Compensation Exam 3 review

Self ratings

- Generally more lenient and possible more unreliable than ratings from other courses - Should use them for developmental rather than administrative purposes - Increasingly firms are asking employees to rate themselves as the first step in the appraisal process - Forcing employees to think about their performance before they go into a formal appraisal with their boss may lead to more realistic assessments

360 degree feedback appraisals

- Generally this system is used in conjunction with supervisory reviews - The method assesses employee performance from 5 points of view: supervisor, peer, self, customer and subordinate o Improving employee understanding and self-awareness, promoting communication between supervisors and staff and promoting better performance and results - Today most companies still use it only for evaluation of their top level personnel and for employee development rather than for appraisal or pay decisions

- Employment development potential - Administrative ease - Personnel research potential - Cost - Validity

Dimensions of appraisal format

Benefits

Driving factor of job satisfaction

Reinforcement

________ theory: rewards reinforce (motivate and sustain) performance o Rewards must follow directly after behaviors to be reinforcing o Behaviors that are not rewarded will be discontinued

Historical benefit cost

Historically, Benefit managers negotiated or provided benefits on a package basis rather than a cost basis From 1955-1975, employee benefit costs rose at a rate almost 4x greater than employee wages or the consumer price index - Benefit cost from 1959 to 2010 increased % of payroll from 25%-30%

Efficiency

_________: three general areas of concern o Strategy: does it support corporate objectives? o Structure: is it sufficiently decentralized to allow different operating units to create flexible variations on a general pay for performance plan? o Standards: objectives, measures, eligibility, funding

Motivation

involves three elements: (1) What's important to a person (2) Offering it in exchange for some (3) Desired behavior - Data suggests that employees prefer pay systems that are influenced by individual performance, changes in cost of living, seniority, and the market rate

Cafeteria style

- Employees choosing from a menu of pay and benefit choices is driven by the issue of needs - Letting the employee choose, within limits, what they want in their rewards package

Organizational Strategy

- Is the guiding force that determines what kinds of employee behavior is needed

Training raters to rate more accurately

- Most research indicates _________ is an effective method for reducing appraisal errors Can be divided into 3 distinct categories: o Rater-error training o Performance-dimension training o Performance-standard training

Alternatives to financing benefit plans

- Noncontributory: employer pays total costs - Contributory: costs are shared between employer and employee - Employee Financed: employee pays total costs for some benefits-by law the organization must bear the cost for certain benefits

Goal Setting Theory

- Performance based pay must be contingent upon achievement of important performance goals - Performance goals should be challenging and specific - The amount of the incentive reward should match the goal difficulty

Complexity Control Communications

3 C's when it comes to team compensation

- Workers compensation: state - Social Security: federal - Unemployment insurance: federal

3 mandated laws

horn error

: downgrading an employee across all performance dimensions exclusively because of poor performance on one dimension

Clone Error

: giving better ratings to individuals who are like the rater in behavior and/or personality

severity error

: rating individuals consistently lower than deserved

f(Motivation,Ability,Environment)

Behavior Formula

Outsourcing

Biggest cost containment strategy

- Halo error - Horn Error - First impression error - Recency error - Leniency error - Severity error - Central tendency error - Clone error - Spillover error

Common errors in the Appraisal Process

- The size of the group that participates in the plan - The standard of performance to determine magnitude of incentive pay - The payout schedule

Common feature of all types of incentive plans

Productivity, Customer Satisfaction, financial performance, and quality of goods and services

Commonly used team incentive performance standards

Fred Hertzberg Two Factor Theory

Employees are motivated by two types of motivators: hygiene factors and satisfiers - Hygiene (or maintenance) factors in their absence prevent behaviors, but in their presence cannot motivate performance. They are related to basic living needs, security and fair treatment - Satisfiers, such as recognition, promotion, and achievement, motivate performance

Individual spot awards

- About 35% of all companies use them - 74% view these awards are highly or moderately effective - Usually these payouts are awarded for exceptional performance often on special projects or for performance that so exceeds expectations as to be deserving of an add-on bonus

Components of a Total Rewards System

- Compensation and benefits - Social integration - Security - Status/recognition - Work variety, workload, work importance - Authority/control/autonomy - Advancement and feedback - Working Conditions - Development opportunity

6 relative issues that courts stress relative to performance appraisal system

- Courts are favorably disposed to appraisal systems that give specific written instructions on how to complete the appraisal - Organizations tend to be able to support their cases better when the appraisal system incorporates clear criteria for evaluating performance - The presence of adequately developed job descriptions provides a rational foundation for personnel decisions - Courts also approve of appraisal systems that require supervisors to provide feedback about appraisal results to the employees affected - The courts seem to like evaluation systems that incorporate a review of any performance rating by a higher level supervisor - Most importantly, the courts consistently suggest that the key to fair appraisals depends on consistent treatment across raters, regardless of race, color, religion, sex or national origin

ACA

- Requires individuals to maintain minimal essential health insurance coverage or pay a penalty unless exempted for religious beliefs or financial hardship - Employers must enroll new employees or face a levy - The law is being contested at the supreme court level

Rank and Yank

- Requires managers to complete performance appraisals by ranking employees into a preset distribution of top, middle and needs improvement categories. - Often this latter category has employees who are "yanked" or terminated from the organization

Advantages of individual incentive plans

- Substantial impact that raises productivity, lowers production costs, and increases earnings of workers - Less direct supervision is required to maintain reasonable levels of output than under payment by time - In most cases, systems of payment by results, if accompanied by improved organizational and work measurement, enable labor costs to be estimated more accurately than under payment by the time. This helps costing and budgeting control

Edward Deming

- The grandfather of the quality movement here and in Japan, launched an attack on appraisals because, he contended, the work situation (not the individual) is the major determinant of performance o Variation in performance arises many times because employees don't have the necessary information, technology or control to adequately perform their jobs o He argued, individual work standards and performance ratings rob employees of pride and self esteem

Key elements of effective performance appraisal process

- We need a sound basis for establishing the performance appraisal dimensions and the scales associated with each dimension - We need to involve employees in every stage of developing performance dimensions and building scales to measure how well they perform on these dimensions - We need to make sure raters are trained in the use of the appraisal system and that all employees understand how the system operates and what it will be used for - We need to make sure raters are motivated to rate accurately - Raters should maintain a diary of employee performance, both as documentation and to job the memory - Raters should attempt a performance diagnosis to determine in advance if performance problems arise because of motivation, skill deficiency, or external environmental constraints - Feedback to employees should be timely

Jack Welch

A hugely popular and successful former CEO of General Electric popularized what came to be called rank and yank

Reverse incentive plan

A plan where there is penalty for poor performance rather than reward for good

- Efficiency - Equity/Fairness - Compliance

Factors of designing a Pay for Performance Plan

Employee

Factors that influence _______ choice of benefit packages: o Equity o Personal needs Age, sex, marital status, number of dependents

Employer

Factors that influence _______ choice of benefit packages: o Relationship to total compensation costs o Costs relative to benefits o Competitor offerings o Role of benefits in attraction, retention and motivation o Legal requirements o Absolute and relative compensation costs

Free Rider

Group plans suffer when members of a group that do not carry their share of the work load - Research suggests that the problem can be lessened through the use of good performance measurement techniques o Rather than being given instructions to "do your best" poorer performers who were asked to deliver specific levels of performance as a specific time actually showed the most performance improvement

expectancy, instrumentality and valence

Motivation is the product of three perceptions

Trending with employers today

Pay for performance plan signal a movement away from entitlement and toward pay that varies with some measure of individual or organizational performance - Greater interest in variable pay

Abraham Maslow's Hierarchy of Needs

People are motivated by their inner needs that form a hierarchy from most basic (food and shelter) to higher order (self-esteem, love, self-actualization) - Needs are never full met; they operate cyclically - Higher order needs become motivating after lower order needs have been met - When needs are not met, they become frustrating

Employment test

Performance appraisals are scrutinized just like what?

Team based incentives

Team performance is measured against a set standard to determine the magnitude of incentive pay o Awards determined based on team/group performance goals or objectives o Payout can be more frequent than annual and can also extend beyond the life of the team o Payout may be uniform for team/group members

Expectancy

________ theory: argues that people behave as if they cognitively evaluate what behaviors are possible (the probability that they can complete the task) in relation to the value of rewards offered in exchange. o According to this theory, we choose behaviors that yield the most satisfactory exchange

Goal Setting

________ theory: challenging performance goals influence greater intensity and duration in employee performance o Goals serve as feedback standards to which employees can compare their performance o Individuals are motivated to the extent that goal achievement is combined with receiving valued rewards

Agency

________ theory: employees are depicted as agents who enter an exchange with principals- the owners or their designated managers o Both sides to the exchange seek the most favorable exchange possible and will act opportunistically if given a chance o Employees prefer static wages (salary) to performance based pay

Components of Scanlon and Rucker plans

Two major components are vital to the implementation and success of a ___________: o A productivity norm: requires both effective measurement of base year data and acceptance by workers and management of this standard for calculating bonus incentives o Effective worker committees: evaluate employee and management suggestions for ways to improve productivity and/or cut costs

Objectives, measures, eligibility, funding

What should managers be concerned with when designing a pay for performance system?

Equity

_______ theory: employers are motivated when perceived outputs (pay) are equal to perceived inputs (effort, work, behaviors) o A disequilibrium in the output to input balance causes discomfort o If employees perceive that others are paid more for the same effort, the will react negatively to correct the output to input balance

recency error

allowing performance, either good or bad, at the end of the review period to play too large a role in determining an employee's rating for the entire period

Halo error

an appraiser giving favorable ratings to all job duties based on impressive performance in just one job function (ex: rater who hates tardiness)

Central Tendency error

avoiding extremes in ratings across employees

leniency error

consistently rating someone higher than is deserved

First impression error

developing a negative or positive opinion of an employee early in the review period and allowing that to influence all later perceptions of performance

Equity/Fairness

ensure that the system is fair to employees. Two types: o Distributive justice: does an employee view the amount of the compensation received as fair o Procedural justice: employees are also concerned about the fairness of the procedures used to determine the amount of rewards they receive

Performance-dimension training:

exposes supervisors to the performance dimensions to be used in rating (quality of work, job knowledge) making sure everyone is on the same page when thinking about a specific performance dimension

Gantt Plan

individual incentive plan that provides for variable incentives as a function of a standard expressed as time period per unit of performance o Under this plan, a standard time for a task is purposely set at a level requiring high effort to complete

Taylor Plan

individual incentive plan that provides for variable incentives as a function of units of production per time period o It provides two rates that are established for production above and below the standard and these rates are higher and lower than the regular wage incentive level

Merrick Plan

individual incentive plan that provides for variable incentives as a function of units of production per time period o Three piecework rates are set: High- for production exceeding 100% of standard Medium- for production between 83 and 100% Low- for production less than 83% of standard

Performance-standard training:

provides raters with a standard of comparison or frame of reference for making appraisals (what constitutes good, average, and bad)

Compliance

should comply with existing compensation laws o Maintains and enhances the reputation of the firm

Rater-error training:

the goal is to reduce psychometric errors (leniency, severity, central tendency, halo) by familiarizing raters with their existence

Gain sharing plan

use operating measures to gauge performance o Incentive plan where employees share in the gains in these types of group incentive plans o are designed to align workers and management in efforts to streamline operations and cut costs Looks at cost components of the income ledger and identifies savings over which employees have more impact (reduced scrap, lower labor costs, reduced utility costs) o less risk to individual than profit sharing because performance measure is more controllable

Profit Sharing plan

uses financial measures as incentives o A plan that focuses on profitability as the standard for group incentive o Add on linked to group performance (team, division, total company) relative to exceeding some financial goal o Profit measures are influenced by factors beyond employee control (economic climate, accounting write offs) less control means more risk o Involves one of three distributions: Cash or current distribution plans provide full payment to participants soon after profits have been determined (quarterly or annually) Deferred plans have a portion of current profits credited to employee accounts with cash payments made at time of retirement, disability, severance, or death Combination plans that incorporate aspects of both current and deferred options

Spillover error

when employers seek to avoid unionization by offering workers the wages, benefits, and working conditions won in rival unionized firms