UGBA105: Organizational Behavior

1. UGBA105: Organizational Behavior Professor Jim Lincoln Week 11: Motivation II: Compensation & Appraisal

2. 2 Compensation Pay is the most standardized, measurable, and controllable reward Sends strong signal both inside and outside the organization Like reorgs and layoffs, shifts in compensation policy are closely monitored by Wall Street and other external constituencies (Pfeffer)

3. 3 Theories of extrinsic motivation(What are the managerial implications?) Homo economicus (Taylor, Theory X, principal/agent) M=f(R) People are rational but selfish, opportunistic, & risk- and effort-averse. They need strong incentives & close monitoring Expectancy/path-goal (Vroom) M = E(Ri) = S(pi)Ri People are rational and goal-directed. They map paths to the attainment of rewards. Extrinsic rewards motivate only when the perceived probability of attainment is high Learning theory (Skinner) People are not rational or goal-directed. Random behavior that is rewarded is reinforced. Behavior that is punished is extinguished Equity theory: M = f(Rs/Es - Ro/Eo) People benchmark the value of their extrinsic rewards on those of others. Perceived inequity may be motivating or demotivating Haas $250 spot awards. HP also. Learning theory implications: once learned, the behavior may be repeated. Says consequences precede motivation. People aren�t goal directed. They behave randomly, the behavior that is rewarded is reinforced. Drive motivates action. Managerial implications: quantitative metrics; high-powered, individual incentives; close monitoring Managerial implications: Set clear, attainable goals and chart path to attainment (MBO) Fit the person to job Small, easy-to-get rewards may be more motivating than big, hard-to-get rewards People benchmark on others in assessing the value of rewards Inequity that disadvantages you >> ? Inequity that advantages >>? But procedural equity blunts the impact of distributive inequity Note Mary Kay Note two-tier pay system as device for segmenting workers to prevent social comparisonsHaas $250 spot awards. HP also. Learning theory implications: once learned, the behavior may be repeated. Says consequences precede motivation. People aren�t goal directed. They behave randomly, the behavior that is rewarded is reinforced. Drive motivates action. Managerial implications: quantitative metrics; high-powered, individual incentives; close monitoring Managerial implications: Set clear, attainable goals and chart path to attainment (MBO) Fit the person to job Small, easy-to-get rewards may be more motivating than big, hard-to-get rewards People benchmark on others in assessing the value of rewards Inequity that disadvantages you >> ? Inequity that advantages >>? But procedural equity blunts the impact of distributive inequity Note Mary Kay Note two-tier pay system as device for segmenting workers to prevent social comparisons

4. 4 Theories of intrinsic motivation(What are the managerial implications?) Theory Y (McGregor, Marx) People find meaning & fulfillment through work (intrinsic rewards) Motivation/hygiene (Herzberg) Extrinsic rewards reduce dissatisfaction; intrinsic rewards motivate Hierarchy of needs (Maslow) People have needs that both intrinsic and extrinsic rewards fulfill. Intrinsic rewards motivate only after a sufficient level of extrinsic reward is attained Cognitive dissonance (Festinger) People as rationalizers: need consistency in cognitions & behavior Too much extrinsic reward makes work less intrinsically rewarding Too little extrinsic reward makes work more intrinsically rewarding �Fake it �til you make it�; Herzberg: �I hate this job but I can�t quite because the money�s too good� Factory managers view of workers� subhuman Learning theory: Consistency�Fake it �til you make it�; Herzberg: �I hate this job but I can�t quite because the money�s too good� Factory managers view of workers� subhuman Learning theory: Consistency

5. 5 Let�s start with the basics:How should employees be paid? Economic theory says pay a person�s marginal product. But that doesn�t work in practice. Why? So employers instead:

6. 6 1. Pay for human capital (education, training, skill, experience) Advantages? Problems?

7. 7 1a. Seniority pay Advantages Problems? 2. Pay according to need Common outside the U. S. In-kind transfers in U. S.

8. 8 2. Pay for the job. Pay rates set by: Job evaluation Collective bargaining Advantages? Problems?

9. 9 Assigning Hay points to jobs Job rated on various dimensions: Type & complexity of knowledge required Number of employees supervised Amount of capital overseen Type & unpleasantness of working conditions These measures are combined to form a one-dimensional scale of �value� to the firm

10. 10 3. Pay the market wage (do wage surveys) Advantages? Problems? 4. Pay �efficiency� wages; i.e., above market Advantages?

11. 11 Costco lowers labor costs by increasing labor rates In addition to offering some of the best wages and benefits in the retail industry, Costco rewards employees with bonuses and other incentives. It promotes from within, encourages workers to make suggestions and to air grievances and gives managers autonomy to experiment with their departments or stores to boost sales or shave expenses as they see fit. ��� The result: People line up to work there, and once hired, they stay. Annual turnover for full- and part-time hourly workers on the job more than a year is 6 percent, compared with an industry average of 59 percent. It�s the same story for executives. The 13member senior management team has stayed virtually unchanged since its birth in 1983. ��� "What they�re doing is creating a competitive advantage through people," says Fred Martels, president of People Solution Strategies, a St. Louis retail industry consultancy. "It lowers costs and increases productivity."

12. 12 5. Pay for performance Individual Group

13. 13 5a. Pay for individual performance On the increase Upsides? Downsides?

14. 14 Objective metrics Examples: piece rates, commissions Advantages? Problems? Subjective metrics (for discussion section) Trait rating Forced ranking Behaviorally-anchored rating scales (BARS) Management by objectives (MBO) 360 degree appraisals

15. 15 Should performance pay be in base or bonus? Base pay advantages? Base pay problems? Bonus advantages? Bonus problems? Most incentive pay systems are a combination Incentive pay above a target threshold Advantages? Problems?

16. 16 Lincoln Electric�s compensation system Wages based solely on piecework Starting pay lower than average and work harder than average Year-end bonus based on productivity Individual�s share of bonus pool determined by semiannual merit rating done by foremen Dependability, quality, output, ideas & cooperation Could equal or exceed annual regular pay Alignment issues Guaranteed employment for all workers Removed disincentive to increase efficiency Family culture (privately-held family-owned firm) Employees guarantee own quality; not paid for defective work until repaired on their own time

17. 17 �s incentive compensation for sales clerks * Guaranteed base wage $9.45/hour * Target sales per week: 40 hrs x $140 sales per hour = $5600 * Commission rate: 6.75% above target

18. 18 5b. Pay for group performance Types Team competitions (quality, productivity, innovation) Gain-sharing (Scanlon plan) Profit-sharing Organization design alignment issues ESOPs Stock options Advantages? Problems?

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20. 20 Employee stock ownership: a disaster at Lucent During the almost 30 years since ESOPs were introduced, they have become popular financial instruments, and champions of employee ownership say that United's failure will probably not do much to stem the employee-ownership tide sweeping over the American workplace. According to the ESOP Association, more than 11,000 companies in America, covering 8 percent of all employees, have ESOPs. In more than half of those firms, employees own enough equity to be a "major factor in the corporation's strategy and culture," the group says. Salon2002. By contrast, Southwest, which is about 10% owned through employee benefit plans and gives options widely on top of that, says it puts "employees first, customers second, and shareholders third." Employees work in teams to make decisions, full information on corporate and work unit performance is shared, and employees are urged to use their judgment to make whatever decisions are necessary to please customers. Southwest continues to make a profit and has a market capitalization greater than the major airlines combined. Employee ownership can and does work in the airline industry. It just failed at United. During the almost 30 years since ESOPs were introduced, they have become popular financial instruments, and champions of employee ownership say that United's failure will probably not do much to stem the employee-ownership tide sweeping over the American workplace. According to the ESOP Association, more than 11,000 companies in America, covering 8 percent of all employees, have ESOPs. In more than half of those firms, employees own enough equity to be a "major factor in the corporation's strategy and culture," the group says. Salon2002. By contrast, Southwest, which is about 10% owned through employee benefit plans and gives options widely on top of that, says it puts "employees first, customers second, and shareholders third." Employees work in teams to make decisions, full information on corporate and work unit performance is shared, and employees are urged to use their judgment to make whatever decisions are necessary to please customers. Southwest continues to make a profit and has a market capitalization greater than the major airlines combined. Employee ownership can and does work in the airline industry. It just failed at United.

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

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23. 23 CEO annual compensation in 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. 24 What exactly is motivating about $$$money$$$? �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

25. 25 The cost of stock options

26. 26 Executive compensation change in response to corporate scandals The Sarbanes-Oxley Act, passed in 2002: 1. More timely disclosure of executive-pay deals 2. CEOs to return compensation based on financial results that were later restated. 3. 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 were changed to require stock-option grants to 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 (more than 100 companies are under scrutiny for manipulating the timing of option grants to generate even bigger gains for executives. (more than 100 companies are under scrutiny for manipulating the timing of option grants to generate even bigger gains for executives.

27. 27 Do Americans care about income inequality? Unlike the lucky crowd at the top of the income scale - hedge fund managers, media superstars, lawyers, strategy consultants, rock stars, sports heroes, and, yes, CEOs - a majority of Americans haven't been reaping the rewards of globalization. Even as benefits shrivel, real median wages have stagnated since 2000, while real median family incomes have fallen four years running.

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29. 29 Performance appraisal �The experience of performance appraisal systems of all kinds over at least a century of trying in government and business has been uniformly bad.� (Wall Street Journal, Nov. 19, 1996) A 1996 Institute of Management Accountants survey found only 15% of respondents� measurement systems were effective at supporting top management�s business objectives; 43% of respondents felt their systems did a poor job in this regard.

30. 30 What should performance appraisal do? Communicate strategy, values, expectations Build the culture Evaluation Current job (e.g., salary and bonus) Future jobs (e.g., promotion, training) Development and feedback Legal defense Hiring, promotion, retention decisions Validation (e.g., of selection criteria) Equity and fairness

31. 31 Problems in performance rating Halo effect Stereotypes Overweight negative information Lack of sufficient observation Memory: primacy/recency Leniency Central tendency Justification for salary Reticence to write things down

32. 32 Evaluating rating formats

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35. 35 Example of Behaviorally Anchored Rating Scale 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 � Frequently leaves important work undone so that he or she can leave on time 0

36. 36 360 Degree Feedback

37. 37 Morgan Stanley 360� Criteria

38. 38 Benefits of 360 Degree Appraisal Validity and accuracy Better acceptance by people rated Promotes equity Legal protection Diversity Useful when spans of control are large Better for knowledge workers More appropriate for team-based system Appropriate for empowered cultures

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