Understanding Pay For Performance: Motivation and Compensation Strategies

1. Compensation • Extrinsic Rewards • Monetary • wage and salary • commissions and bonuses • Benefits • Intrinsic Rewards • recognition, promotion opportunities, working conditions, nature of the work

2. Objectives of Compensation • Attract Good Applicants • Market competitiveness • Wage survey • External equity • Retain Good Employees • External and internal equity • Distributive and procedural justice • Job Evaluation • Motivate Employees ???

3. Does Pay Motivate ? YES • Reinforcement Theory • Pay is positive reinforcement • Expectancy Theory • Effort = Expectancy * (Sum (Instrumentality*Valence)) • Pay is valent outcome that is contingency-based • Equity Theory • Social comparison of inputs and outputs • Paid less for same or more effort = less effort

4. Does Pay Motivate ? NO • Maslow’s Need Hierarchy Theory • Pay is lower-order need, once it is satisfied it no longer motivates -- move to higher order needs. • Herzberg’s Two-Factor Theory • Motivators and Hygiene Factors • Pay is Hygiene Factor - presence will not motivate • Motivation comes from presence of motivators (recognition, job enrichment) • Deci’s Theory of Intrinsic Motivation • intrinsic rewards gained from certain activities • extrinsic rewards decrease intrinsic motivation

5. Does Pay Motivate ? Compromise • Individual differences in response to pay as a motivator • Need pay, but don’t rely on it as a sole motivator • Pay loses potency over time • Establish clear performance-reward contingencies • Good performance appraisal system; feedback • Make sure employees have skills, abilities and resources needed to do the job (selection; training) • Ensure equity (perceived and actual) • Money is not for everyone: determine individual reinforcers (reinforcement buffet)

6. Issues in Compensation: Overview • Pay-for-Performance • Fixed vs. Variable Pay • Performance vs. Membership • Job vs. Individual Pay • Open vs. Secret Pay Policy • Egalitarianism vs. Elitism • Monetary vs. Nonmonetary Rewards • Below-Market vs. Above Market Compensation • Centralization vs. Decentralization of Pay Decisions

7. Pay-for-Performance • Incentive system rewards employee performance • performance rather than entitlement orientation • Assumptions: • individuals and teams differ in contributions • performance-based pay will affect attraction, retention and motivation • vs. aspects of job, job security, corporate culture • assumes performance appraisals are done well (cont’d)

8. Pay -for -Performance (cont’d) • Advantages: • Merit-based • Objective rather than subjective • Disadvantages: • “Do only what you get paid for” syndrome • employees focus on rewarded measures of job & ignore other important aspects (quality or service) • manipulate system • negative effects on cooperation: increases competition • Lack of control over factors affecting performance • performance of other group members, job support, materials • leads to job dissatisfaction and stress • Difficulties in measuring performance (individual and team) • Encourages short-term orientation (performance over a year) • Psychological contracts (broken when changing system) • Lack of confidence in the system (is it really fair?)

9. Establishing Effective Pay-For-Performance Incentive Systems • Is it appropriate for the job? • piece-rate: absolutely • other knowledge-based jobs? What is the product? • Reinforce with other HR systems • Performance appraisal, selection, rater training • Build employee trust • Does it pay for me to work longer, harder, smarter? • Does anyone notice my extra efforts? • Promote belief that performance makes a difference • Use multiple layers of rewards (individual and team) • Involve employees in design of pay plan • Complement with non-financial rewards

10. Pay-For Performance Plans: Individual • Examples: merit pay, piece-rate, commissions, bonuses • Advantages: • individual equity • ties with goal theory, expectancy theory & reinforcement theory • fits individualistic cultures • Disadvantages: • create competition and destroy cooperation among peers • general pitfalls of p-f-p most evident at individual level • Use: • contributions of individual employee can be accurately isolated • job demands autonomy • cooperation not critical; competition encouraged

11. Pay-For Performance Plans: Team Incentives • Advantages: • Foster group cohesiveness • Reflect current work situation: more effective measurement level • Disadvantages: • Lack of fit with individualistic corporate cultures • Free-riders • Social pressures to limit performance • Difficulties in identifying groups • Intergroup competition leading to a decline in overall performance • Use: • high task interdependence within group • independent tasks between groups • objective to foster self-managed work teams

12. Pay-For Performance Plans: Organizational • Examples: gainsharing, profit sharing, ESOP • Advantages: • employee ownership • provides financial flexibility for firm (cost is automatically adjusted downwards during economic downturns) • tax advantages • Disadvantages: • profits vary from year to year • payoff removed from employee efforts • stock risks • Use: • large corporations with interdependent business units (difficult to target contributions of individual units) • with other individual and team incentive programs

13. Job vs. Individual Pay • Knowledge-based or skill-based pay: employees paid on the basis of the jobs they can do • base level of pay increased with ability to do other jobs • employees move from job to job as needed • Advantages: • increases staffing flexibility • reduces costs of turnover & absenteeism • motivational: job rotation • Disadvantages: • loss of labor specialization • greater difficulty in selecting applicants because qualifications are less specific • chaos if not managed properly

14. Use Knowledge-based pay system: • limited opportunities for upward mobility • high change in technology and organizational structure • educated work force with ability & willingness to learn new jobs • teamwork and participation stressed • opportunities to learn new skills • high costs associated with absenteeism and turnover

15. Open vs. Secret Pay Policy • Advantages to Open Pay Policy: • When compensation is secret, people believe they are more underpaid than they really are • Forces managers to be more fair and effective in administering compensation • bad decisions cannot be hidden • good decisions motivate others • Disadvantages: • Managers forced to defend decisions publicly • may give everyone the same raise to avoid conflict; demotivates high performers. • Pay becomes political -- unleashes jealousy, conflict • Use Open Pay Policy: • Egalitarian culture with employee involvement • Cultures with trust and commitment

16. Elitism v. Egalitarianism • Egalitarianism: employees under the same compensation system (ie. all employees eligible for stock options) • Reduces barriers between employees • Allows reassignment of employee to different area without changing compensation package • More common in highly competitive environments • Elitism: different compensation plans for different groups • Increases stability: have to stay in organization and move up through ranks to get stock options • More common in older, well-established firms with mature products

17. Other Compensation Questions • Monetary vs.Non-monetary Awards? • Non-monetary Awards: interesting work, job security, work sabbaticals, flexible work, benefits, overseas transfers, extensive training and development. • Use combination; contingent on employee and position. • Below-Market vs. Above Market Compensation? • Depends on labor market, position, technology, geographic location. • Implications for turnover, organizational commitment, getting and keeping top performers. • Pay Decisions Centralized vs. Decentralized? • Centralization may be cost efficient; hire compensation specialist • Centralization increases internal equity, but may be less in touch with external market. • Decentralization better in large and diverse organizations.