Pay for Performance

1. Pay for Performance SESSION 4a - Pay for Performance Appraisals

2. Employees Performance • Three general factors driving employees performance : • Skills & ability to perform task • Knowledge of facts, rules, principles and procedures • Motivation to perform SESSION 4a - Pay for Performance Appraisals

3. Principal determinants of job performance Knowledge & Skills Environment Work Organization Effort (Motivation) Behavior Job Performance SESSION 4a - Pay for Performance Appraisals Role Personality Available resources • Financial • Technical • Material • Human • Temporal

4. Motivation Theories • Based on needs • Maslow’s need hierarchy • Herzberg’s two-factor theory • Based on employer/employee’s relationship • Expectancy • Equity • Reinforcement • Goal setting • Agency SESSION 4a - Pay for Performance Appraisals

5. Motivation Theories • Maslow’s need hierarchy • Performance-based pay • Must be set high enough to meet basic living needs • At-risk program will not be motivating is it restricts employees’ ability to meet basic needs • Incentive pay is motivating if attached to achievement, recognition, or approval SESSION 4a - Pay for Performance Appraisals

6. Motivation Theories • Herzberg’s two-factor theory • Performance based pay • Pay level is important - must meet minimum requirements to be considered as a motivator • Performance is obtained through reward : • Security plans will induce minimum performance • Success sharing plans will be motivating • At-risk plans will be demotivating • Other conditions in the working relationship influence performance-based pay SESSION 4a - Pay for Performance Appraisals

7. Motivation Theories • Expectancy • Performance-based pay • Larger incentive payments are better than smaller ones • Employees must believe they can influence performance targets • People choose the behavior that leads to the greatest reward • Identification of training and resource needs required to meet target levels are essential SESSION 4a - Pay for Performance Appraisals

8. Motivation Theories • Equity • Performance-based pay • Performance measures must be clearly defined • Employees must be able to affect them through work behaviors • Fairness and consistency employees across the organization is important • Relative pay amongst employees matters SESSION 4a - Pay for Performance Appraisals

9. Motivation Theories • Reinforcement • Performance-based pay • Timing on payouts is very important • Rewards must be tightly coupled to desired performance objectives SESSION 4a - Pay for Performance Appraisals

10. Motivation Theories • Goal setting • Performance-based pay • Employees must believe they can influence performance targets • Performance targets should be challenging and specific • Feedback about performance is important • The amount of the incentive reward should match the goal difficulty SESSION 4a - Pay for Performance Appraisals

11. Motivation Theories • Agency • Performance-based pay • Is the optimal compensation choice for more complex jobs where monitoring employees’ work is difficult • Performance target should be tied to organizational goals • Employees dislike risky pay and will require a higher total cash pay opportunity in exchange for accepting performance-based pay SESSION 4a - Pay for Performance Appraisals

12. Components of a Total Reward System • Compensation Wages, commissions, & short/long-term incentives • Benefits Vacations, health insurance • Social interaction Friendly workspace • Security Stable, consistent position & rewards • Status/recognition Respect, prominence due to work • Work variety Opportunities to experience different things • Workload Right amount of work (not too much nor too little) • Work importance Is work valued by society • Authority/control/autonomy Ability to influence others; control own destiny • Advancement Chance to get ahead • Feedback Receive information helping to improve performance • Work conditions Hazard free • Development opportunities Formal/informal training to learn new KSAs SESSION 4a - Pay for Performance Appraisals

13. Wage Components • Compensation components from least risky to most risky for employees : • Base pay • Salary Increase Plans • Across the board • Cost-of-living increase • Merit pay • Lump-sum bonus • Individual incentive • Sharing Plans • Success-sharing plans • Gain sharing • Profit sharing • Risk sharing SESSION 4a - Pay for Performance Appraisals

14. Wage Components • Base Pay • The guaranteed portion of an employee’s wage package • This is the secure portion of wages • Viewed as a fixed cost to the employer • Can be lowered by employers in some countries (i.e. US UK, Switzerland) based on company performance. • Not possible in most EU countries without harsh union negotiations • Could be lowered on a voluntary basis (e.g. HP) SESSION 4a - Pay for Performance Appraisals

15. Wage Components • Salary Increase Plans • Across the board • Wage increase granted to all employees, regardless of performances • Low risk even though at discretion of employer • Cost-of-living (COL) • Same as above but based on local COL indexes • Merit pay • Salary increase based on individual performance • Size of merit pool at discretion of employer • Lump-sum bonus • Same as merit pay increase but paid as a one-time payment • Not added to the base salary (i.e base salary level stays untouched) SESSION 4a - Pay for Performance Appraisals

16. Wage Components • Sign-in bonus • Lump-sum or installment bonuses designed to attract new high performers to join a company or take a new challenging position within the organization • Stay-on bonus • Lump-sum or installment bonuses designed specifically to retain key employees during and after a major restructuration (e.g. Chapter 11 or after a merger & acquisition) SESSION 4a - Pay for Performance Appraisals

17. Wage Components • Individual Incentives • Are either : • An add-on to a fixed base pay - lower risk => Base Salary plus Bonus = Total Cash (TC) • A variable portion of the overall pay - higher risk but higher earning potential => Base Salary plus Incentive = Total Target Cash (TTC) • Measures of performance are objective (e.g. sales volume) Incentive Overachievement (50%) SESSION 4a - Pay for Performance Appraisals Total Cash (TC) Bonus (25%) Total Target Cash (TTC) Market value Base Pay (100%) Incentive (25%) Base Pay (75%)

18. Wage Components • Sharing Plans • Success-sharing • Tied to group performance • Not penalized for performance below standard • Gain sharing • Same as above but usually not based on financial performance of organization but on some cost index • Profit sharing • Add-on linked to group performance relative to exceeding some financial goals • Risk sharing • Same as above but employees can be penalized during poor performance years. However rewards is typically higher than the other sharing plans • Employees absorb a “temporary” cut in base pay SESSION 4a - Pay for Performance Appraisals

19. Does Compensation Motivate Behavior? Person Characteristics Preferred reward Characteristics Materialistic Relatively more concerned about pay level Low self-esteem Want large decentralized organization with little pay for performance Risk takers Want more pay-based on performance Risk averse Want less performance-based pay Individualists Want pay plans based on individual performance, not group performance SESSION 4a - Pay for Performance Appraisals

20. Other Motivators • Type of rewards Important • Work variety and challenge 50% • Development opportunities 38% • Social 40% • Status recognition 23% • Work importance 20% • Benefits 22% SESSION 4a - Pay for Performance Appraisals

21. Effectiveness of Alternative Reward Plans Type of Plan Considered Effective Log-term executive incentives High Annual bonus High Individual incentives High Employee stock ownership High Spot awards Medium - High Gain sharingMedium - High Lump-sum merit payMedium Profit sharingMedium Suggestion boxMedium - Low SESSION 4a - Pay for Performance Appraisals

22. What is expected from a Reward System • Rewards must : • Help organizations attract and retain employees • Must make high performance an attractive option for employees • Must encourage employees to built new skills and gradually foster commitment to the organization SESSION 4a - Pay for Performance Appraisals

23. PerformanceManagement SESSION 4a - Pay for Performance Appraisals

24. Performance Appraisal Perception • Probably the most misused and abused management tool • Everyone believes that it is an important tool, however : • The odd thing is that they often don’t get done • Managers, supervisors and employees hate them • Managers look for a variety of reasons to delay and delay… SESSION 4a - Pay for Performance Appraisals

25. Why such Negative Perception • It’s uncomfortable to do performance appraisals • Why? • Because people undertake them for the wrong reasons and wrong perspectives • Ends up putting the manager and the employees on different “sides” • Often used to focus on what people have done wrong SESSION 4a - Pay for Performance Appraisals

26. How to sell the Process? • The most important purpose of performance appraisal is to improve performance in the future • We need to • shift from affixing blame • Identify barriers to performance So we can begin to remove the fear and dread people have about these “appraisals” When we focus on the present and the future, we change our focus to what’s been to what can be better tomorrow SESSION 4a - Pay for Performance Appraisals

27. Performance Appraisal Issues • Frustration from employees • Performance goals are not clearly defined • They don’t know how their performance is evaluated • They don’t believe their last performance review guided them on how to improve • They don’t think the reviews can differentiate among good, average, and poor performer • They don’t think doing a good job is recognized SESSION 4a - Pay for Performance Appraisals

28. Feedback Objectives • Employees find out where they stand with the supervisor and the organization. 2. Supervisor-Subordinate relationships are strengthened because they encourage mutual agreement on performance expectations. SESSION 4a - Pay for Performance Appraisals

29. Appraising performance Planning for performance Managing & coaching for performance Performance Appraisal Overview WEF Mission Goals of MD, Principals and Directors Department/Generalist Strategies & Objectives SESSION 4a - Pay for Performance Appraisals Individual/Team/Organizational Performance

30. Roles & Responsibilities • Organization goals and objectives • Individual objectives • Development plans Planning for performance SESSION 4a - Pay for Performance Appraisals

31. Roles and Responsibilities Managing & coaching for performance SESSION 4a - Pay for Performance Appraisals • Communication of major changes • Adjustments and mutual feedback on results • Coaching • Informal follow-ups • Review discussions

32. Roles and Responsibilities • Appraisal of individual contribution • Identification of training and development needs Appraising performance SESSION 4a - Pay for Performance Appraisals

33. Why Is It Important to Have Objectives? • To give each staff member a sense that his/her contribution makes a difference • To promote ongoing communication between supervisor and staff member • To clarify expectations • To provide a clear direction • To reinforce pride and self-esteem SESSION 4a - Pay for Performance Appraisals

34. Feedback Objectives • Training and Development needs are identified. • Provides an opportunity for the supervisor and subordinate to express themselves on a variety of performance related issues. SESSION 4a - Pay for Performance Appraisals

35. Discipline • Dealing with problem employees is probably one of the most troublesome aspects of a supervisor’s job • Performance appraisals can be used to identify job related problems and through frequent observation and feedback, the employee can be made aware of the problems and what corrections are necessary. • Also performance appraisals (if reliable and valid) can be used as legal justification for termination. SESSION 4a - Pay for Performance Appraisals

36. Performance Appraisal Issues • Perhaps the biggest complaint of all employees (and managers too) is that appraisals are too subjective. • Performance is not easily quantified • Some believe that work situation (not the individual) is the major determinant of performance. • Not having the necessary information, technology, or control to adequately perform his/her job • Its is critical to understand the influence of the work environment and system in order to assess individual performance • Equally important is to identify the strategies for understanding and measuring job performance better SESSION 4a - Pay for Performance Appraisals

37. Common Errors in Appraising Performance • Most supervisors dread doing appraisals • Several factors that lead raters to give inaccurate appraisals : • Guilt • Embarrassment about giving praise • Taking things for granted • Not noticing • The halo effect • Dislike of confrontation • Spending too little time on the preparation of the appraisal SESSION 4a - Pay for Performance Appraisals

38. Avoid the following errors in evaluations • Ensure that your supervisors not to make the following eight common errors that can distort and even invalidate the evaluation process. Specifically, supervisors should not: • Base the evaluation on the employee's most recent behavior, instead of reviewing the whole performance period; • Allow irrelevant or non job-related factors to influence the evaluation, such as physical appearance, social standing, participation in employee assistance programs, or use of leaves of absence; • Include only favorable remarks on the evaluation, even when negative comments are justified and appropriate; • Rate all subordinates at about the same point on a ranking scale, usually in the middle; SESSION 4a - Pay for Performance Appraisals

39. Avoid the following errors in evaluations • Specifically, supervisors should not (continued): • Allow one characteristic of the employee or one aspect of the job performance to distort the rest of the rating process; • Judge all employees at the extremes, either too leniently or too strictly; • Allow one very good or very bad rating to affect all the other ratings of the employee (the "halo effect"); or • Permit personal bias to unduly influence the evaluation process. SESSION 4a - Pay for Performance Appraisals

40. 10 Stupid things Managers do to screw up Performance Appraisal #1: Spending more time on performance appraisal than performance PLANNING, or ongoing performance communication. #2: Comparing employees with each other. #3: Forgetting appraisal is about improvement, not blame. #4: Thinking a rating form is an objective, impartial tool. #5: Stopping performance appraisal when a person's salary is no longer tied to the appraisals. SESSION 4a - Pay for Performance Appraisals

41. 10 Stupid things Managers do to screw up Performance Appraisal (cont’d) #6: Believing they are in position to accurately assess staff. #7: Canceling or postponing appraisal meetings. #8: Measuring or appraising the trivial. #9: Surprising employees during appraisal. #10: Thinking all employees and all jobs should be assessed in exactly the same way using the same procedures. SESSION 4a - Pay for Performance Appraisals

42. Four factors to make an effective program • Regular, informal feedback from supervisors. • Annual evaluations aren't enough. Employees need regular input that focuses on day-to-day performance objectives rather than concentrating on past mistakes or failures • Performance goals set jointly by employees and supervisors • Goals should be precise and quantifiable where possible, such as the completion of a specific project within a set period of time. • To help employees meet their goals, supervisors should provide additional training or other necessary support. SESSION 4a - Pay for Performance Appraisals

43. Four factors to make an effective program • Action plans to address performance or disciplinary problems • The supervisor should identify and discuss problems with the employee as they occur and develop a plan of action for improvement. • The employee also should have input and be able to suggest changes to the plan. • Once agreed upon, the plan should be reviewed regularly to make sure the employee is progressing satisfactorily.. • Formal reviews that accurately document the "big picture." • Ideally, these formal reviews should be done several times a year. • But, if you regularly conduct informal meetings to discuss performance, a semi-annual or even annual review may be sufficient. • the purpose of formal meetings is to assess whether goals and action plans have been met and to determine if the employee is on track for career development. SESSION 4a - Pay for Performance Appraisals

44. Better Understanding Job Performance • Looking strictly at task performance • How the employees perform the responsibilities of their jobs • Evaluation based on the negative behaviors of employees (i.e. counterproductive performance) • Jobs becoming more dynamic require employees to adapt and grow on an ongoing basis • Focuses on individual characteristics or personal competencies • Consistent with the whole trend toward measuring job competency • Identifying the best appraisal format • Recent attention has focused less on the rating format and more on the raters themselves SESSION 4a - Pay for Performance Appraisals

45. Better Understanding Job Performance • Identification of possible groups of raters (supervisor, peers, subordinates, customers, self) • Examines whether a given group leads to more or less accurate ratings • How raters process information about job performance and translate it into performance ratings • Impact of irrelevant information on the evaluation of employees. • May yield strategies for reducing the flaws in the total process • Raters may be trained to increase the accuracy of their trainings SESSION 4a - Pay for Performance Appraisals

46. Performance Evaluation methods • Comparison-based methods • Standard-based Methods • The standard rating scale method • The BARS method • Methods based on performance objectives • Methods based on objective indicators SESSION 4a - Pay for Performance Appraisals

47. Comparison-Based Methods • The ranking method • Straight ranking • Based on individual performances • Alternative ranking • Identifying best against worst performers until all ranked • Paired comparison method • Allow performance of employees reporting to same manager to be compared between each others • Performance of employees can be judged equivalent =>risk of over concentration, i.e. too many employees with same rating…few managers have courage of their convictions. • The forced distribution • Predetermined distribution (bell curve approach) • Not encouraged is less than 20 employees SESSION 4a - Pay for Performance Appraisals

48. Three Ranking Formats SESSION 4a - Pay for Performance Appraisals

49. Standard-Based Methods • The standard rating scale method • List of criteria and an evaluation scale • Either numeric (e.g. 1 to 5) • Or qualitative (e.g. weak to strong) • The most widely used method SESSION 4a - Pay for Performance Appraisals

50. Methods based on performance objectives • The BARS (Behavioral Anchored Rating Scales) method • Evaluates performance against a set of behavioral aspects or dimensions • Quite complex process involving a number of steps to develop this method, i.e • Identify set of critical incidents • Grouping incidents classified and selected • Set incidents prevalence • Various working group to design such approach SESSION 4a - Pay for Performance Appraisals