Compensation
Physiological, Safety, Social, Esteem, Self-actualization. if basic needs aren't provided you cant care about money physiological, safety, belongingness, self-esteem, self actualization. Money can fulfill bottom two, belongingness can't be bought and level 4 and 5 impossible. FULFILL ONLY AT BOTTOM LEVEL
Needs hierarchy (Maslow)
• Reduce tension? - Decrease input • Making less effort - Increase outcome • Asking for increase • Theft or stealing - Distort perception • Different outcome measure • Change referent - Leave the organization lower input, steal to raise outcomes. Can quit. Change perception about output and input or find other reference inside or outside )
Negative ineqity (underpayment situation)
Pay compression motivating?
Not really because highest performer can make money similar to low performers
Right to purchase a fixed number of shares of stock during a fixed time period at a fixed price, regardless of actual stock price • Problem - Underwater: stock price < option price • Risky behavior of CEO - "nothing to lose" - Overuse • Conflicts between shareholders and employees - Value of stock option to employees • Lack of the sense of ownership of employees
Stock options
Quality, service, technical characteristics of products Malden Mills of Lawrence, MA Quality matters Levi Strauss Labor cost counts for only 15% Hours required to assemble a car among leading car manufacturer GM cannot solve problems solely by adjusting wage rates
Values for competitive advantage
Motivate using V x I X E together Must address all If they don't care about outcomes don't matter
Victor Vroom's Expectancy Theory
Benchmark jobs-within and outside of organiation (benchmark jobs, job grade)
benchmark (key) jobs
income protection work/life focus allowance
benefits (under total compensation under total returns)
toilet, money is like toilet it is there when it is not there it is a complete disaster. The existence of toilet leads to only no dissatisfaction (no dissatisfaction vs dissastisfaction) clear difference is this might not lead to satisfaction
hygiene factor (herzberg)
- What we get from job situations • Example: Salary levels, raises, recognition
outcome
-Link pay to the accomplishment of target goal of organizational profit Bonus contingent on achieving a profitability target • Advantages - Popular measurement: profitability • Reduces agency costs • Cooperate towards common goals • Problems - Lack of expectancy - Weak relationship between operation efficiency and profit
profit sharing
attraction and retention
sorting effect (pay level effect)
Link pay to multiple objectives other than profitability at a collective (facility) level (dont put a dollar value on it) - cost components, schedule attainment, safety, customer returns, customer satisfaction, the quantity and quality of employee suggestions • Advantages - Better expectancy perceptions - Increases employees' knowledge of the business - Facilitates cooperation - Makes use of tacit knowledge
Gainsharing
High performance work practices -Interpersonal relationship -Team work Southwest Airlines, AES
Group/org based pay effective when
Too much administrative burden. To be more flexibile increase width of pay grade. (Pay grade: flexibility) recognition, motivation (Pay range)
job based pay: pay grade
Benefical for symbolic and administrative purpose we are an egalitarian culture (brandbanding: flexibility)
job based pay:broadbanding
A _____ approach controls costs by paying only as much as the work performed is worth, regardless of any greater skills the employee may possess.
job-based pay
base pay merit cost of living long-term incentives short-term incentives
Cash Compensation (under total compensation under total returns)
Effective compensation practices reward individual efforts and individual achievement Merit pay is a great idea and the only issue is in how to implement effectively (how are you going to do it) Compensation based on piecework is even better when individual work output can be measured Collective pay schemes encourage free riding and shirking
Conventional wisdom (which may not be true)
Weak relationship between pay level and pay satisfaction (r=.15) Limited managerial discretion in adjusting pay level- really scarce resources Pay secrecy Lake walbolein effect
Critiques on pay level effect
• Broad-based: not limited to a certain group of people pride of ownership effect • Very popular - More than 9,500 companies covering more than 10 million employees holding more than $150 billion. - Lincoln Electric: 28% of outstanding stock • Positive influence on motivation - Pride of ownership effect • Limitation - Long-term oriented - Lack of expectancy of employees good when company doing good but waste when not
Employee stock ownership plans (ESOPs)
The rate of pay + what people produce Higher productivity may reduce labor costs even if labor rates are high (e.g., Efficiency wage hypothesis) Higher prodcutivitiy can lead to higher wages and higher productivity (higher level of motivation)
Labor costs- how does labor costs differ from labor rates?
out of 12 guys all 12 think they have above average driving skills. Public information they think they have the biggest outcomes or do the best,
Lake walbolein effect (critiques on pay level effect)
Rewards usually improve performance only at extremely simple tasks and even then they improve only quantitative performance (Alfie Kohn)
Linking pay to certain tasks is easy to do with simple task. With complicated task we cant always reward them for each positive outcome. They want to produce more and more instead of high quality (Limited role of pay: the power of non-financial incentives) pay level effect
Decrease the size of differentials between high-level and low-level employees Detrimental effect of pay dispersion on team work Pay compression and MLB (Bloom, 1999) Effective when there is a strong job interdependence Community-like organization Job security, job rotation, job enrichment, team work
Pay compression
Needs hierarchy (Maslow) Two factor theory (Herzberg) Cognitive evaluation theory (Deci & Ryan) Contingency theory
Pay level may NOT be a motivator
nobody complains because they don't know to managers. If it comes out, people will lower motivation it completely blocks your peers inputs and outputs. Pay secrecy leads to input and output perception of yourself. All about perception.
Pay secrecy (critiques on pay level effect)
Focus on "how" to pay Organizational idiosyncrasy of pay structure The key issue is "how to structure pay systems" External competitiveness weighed much more heavily than internal alignment in pay decisions
Pay structure
Rational self-interested individuals will not act to achieve their common or group interests (Olson, 1965) - Detrimental sorting effect is magnified when Lake Woebegone effect exists Lake- men says they are all better than others, and then that detriminetal sorting effecrt getting magnified
Problems of group performance based pay
Link of pay to KSAs a person acquires that are relevant to a job. pay-mechanic- highest level of certificate determines their hour wage. Encourages learning, those with higher levels of knowledge and skills get paid more. Problem might be getting paid for a skill that you don't use it.
Skill-based pay
Financial incentives are based on the success of the total firm Individual employees are graded on factors that include how well they cooperate with their peers Link- Lincoln best way to protect profits is to protect people. Piece work pay-paid a fixed piece rate for each unit of product produced. Company hasn't had layoffs in 60 years. Done because they reassign people to different jobs. Reduced workweek from 50 to 32. They cut salaries across the board. No paid sick days. ***initiated early retirement plan Total compensation Profit sharing- 2008 $28,000 09 $17,000 "Quality" piecework- quality and quantitity test quality by testing pieces and return from customer. Tracking pieces essentially Merit system- performance rating shows how much profit goes to an indvidiual ESOP- 20% employee stock ownership plan Relational returns. Security (not really efficient according to wall street Opportunity for growth (promotion from within)
Successful piecework systems at Lincoln Electric
- Apparent differences among individual performance tend to arise from the system rather from people themselves (Deming) - Free-riding problem is surprisingly meager (Pfeffer) - Positive impact on low-performing employees - Effective when ... • Implementing high performance work practices • Emphasizing team work and reciprocal interdependence
Supporting arguments for Group/org-based pay
Although economic rewards play an important part in securing adherence to organizational goals and management authority, they are limited in their effectiveness (Herbert Simon)
When you talk about motivation the first things you may think is compensation. Motivate people through positive policies and compensation (Limited role of pay: the power of non-financial incentives) pay level effect
Is pay dispersion motivating?
Yes because employee has ability to make more money. Steeper pay structure has incentive effect. Sorting efffect is attraction and retention. May not always be motivating
Total compensation involves
cash compensation and benefits
addresses battle between extrinsic and intrinsic motivation
cognitive evaluation theory (Deci & Ryan)
all about perception
cognitive theory
want to compress your pay a little bit more. Pay dispersion in team setting causes more conflict, because they want more conflict.
community (pay dispersion)
people have different needs some people care about security or something other than pay
contingency theory
Pay dispersion influenced by team performance. Collected data from 2000-2010. calculated level of P.D.by using coefficient of variance= standard deviation/ mean ii) gini co efficient MLB NBA NFL dispersed pay leads to negative performance in MLB, not significant in NFL, and in NBA it has a positive effect.
effective when there is a strong job interdependence
Efficiency wage hypothesis (Akerlof & Yellen, 1986) Positive impact of efficiency wage (Cappelli and Chauvin , 1991) Behavior: reduce shirking Attitude: job satisfaction, intention to stay, commitment Employment relations: less need for closer supervision, lower turnover Recruitment: applicant pool size, job acceptance ratio Pay level doesn't decrease profit per say but increase in productivity at same time
efficiency wage hypothesis
Employees make comparisons of their job inputs and outcomes relative to those of others • Motivation = f (perception of inequity) - Perception of inequity creates an tension - The state of tension motivates an individual to reduce the tension
equity theory
two cognitive theories that address importance of motivation through compensation
equity theory and expectancy theory
effort-performance linkage. Do you think you could perform well if you make an effort?
expectancy
Jobs in a company are valued appropriately relative to similar jobs in the company's external labor market importance much bigger role than internal alignment
external competitiveness
Referent or comparison others are external to the organization
external equity
you get paid for that, at the beginning u said informaiton aspect your behavior towards being intrinsic is rewarded. Until this stage it's ok. When control aspect comes in you feel like you are being controlled by extrinsic motivation and get more satisfaction from it and expect more of it. Compensation in exchnage for your certain good behaviors. Tht intrinsic motivation would be destroyed. Introduction to extrinsic motivation will lead to decrease in intrinsic. Ex; snow shoveling first time you do out of your own pleasure she appreciated it she offers $10 later but you still feel good later on more snow coming in she offers you more money and now your gonna start to expect it your good behavior out of intrinsic motivation will be destroyed. Is it always good to pay them just because they show good behaviors? Not necessarily. We don't link every aspect of behavior to pay because it now has control aspect, and students would just care about points (answering questions),in real world we don't want employees to become point grabbers
extrinsic
motivation- through higher pay level leads to sorting effect attract and retain qualified individuals
incentive effect (pay level effect)
Need to make sure increase in outcome leads to
increase in motivation and inputs
- Personal characteristics and behaviors a person brings to the employment exchange • Example: training, education, skills, experience, gender, age, and ethic backgrounds, effort level
input
performance-reward linkage. Will the desired performance lead to the outcome?
instrumentality
When each job in a company is valued appropriately relative to every other job in terms of its ability to help the firm achieve its goals Example: financial services firm Financial analyst position Account payable position Pay rates are established for jobs, not for employees who perform their jobs
internal alignment
Internal to the organization
internal equity
volunteer work do it because you like it, you do it just because.
intrinsic
total compensation is ___
monetary
4 bullets are pay bullets market leader matching the market market lag lead-lag (Pay policy line)
market data analysis
How much pay is being made by external company. (market pay line)
market data analysis
Job evaluation- assess importance of job within an organization. (job evaluation score)
market-based pay structure
- Differential raises or bonuses based on performance evaluation - Problems of systems • Subjectivity of the reward criteria • Arbitrary budget allocation • Zero-sum game • Less concern for organizational performance • Focus on short-term results an annual raise done by supervisors Merit pay would be huge burden over years (accumulated) Cash-bonus is not going to do that each year. Prefer this. Bonus based upon supervisory ratings- make sure performance evaluation's have integiry make sure they are individual based. Do you have opportunity to monitor employees individual behaviors. Teammwork with complicated task you might not be able to use team-based. Performance evaluation is it really fair ? Does it really have acceptability of fairness from employee perspective. Comparative approach and forced distribution ranking(top employees then first tier, second tier etc showing that resources/skills are distributed very arbitrary sometimes groups are not significantly different) Fixed bonus- high performers get more, low get less
merit pay (individual plans)
intrinsic, commitment to the job, the probability of you getting the growth through the career. (satisfaction vs no satisfaction)
motivator (herzberg)
what are herzberg's two factor's
motivator and hygiene
relational returns is ____
non-monetary
tournament theory, winner take all, both are
pay dispersion
• How to reduce tension? - Increase input • Making more effort - Decrease output (?) • Asking for pay reduction (?) - Justification of overpayment situation - outcomes are huge, excessive reward you wouldn't change your input necessarily. You justify what your doing. Motivate through outcomes doesn't always work!
positive inequity (overpayment) overpaid theory
recognition & status employment security challenging work learning opportunities
relational returns (under total returns)
- Pay on the basis of objective productivity with typically no upper limit on what they can earn • Sales commission system Problems of systems • Short-term oriented • Emphasis on individual - Sears' commission system • Moving toward easy jobs • Tendency to reset the incentive rate if employees do too well no upper limit, if you produce more and more your going to get paid for that. The more sales the higher your bonus. Problem with commission, they may have to adjust it. Doing very well everybody doing great you might have to adjust it, might see employee backlash
straight piecework plan
Need to focus on internal issues. Huge differences in LA than others. More LA supply of teachers can suppress of pay. External pay. Pay gap across colleges/schools -determinants?
supply and possibly external pay in comparison into what others on market are getting paid
Tournament theory Incentive role of the movement in the job hierarchy Increase in payout to offset the loss of promotion probabilities Popular where cost of monitoring is high compensate as they win series of tournaments coming up to the highest level's of the org.
tournament theory (pay dispersion)
Steeper pay structure has incentive effect
tournament theory and winner-take-all model
attractiveness. How much do you care about the outcome?
valence
Small difference in performance, but big difference in pay Golf tournament, auto racing small difference between 1st and 2nd but at the bottom the difference in pay is smaller.
winner-take-all model