500 +5% Year 3 $2,756 $2,756 $2,756 $8,268 +5% Year 4 $2,895 $2,895 $5,790 +5% Year 5 $3,039 $3,039 $40,097 Annual base salary $52,500 $55,125 $57,881 $60,776 $63,815 $290,097 Merit increments – the annuity problem

12. Range minimum ($40k)  Range midpoint ($50k)  Range maximum ($60K)     $45k (compa-ratio= 0.90) $50k (compa-ratio = 1.00) $55k (compa-ratio= 1.10) ‘Compa-ratio’ (= compensation comparison ratio) Compa-ratio (or position in base pay grade range)

13. Performance grade Compa-ratio Exceptional 1.20 Outstanding 1.12 ++Qualified+++++ 1.04 +++++++++1.00 0.96 Developing 0.88 Minimal 0.80 ‘Compa-ratio’ (= compensation comparison ratio) Performance index and target compa-ratios

14. Current performance grading ‘Base pay range penetration’ = current position in base pay range (quintiles) Minimal quintile Developing quintile Qualified quintile Outstanding quintile Exceptional quintile Exceptional 6%–8% 6%–8% 4%–6% 3%–5% 2%–4% Outstanding 6%–8% 4%–6% 3%–5% 2%–4% 2%–4% Qualified 4%–6% 3%–5% 2%–4% 2%–4% 0% Developing 2%–4% 2%–4% 2%–4% 0% 0% Minimum 0%–2% 0% 0% 0% 0% Merit matrix Pay range midpoint (compa-ratio = 1.00)

15. Merit increment curves

16. Merit increments Advantages: • Pay increments are linked to achieved individual performance • Because they increase base pay, they can increase membership behaviour and reduce labour turnover • No ‘downside’ risk to the employee’s total pay • Act as an incentive for higher productivity in the future • Increase managerial flexibility in base pay adjustment • Can substitute for promotion in ‘flattened’ organisations • Can be used to send a strong signal to poor performers and help identify training needs

17. Merit increments Disadvantages: • Difficult to design a performance appraisal system which is both accurate and felt-fair • Link to pay may overshadow developmental purpose of performance review system • Increments conflate performance-contingent pay and base pay (inadequate ‘line of sight’; entitlement mentality) • Not self-funding. The total amount available for payout is typically not driven by a formula for measuring financial performance • Size of the traditional merit increase is often too small to have any effect on motivation and performance • Inadequate differentiation in pay between top and bottom performers

18. Range minimum ($40k)  Range midpoint ($50k)  Range maximum ($60k)   Merit increments to base pay for developmental performance   Merit bonus for high performance  Rate for job/role proficiency Merit bonuses (in broad grade)

19. Discretionary bonuses Advantages: • The reward is payable immediately so there may be a clear and instantaneous reinforcement effect • The organisation is not committed to making pay-outs on a regular basis • The payment does not become an annuity • Lump sum rewards are highly visible • Additional rewards can be given to those at the top of their pay range without inflating future base pay costs • Simple and easy to administer

20. Discretionary bonuses Disadvantages: • Difficult to apply to people whose jobs have less tangible outcomes (e.g. sale support staff) • Individualistic and may impair team cooperation • Discretionary and arbitrary nature can mean there is little clear link between performance and pay • Because they do not always differentiate between employees, high performers may feel their contribution is not fairly recognised, which can be demotivating • May discriminate against those working on long-term projects where tangible outcomes and rewards may be months or even years away

21. ‘The only thing more powerful than money and sex is praise and recognition.’ – Mary Kay Ash

22. Forms of non-cash recognition • Social reinforcers: praise, involvement • Learning and development opportunities • Merchandise: gifts, vouchers, debit cards, online catalogue points • Symbolic awards: plaques, certificates, letters, flowers, ‘thank you’ notes, intranet publicity, pins, gold watches, pens, hampers, T-shirts, embossed mugs, company umbrellas, caps • Leisure and entertainment: restaurant meals, theatre tickets, tickets to sporting events, corporate ‘boxes’, gym or sporting club membership, sky diving, flying • Earned time off

23. Non-cash recognition plans in Australia • The proportion of Australian firms offering non-financial recognition awards rose from 55% in 2002 to 94% in 2014 • Only 13% of users rated plans as highly effective • 25% of all firms sceptical about the efficacy of non-cash incentives Mercer Human Resource Consulting, 2004, 2014

24. Non-cash recognition: pros and cons Advantages: • Low cost • Instant reinforcement • Rewards system flexibility and spontaneity • Factors in celebration and fun • Avoids entitlement mentality • Longer ‘shelf life’ than cash (= ‘trophy value’) • Applicable to individuals and teams

25. Non-cash recognition: pros and cons Disadvantages: • May create atmosphere of ‘winners’ and ‘losers’ or, alternatively, of ‘everyone is a winner’ • Employees may perceive the rewards as tokenistic (‘beads and trinkets’) • May be seen as a substitute for regular pay • Unlikely to motivate low performers