Chapter 9

Instrumentality

Belief that the behavior or performance will lead to the desired outcome, will this path and these tools work to get what is wanted; for compensation it's the employee's assessment that the job performance will be rewarded by the organization

Behaviors that compensation needs to reinforce

Compensation should be sufficiently attractive to make recruiting and hiring good potential employees possible (attraction) Make sure the good employees stay with the company (retention) Build further knowledge and skills

Risk sharing plans

A generic category of pay add-on (variable pay) that differs from success sharing in that employee not only shares in the successes but also is penalized during poor performance years. Penalty is in form of lower total compensation in poor corporate performance years. Reward, though, is typically higher than that for success-sharing programs in high performance years.

Do Employees Perform Better on Their Jobs Because of Pay?

A well-designed plan linking pay to behaviors of employees generally results in better individual and organizational performance If the incentive depends on individual performance, some personality types will find the company more attractive but in some work environments it creates problems Team-based incentives, in contrast, are less attractive to a high individual performer or strong individualists One view suggests that linking pay to individual or group performance occurs through two mechanisms, an incentive effect and a sorting effect However, it's important to match the pay scheme to the work type

Profit sharing

An add-on linked to group performance (team, division, total company) relative to exceeding some financial goals

Lump-sum bonus

As with merit pay, granted for individual performance. Does not add to base pay, but is distributed as a one-time bonus.

Gain sharing

Differs from profit sharing in that goal to exceed is not financial performance of organization but some cost index.

Designing A Pay-For-Performance Plan

Efficiency Is it well aligned with org strategy Does it provide an understandable structure Standards What are the performance objectives? How will performance be measured? What behavior and what work are eligible? How will the incentive scheme be funded? Equity/Fairness Distributive justice Procedural justice Communications Compliance Comply with existing laws Enhance and maintain firm's reputation

Does Compensation Motivate Behavior?

Key factors influencing a person's decision to join a firm (sorting) Level of pay Pay system characteristics Job candidates look for organizations with reward systems that fit their personalities and life circumstance. Reward systems should be designed to attract people with desired values and traits Personalities and values

JCM Core Job Characteristics

Skill Variety Task Identity Task Significance Autonomy Feedback from the job

Do Employees More Readily Agree to Develop Job Skills Because of Pay?

Skill-based pay is intended to pay employees for learning new skills Evidence indicates that pay for skill may not increase productivity without other org adjustments, but it does support the belief the org invests in their talent and in the importance of quality and in turning out significantly higher quality products

Individual Incentive

Sometimes this variable pay is an add-on to a fixed base pay. The incentive component ties increments in compensation directly to extra individual production (commission systems, piece rate). While measures of performance are typically subjective with merit and lump-sum components, this form of variable pay differs because measures of performance are objective.

What Behaviors Do Employers Care About?

Employers want employees to perform in ways that lead to better organizational performance Organizational strategy is the guiding force that determines what kinds of employee behaviors are needed Employers want to attract, retain, and motivate workers to improve skills/knowledge and perform well Performance must be accurately measured to tell if compensation efforts are working Performance management

Do People Stay in a Firm (Or Leave) Because of Pay?

Factors impacting turnover Pay based on individual performance Group incentive plans Level of employee satisfaction with pay Changing base pay

Motivation involves three elements:

Find a reward that is important to the person? (Valence) Pair the reward to the behavior (learning theory) Desired behavior (performance)

Expectancy

How likely is the desired outcome to follow performance; for compensation it's the employee's assessment of likelihood of meeting the required performance level to get compensated

Do People Stay in a Firm (Or Leave) Because of Pay?

Other rewards that influence the decision to stay Work variety and challenge Development opportunity Social Status recognition Work importance Benefits

Valence

Perceived attractiveness of outcome: strength positive emotional charge; how much does the employee value the reward?

Cost-of-living increase

Same as across-the-board increase, except magnitude based on change in cost of living

Base pay

The guaranteed portion of an employee's wage package.

Across the board

Wage increase granted to all employees, regardless of performance. Size related to some subjective assessment of employer about ability to pay.

Merit Pay

Wage increase granted to employee as function of some assessment of employee performance.

Success-sharing plans

a generic category of pay add-on (variable pay) which is tied to some measure group performance, not individual performance. Not added into base pay.