Chapter 9: Pay-for-Performance

Making sure that what is expected of employees, and what is measured in regular performance reviews, is consistent with

what the compensation practices are doing.

Maslow's and Herzberg's theories both fall in this category

People have certain needs, such as physiological, security, and self-esteem, that influence behavior. Although neither theory is clear on how these needs are offered and how they help deliver behavior, presumably if employees are offered rewards that satisfy one or more needs, they will behave in desired ways. These theories often drive compensation decisions about the breadth and depth of compensation offerings. Flexible compensation, with employees choosing from a menu of pay and benefit choices, clearly is driven by the issue of needs.

Progressive companies ask,

"What do we want our compensation package to do?"

There are four questions that organizations should address

1 - How to we attract good employment prospects to join our company? 2 - How do we retain these good employees once they join? 3- How do we get employees to develop skills for current and future jobs? 4 - How do we get employees to perform well once they are here?

Scarce talent

?

According to this theory, employers choose behaviors that yield the most satisfactory exchange.

Expectancy theory

One view suggests that linking pay to performance occurs through two mechanisms

Incentive effect; Sorting effect

Important motivation theories

Maslow's need hierarchy, Herzberg's two-factor theory, Expectancy theory, Equity theory, Agency theory, Goal setting theory, Self determination theory

Success depends on finding people with

ability

Agency theory depicts employees as

agents

One of the biggest recent advances in compensation strategy has been to document and extend the link between units of performance and

amount of compensation to the ease of measuring performance and the type of compensation system that works best.

Equity theory

argues that people are highly concerned about equity, or fairness of the exchange process.

The four questions that organizations should address are concerned with what topics?

attracting, retaining, developing skills, and performing well

flexible compensation

based on the idea that only the individual employee knows what package of rewards would best suit personal needs.

A well-designed plan linking pay to behaviors of employees generally results in

better individual and organizational performance.

A key element in fairness is

communications

A pay-for-performance plan must support

corporate objectives (strategy)

A pay-for-performance plan must be

cost-effective, improve quality, link well with HR strategy and objectives, indicate how much of an increase makes a difference (strategy)

Agency theory

depicts employees as agents who enter an exchange with principals—the owners or their designated managers.

Goal setting theory focuses on

desired behavior

Pay and other rewards should reinforce

desired behaviors

The compensation challenge is to get employees, traditionally resistant to change, to willingly

develop skills that may not be vital on the current job but are forecast to be critical as the company's strategic plan adjusts to change

The human resources manager's job is to

devise policies and practices (and compensation falls in this mix) that lead employees to behave in ways that ultimately support the corporate goals.

involves three general areas of concern—strategy, structure, and standards.

efficiency

effectiveness is dependent on three things

efficiency, equity, and compliance

Procedural justice

employees are concerned about the fairness of the procedures used to determine the amount of rewards they receive.

Surveys indicate that workers highly value other job rewards such as

empowerment, recognition, and opportunities for advancement

The compensation challenge is to design rewards that

enhance job performance

A pay-for-performance system should comply with

existing laws (compliance)

Distributive justice

fairness in the amount that is distributed to employees.

Performance needs to be

measured

As to the first element, what's important to employees, data suggest employees prefer pay systems that are influenced by:

o Individual performance o Changes in cost of living o Seniority o Market rate

rewards that "work" to help retain employees in the tough economic times we face heading into the middle of this decade are as follows:

o Job Satisfaction - work enjoyment. o Pay and Benefits. o Social - coworkers are fun. o Organizational commitment - not a job jumper; loyal. o Organizational Prestige - respect afforded company in industry or region.

the nature of the exchange- company rewards in exchange for desired employee behaviors.

o Many compensation practices recognize the importance of a fair exchange. o Jobs are evaluated using a common set of compensable factors (Chapter 5) in part to let employees know that an explicit set of rules that governs the evaluation process. o Employers collect salary survey data (Chapter 8) because they want the exchange to be fair compared to external standards. o Employers design incentive systems (Chapter 10) to align employee behavior with the needs (desired behaviors) of the organization. o All of the pay decisions, and more, owe much to understanding how the employment exchange affects employee motivation.

Motivation involves three elements

o what's important to a person, and, o offering it in exchange for some o desired behavior

Operationally, the key to designing a pay-for-performance system rests on standards. Specifically, employers need to be concerned about the following:

objectives, measures, eligibility, funding

Employers want employees to perform in ways that lead to better

organizational performance

is the guiding force that determines what kind of employee behaviors are needed

organizational strategy

Expectancy theory argues that

people behave as if they cognitively evaluate what behaviors are possible in relation to the value of rewards offered in exchange.

High performers will also leave firms that don't reward their

performance

Higher ability individuals are attracted to companies that will pay for

performance

HR needs to establish what to minimize the chances that outside "distractors" hinder performance?

policies and practices

Materialistic

relatively more concerned about pay level

Firms want a reward system that maintains and enhances their

reputation

Recent research suggests job candidates look for organizations with

reward systems that fit their personalities

This approach believes that employees are motivated not only by reward systems and pay grades, examples of extrinsic motivators, but also by intrinsic motivators.

self determination theory

If employers don't recognize changing (blank), it's hard to set up revised training programs or develop compensation packages to reward these new skills instantly.

skills requirements (human resource planning)

Risky is defined in terms of

stability of income, or the ability to accurately predict income level from year to year.

Anything that promotes our sense of autonomy, competence and relatedness is believed to generate

the highest quality motivation and level of engagement (SDT)

A second set of theories, best exemplified by expectancy theory, equity theory, and agency theory, focus less on need states and more on the second element of motivation—

the nature of the exchange- company rewards in exchange for desired employee behaviors.

Performance management

the process through which managers ensure that employees' activities and outputs contribute to the organization's goals

Organizational culture

the set of values, ideas, attitudes, and norms of behavior that is learned and shared among the members of an organization

The moral argument suggests that incentives are flawed because

they involve one person controlling another

Evidence suggests that the companies are best able to get employees to

to adjust, be flexible, and show commitment when a broader array of rewards, rather than just money, is part of the compensation package.

Low-self esteem

want large, decentralized organization with little pay for performance

Risk adverse

want less performance-based pay

Risk takers

want more pay based on performance

Individualistic

want pay plans based on individual performance, not group performance

Employees look at the exchange as a ratio between

what is expected and what is received.

The culture of the organization should also be consistent with

what the compensation practices are doing