UGBA 105 Sections 102,104,106

1. UGBA 105Sections 102,104,106 Week 12: Motivation II [section # N-1!]

2. Agenda • Review theories of motivation • Extrinsic • Intrinsic • Review bases for pay • Measuring and/or rewarding performance • Individuals • Teams • Discuss Brainard case

3. Extrinsic motivation • Homo economicus (Taylor, Theory X, principal/agent) • M=f(R) • Expectancy/path-goal (Vroom) • M = E(Ri) = S(pi)Ri • Learning theory (Skinner) • Equity theory • M = f(Rs/Es - Ro/Eo)

4. Intrinsic motivation • Theory Y (McGregor, Marx) • Motivation/hygiene (Herzberg) • Motivation factors are associated w/the actual work itself and how challenging it is • Hygiene factors are associated w/ the physical & psychological context in which the work is performed • Hierarchy of needs (Maslow) • Cognitive dissonance (Festinger)

5. What’s so motivating about $$$$? “Status is of great importance in all human relationships. The greatest incentive that money has, usually, is that it is a symbol of success... The resulting status is the real incentive. Money can be an incentive to the miser only.” John F. Lincoln, CEO Lincoln Electric

6. Bases for pay • Human capital (education, training, skill, experience) • Seniority pay • Pay according to need • Pay for the job w/ pay rates set by: • Job evaluation • Collective bargaining • Hay points

7. Assigning Hay points • Job rated on various dimensions: • Type & complexity of knowledge required • Number of employees supervised • Amount of capital overseen • Type & unpleasantness of working conditions • Measures combined to form a one-dimensional scale of “value” to the firm

8. Bases for pay (cont.) • Pay the market wage (wage surveys) • Pay “efficiency” wages i.e., above market • Pay for performance • Individual • Group

9. Measuring Performance: Individuals • Objective metrics • Examples: piece rates, commissions • Subjective metrics A) Comparative methods • Ranking and forced distribution B) Absolute methods • Trait rating • Behaviorally-anchored rating scales (BARS) • Management by objectives (MBO) • 360 degree appraisals

10. Trait rating • Evaluation based on personal characteristics (e.g., personality, skills, abilities) deemed relevant to job performance • Ex (for a division mngr): initiative, farsightedness, ability to identify managerial talent

11. Selects nursing activities and delegates responsibilities to make the most efficient use of time and personnel available Customarily makes and carries out a satisfactory work plan to handle daily assignments Approaches daily work assignments without foresight or systematic planning 10 Checks orders for medication to be given during the day and attempts to maintain a daily schedule for distributing medication When short of linen, rearranges work assignments to accommodate bedridden patients first 6 If aides had completed their normal work assignments during night shift, would have them help clean equipment during remaining time on shift Makes a routine check for paper supplies available on unit 3 Spends most time charting and very little time with patients and aides 0 Frequently leaves important work undone so that he or she can leave on time Behaviorally Anchored Rating Scale

12. Management by Objective • A formal goal-setting process • Typically 3 components: • Goal setting • Implementation • Evaluation

13. Peers Internal Customers External Customers Me Boss Self Appraisal Skip-level Reports 360 Degree Feedback

14. Morgan Stanley 360° Criteria • Marketing/Professional Skills Problem solving, initiative, communication, versatility • Management and Leadership People management, development, coaching, fairness • Commercial Orientation Client relationships, revenue contribution, deal execution • Teamwork/One Firm Contribution Cross-division projects, business team activity, recruitment

15. Measuring Performance: Groups • Types of pay for group performance • Team competitions (quality, productivity, innovation) • Gain-sharing (Scanlon plan) • Profit-sharing • Employee Stock Option Plans (ESOPs)

16. Stock Option Plans • A stock option is a contract that provides for the owner to purchase a certain number of company shares at a set price • Some vocabulary • Stock grant: The number of shares optioned • Strike price: The set purchase price • Option exercise: Purchasing shares at your strike price • Vesting: How long before you can exercise your options

17. Stock Purchase Plans • The opportunity for employees to purchase company shares at a discount • Used to promote the benefits of ownership

18. Nobel Laureate Gary Becker on ESOPs • The advantages of employee ownership have been oversold, and its disadvantages have been overlooked. The number of employee-owned companies … grew from a handful in 1974 to 5,000 now because of tax advantages introduced during this period. • It is possible that ownership does indirectly motivate employees, but the direct incentive is weak: almost all the additional profit created when an employee works harder goes to fellow employees and other owners of stock

19. Gary Becker (cont.) • Employee stock ownership increases workers’ exposure to risk from fluctuations in the fortunes of their companies. • ESOPs often become a management tool to fend off unfriendly takeovers and other efforts to oust current managers. • A General Accounting Office study found no evidence that profits and productivity increase after companies introduce ESOP.

20. Employee stock ownership • Disaster at Lucent • Workers used the employee stock purchase plan • Applied up to 10% of pay to stock purchase at a 15% discount. • Workers could invest in company shares through their 401(k)s; some invested entirely in Lucent. • Blue-collar workers received the company's voluntary 401(k) matching contribution in stock. • Many Lucent workers received incentives and pay in options •  The contracts are largely worthless.

21. Stock options for execs • Corporate governance considerations • The Berle & Means“agency” problem • How to align the incentives of executives with those of stockholders • A cause of the Enron, etc., scandals?

22. Michael Eisner takes no bonus in 1999 Disney Chief Executive and Chairman Michael Eisner didn't receive a bonus in fiscal 1999… The entertainment and media giant's fiscal fourth-quarter earnings fell to $85 million, or four cents a share, from $296 million, or 14 cents a share a year earlier. Eisner did receive his annual salary of $750,000 in 1999. In fiscal 1998, Mr. Eisner's bonus came to $5 million. His total compensation in 1998 came to $575.6 million thanks to $569.8 million in stock options he exercised. He received a bonus of $9.9 million in 1997. In 1999, Mr. Eisner acquired 1.9 million shares of options that realized a value of $49.9 million when exercised, the filing said. As of Sept. 30, Mr. Eisner held 24 million in unexercised options valued at $68.4 million. WSJ 1/5/2000 

23. CEO annual comp, 2005 • William McGuire (UnitedHealth): $1 Billion • Lee Raymond (Exxon): $405 Million • Bob Nardelli (Home Depot): $250 Million • Hank McKinnell (Pfizer): $99 Million • Franklin Raines (Fannie Mae): $90 Million • Phil Purcell (Morgan Stanley): $66 Million Fortune, July 10, 2006

24. The cost of stock options Many of Silicon Valley's high-tech companies … have relied heavily on options to motivate their employees Santa Clara-based Yahoo is one example of how the true cost of stock options is eroding the bottom line of many of America's best-known companies. …(E)arnings per share of Yahoo, Network Appliances, Mercury Interactive, Palm, and Autodesk Inc. were cut by at least half once the cost of options was included. For Yahoo, a profit of 10 cents per share profit turned into a loss of 50 cents per share, or a fall of 600 percent. WSJ, 2000

25. Exec comp changes in face of corporate scandals • The Sarbanes-Oxley Act (2002) • More timely disclosure of executive-pay deals • CEOs to return compensation based on financial results that were later restated. • Outlawed "backdating" of stock options. • By 2003, the average option grant fell nearly by half to $3.3 million • Average CEO compensation declined, to $8.7 million in 2003, from $12.8 million in 2000. • In 2004, accounting rules changed to require stock grants be treated as an expense. • Corporate boards began substituting restricted stock for options. • Unlike options, restricted stock retains its value even if share prices decline. “Behind Soaring Executive Pay, Decades of Failed Restraints,”WSJ, October 12, 2006

26. Takeaways on pay • Managers should not rely entirely on pay systems for motivation but should design intrinsic rewards into jobs and control systems • Every method of pay has its drawbacks. A combination of individual and group systems is ideal • Don’t overdo it on individual incentives. Group incentives have many advantages! • Alignment is critical! Make sure that the pay system is congruent with the people, the tasks, the technology, the structure, and the culture!

27. Brainard, Bennis & Ferrell

28. Teams • Represent the view on compensation from the perspective of the following parties: • Richard Kincaid • Paul Piccoli • Paula O’Brien • Jason Cesario • Thornton Grey • An academic researching a case • Outside consulting agency