CH 9 Pay-for Performance

motivation involves 3 elements

(1) what's important to a person, and (2) offering it in exchange for some (3) desired behavior.

Components of a total Reward System: 13 items

- Compensation: - Benefits: - Social interaction: - Security: - Status or recognition: - Work variety: - Workload: - Work importance: - Authority or control/autonomy: - Advancement: - Feedback: - Work conditions: - Development opportunity:

rewards that lead people to stay 5 items

- Job satisfaction: Work enjoyment - Pay and benefits: Self-explanatory - Social: Coworkers are fun - Organizational commitment: Not a job jumper; loyal - Organizational prestige: Respect afforded company in industry, region

Do people stay in a firm (or leave) because of pay?

- Turnover is much higher for poor performers when pay is based on individual performance (a good outcome!). - Conversely, group incentive plans may lead to more turnover of better performers—clearly an undesirable sorting

pay for performance plans are dependent on 3 things

1. efficiency: strategy, structure, standards( objectives, measures, eligibility, funding) 2. equity: distributive justice 3. compliance

Goal Setting

Challenging and specific performance goals generate the most employee effort. Goals serve as feedback standards to which employees can evaluate their performance. Employees must be motivated to choose and persevere in (be committed to) pursuing performance goals.

4. How do we get employees to perform well while they are here?

Design rewards that enhance job performance

Equity

Employees experience equity and will be motivated to perform when the ratio of their perceived outputs (e.g., pay) to perceived inputs (e.g., effort, performance) is equal to the perceived outputs/inputs of a comparison person. If the two ratios above are not equal, perceived inequity results and the person is motivated to take action to restore equity. Some actions employees take (e.g., lower effort) to restore perceived equity are not helpful to organizations

do people join because of pay?

Evidence suggests that talented employees are attracted to companies that have strong links between pay and performance: - 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 ("I control my destiny"): Want pay plans based on individual performance not group performance

Do employees More Readily Agree to develop job skills because of pay?

Evidence suggests that while pay for skill may sometimes but not always increase productivity, it does focus people on believing in the importance of quality and in turning out significantly higher quality products

Expectancy Motivation

Expectancy is employees' assessment of their ability to perform required job tasks. Instrumentality is employees' beliefs that higher job performance will be rewarded by the organization. Valence is the value employees attach to the organization rewards received for job performance.

Herzberg's two factor theory

Hygiene/maintenance factors (e.g., pay) prevent dissatisfaction, but do not motivate or cause satisfaction. Hygiene factors, which include pay, help with basic living needs, security, and fair treatment. Satisfiers/motivators, such as recognition, promotion, and achievement, motivate performance.

3. How do we get employees to develop skills for current and future jobs?

Must recognize that what we need employees to do today might change tomorrow Fast changing world requires employees who can adjust more quickly

merit bonus

Nonpermanent (variable) payment (bonus or lump sum) form of variable pay granted to employee as function of some (typically primarily subjective) assessment of individual employee performance. - Three types of risks faced here. Both types mentioned under merit pay, plus not added into base—requires annually "re-earning" the added pay.

2. How do we retain these good employees once they join?

Once our compensation system geta a good employee in the door, We need to figure out ways to ensure its not a revolving door.

Maslow's need of hierarchy

People are motivated by needs. Needs form a hierarchy from most lower/basic (food and shelter) to higher-order (e.g., self-esteem, love, self-actualization). Unmet needs motivate. Met needs do not. Unmet higher-order needs become motivating after lower-order needs have been met.

across the board increase

Permanent base wage/salary increase granted to all employees, regardless of performance. Size related to some subjective assessment of employer ability to pay. - Some risk to employee, because at discretion of employer. But not tied to performance differences, so risk lower in that respect.

merit pay

Permanent wage/salary increase granted to employee as function of some (typically primarily subjective) assessment of individual employee performance. - Two types of risk faced by employees. Size of total merit pool at discretion of employer and individual portion of pool depends on performance, which also is not totally predictable.

reinforcement

Rewards reinforce (motivate and sustain) performance. Rewards are most effective when they follow directly after behaviors to be reinforced. Behaviors that are not rewarded will be discontinued (extinction).

cost of living increase

Same as across-the-board increase, except magnitude based on change in cost of living (e.g., as measured by the Consumer Price Index [CPI]). - Same as across-the-board increases.

base pay and risk

The guaranteed portion of an employee's wage package. - As long as employment continues, this is the secure portion of wages.

profit sharing

Variable pay plan where payout depends on company profitability. (Can also be used at lower levels such as the division. Size of payouts to individuals can be modified based on other measures such as individual performance.) - Profit measures are influenced by factors beyond employee control (e.g., economic climate, accounting write-offs). Less control means more risk.

Individual incentive

Variable pay tied directly to objective measure of individual performance such as sales, production volume, or production quality. - Most risky compensation component if sole element of pay, but often combined with a base pay. No or low fixed-base pay means each year employee is dependent upon meeting performance target to determine pay.

success-sharing plans

a generic category of pay add-on which is tied to some measure of group performance, not individual performance - All success-sharing plans have risks noted in above pay components plus the risk associated with group performance measures. Now individual worker is also dependent upon the performance of others included in the group.

gain sharing

allows employees to share in cost savings or productivity gains realized by their efforts - Less risk to individual than profit sharing because performance measure is more controllable in a sub-unit than for an entire organization and because the performance measures themselves may be more controllable for employees than profits.

1. How do we attract good employment prospects to join our company?

job characteristics (including rewards and tasks/abilities required) and recruiter behaviors were key elements in the decision to join a company

Do Employees perform better on their jobs because of pay?

pay depends on individual performance, applicants find the company more attractive. Team-based incentives, in contrast, are less attractive, although it depends on the person. rewarding a person for performing a task reduces interest in that task—extrinsic rewards (money) reduce intrinsic rewards (enjoyment of the task for its own sake)

agency

pay directs and motivates employee performance

pay for performance plans

pay that varies with some measure of individual or organizational performance such as merit pay, lumpsum bonus plans, skill-based pay, incentive plans, variable pay plans, risk sharing and success sharing

risk sharing

plans A generic term for variable pay plans that tie pay to measures of group/ organization performance. Distinguished from success-sharing plans in that failure to achieve baseline performance results in lower (total) direct pay. However, upside reward opportunity may be higher than in success-sharing plans in good years. - Greater risk than success-sharing plans. Typically, employees absorb a "temporary" cut in base pay. If performance targets are met, this cut is neutralized by one component of variable pay. Risk to employee is increased though because even base pay is no longer totally predictable

Flexible compensation

the allocation of employee compensation in a variety of forms tailored to organization pay objectives and/or the needs of individual employees

self-determination theory

this approach believes that employees are motivated not only by monetary rewards (referred to as extrinsic motivation), but also by intrinsic motivation, which is enjoyment or satisfaction that comes from performing the work itself and produces a sense of autonomy.