77: Pay-for-performance

Differential performance:

is a common occurrence

halo effect

When a rater's rating of all factors is influenced by the rating on one factor it is called the:

no

Your organization has a wide spectrum of jobs. Should you use rank-ordering for performance appraisals?

may feel uncomfortable conducting performance appraisals

Generally, supervisors:

usually valent

Money is:

equitable compensation

Pay for performance can conflict with:

C) makes rating results more reliable

Using multiple raters:

B) central tendency

Employee comparison systems reduce:

some increase

In a merit matrix chart, all top performers receive:

interval

A Graphic Rating Scale is which type of scale?

the rater is observing, not evaluating

A major positive for behavioral checklists is that:

each job classification needs a separate set of factors

A major problem with both BARS and BOS is that:

Requirements of a Pay for Performance Program

A pay for performance program requires the use of: a salary range a merit matrix for pay increases a good performance appraisal system We'll now review each of these requirements in-depth.

how well the essential function is to be done

A performance standard within an essential function from a job description comes from:

one of trust

Management by objectives requires that the relationship between supervisor and subordinate be:

PROGRAM DEVELOPMENT

An important use of a pay for performance program is for base salary management under a merit pay plan to determine the movement of employees within a pay range. The goal of the program can be to match employee performance level with position in the pay range over time. This concept is shown below. Upward movement. Movement upward in the rate range occurs only if the employee's pay rate is lower in the salary range than his/her performance is on the performance scale. Pay for performance allows the organization to rapidly move high performers upward in the salary range by giving larger increases to these employees. Downward movement. Pay for performance also allows movement downward in the salary range, by freezing the pay rate at the current level. In pay for performance systems, employees typically will not receive pay cuts due to poor performance. The worst thing that can happen to their pay is that it will remain the same.

The idea of relating pay directly to performance is attractive to most managers - so much so that most organizations claim that they have pay for performance in the form of a merit pay system. Both management and employees agree that tying pay to performance is desirable, but today performance-based pay has spread beyond traditional base pay administration. It can influence both short- and long-term incentive pay as well. Pay for performance has been extended to nontraditional groups such as teachers where equity-based pay has been the norm. Today, pay for performance is going through its own transformation. There is evidence that pay for performance can: be complicated be inefficient be focused on the past label employees be inappropiate for some organizations

DESIRABILITY OF PAY FOR PERFORMANCE

performance-reward

If there is a long lag between a performance appraisal and a pay raise, which of the following aspects of motivation theory is weakened?

Pay for Performance Won't Solve All Problems

Pay for performance is not a solution for all motivation and performance problems in organizations. Pay for performance can be extremely effective where the requirements of expectancy theory are met. However, in many circumstances implementing a pay for performance program may lead to frustration.

Salary Range

A pay for performance program typically relies on a salary range, which defines the minimum, midpoint and the maximum. The salary range needs to be broad enough so that it is possible to give larger pay increases to outstanding performers. Movement within the pay grade is determined based on the performance of the employee, and the employee's position in range is maintained only by satisfactory performance over time. Having reached a particular point in the range, the employee may slip back in relative terms the next time the pay structure is adjusted upward, if his/her performance is not as high as in the present performance period.

Drawbacks

Despite its obvious appeal, not all aspects of pay-for-performance are desirable. Inequity. A focus on performance often conflicts with the compensation goal of equity: in a pay for performance system, employees in the same work group doing the same work may be earning greatly different pay rates. Employees can resent this, especially if the program is not well designed and communicated, or if employees do not perceive performance as a proper criterion by which to set pay. Competition. A pay for performance program implicitly or explicitly puts people in competition with each other. Forced ranking and labeling of a high-performing team for performance-based rewards can cause fracturing of a team or workforce. Yet cooperation is what is really needed for the work of the organizational unit to be accomplished. Where everyone has to work together, different levels of pay for the same job can have a divisive effect that may produce lower and not higher performance for the group as a whole. This may explain why first-line supervisors are often not as enthusiastic about pay-for-performance as higher-level managers. Effort. Pay-for-performance requires managerial time and effort and must be designed and administered carefully. Failure to put forth the training, communication, and effort required can lead to a program that: does not actually tie pay to performance makes employees distrust management Distrust. Pay for performance most often relies on the judgment of managers about the level of performance of employees. Unless employees trust the judgment of the managers and perceive that it is in fact employee performance that is being rewarded, there is a possibility that employees will reject the plan. The problem is that trust cannot be entirely created by the compensation program. Although a good program can enhance the feeling of trust, trust between employees and management must already be present.

Valence

Does the employee value the reward being offered? Normally, the answer is yes - but not in all cases. Employees differ in how they value incentives compared with other needs on and off the job. A pay for performance program will be most successful when the incentive is highly valent to employees. Valence should be determined by appropriate research. Example: A consultant was retained by an organization when a team of employees were unable to meet production standards, even though there was an attractive cash incentive program. The consultant discovered that the employees felt they were paid competitively but needed to leave work promptly at the end of their shift at 3 p.m. In this case, the employees did not value the extra incentive as it conflicted with their need to leave at the end of their normal shift. The incentive plan was revised to allow the employees to leave before their normal shift ended when the daily standard was achieved. Once this was implemented, the daily production standard was consistently achieved. It is important to know what will motivate your workforce. In this instance, time was a more important motivator than additional pay.

The Performance-Effort Connection

Employees MUST perceive that their efforts are reflected in their performance ratings. A pay for performance program assumes that performance varies among employees and that this difference is observable. But in many jobs, variation is impossible or is so little that it is unrealistic to try to measure it for pay purposes. Even if there are differences, measuring or attributing the differences to employee effort may be difficult. For instance, the efforts of an individual in a group project may not be able to be separated from the efforts of the other members of the group. Employees may not feel that they control the important measures of performance. Teachers, for example, realize that for them the important measure is student learning, but teachers feel only minimal control over that variable. Today, many companies stack rank employees for performance purposes. Managers complain that effectively differentiating employee performance in this case can be very difficult or near impossible.

PERFORMANCE EVALUATION METHODS

Evaluating performance is a necessary part of the management process within an organization. Regular, effective communications between a manager and an employee is an important part of the performance management process. For some companies, the cumbersome performance appraisal process and ratings have been eliminated and replaced with forward thinking programs with regular communications between a boss and subordinate. For the majority of companies, the evaluation process is systematized. Performance appraisals should be specific, and the ratings should be recorded in such a way that top performers can be identified from average and below average performers.

Performance-Reward Connection

For pay for performance to be effective, there must be a connection between pay and performance. This is easy to say, but difficult to achieve. Organizations are complex social systems whose members are subject to many influences on their performance at any one time. To isolate a simple pay-performance connection is not possible. A number of problems increase the complexity of the connection: multiple goals employee perception performance appraisal employee acceptance Multiple goals. Compensation programs try to achieve a number of things at the same time and these different goals are often in conflict with one another, such as revenue growth and profitability attainment. Employee perception. Even if the program does connect pay with performance, employees must perceive the connection. Edward E. Lawler III, a well-known authority on human resources management states: But does secrecy help reduce the amount of dissatisfaction with pay that exists? It does not! There is a considerable amount of research that suggests that keeping pay secret contributes to greater pay dissatisfaction and worse pay administration. As far as dissatisfaction is concerned, data that I collected over 40 years ago show that when employees do not know what other people earn, they overestimate what their coworkers earn and end up being more dissatisfied than they would be if they had accurate pay information. Performance appraisal. Pay for performance is only as good as the organization's underlying performance appraisal system that defines "good performance." A perception that the performance appraisal system is biased or does not appraise actual performance destroys the connection for the employee. (We'll discuss reliable performance appraisal methods later in this course.) Employee acceptance. Management and employees may not agree on performance ratings. This creates a serious complication. In fact, many companies are eliminating performance ratings today since they can inappropriately label employees. Management often views employee performance as a normal distribution bell curve. In this normal distribution, the bulk of employees have average performance and fall in the middle of the curve.

only employees whose performance level supports a pay increase will receive pay increases

In a pay for performance system:

Performance Appraisal Rating

It must be possible to rate each employee by performance. This distribution is assumed to be divisible into segments such as quartiles, and each individual can be identified as being within a particular quartile. This system does not allow for everyone being rated high or low; it assumes that there is an even spread of performance - a normal distribution. If this distribution does not appear in the ratings, the distribution must be developed by spreading out the ratings along a continuum.

Differential performance

Many managers will tell you that differential performance is not just an ideal; it is a fact. Some people are capable of producing 2 to 3 times what others are; the best workers can produce as much as 5 or 6 times what the worst performers can. The reward system of organizations could create much higher levels of performance, and therefore productivity in employees, if it were clear to the employees that they would be rewarded for the increased productivity. But it should be kept in mind that not all jobs permit differences in performance and not all organizations require or desire them. Assembly-line jobs. Assembly-line jobs are often designed so that variation in performance is impossible or irrelevant to the desired outcomes. Variation in performance where tight coordination of activities is necessary creates trouble, not increased productivity. Sales, engineering, managerial jobs. Jobs such as sales, engineering, and managerial jobs have a great deal of latitude in their effects on outcomes. Middle performers. Middle performers represent an intermediate position between the two extremes (discussed above) and may be extremely common in organizations. Most raters can identify the few employees who are doing an outstanding job and the few doing a poor job. But most performance appraisal systems ask that performance distinctions be made among all employees. Making distinctions in the middle of the performance scale is difficult, because the differences may be so small as to not warrant differentiation.

errors

The critical incident method reduces:

the performance-reward connection

The fact that most people feel that their performance is above average becomes a problem when establishing:

Where to start (pay structure)

The starting point for determining a pay increase is the position of each employee in the salary range after a structure adjustment has been made. This is illustrated in the figure below for 3 employees: A, B and C. Before the structure adjustment: A was between the first and second quartiles B was just above the midpoint C was at the top of the pay grade After the adjustment: A is at the bottom of the pay grade B is in the second quartile C is between the third and fourth quartiles These new positions are the starting points for determining the pay increases for the next period. Memory Jogger

B) reduction of response errors

Through training, it seems we can best improve on the rater's: