Reward and Comp UARK MGMT 4953 Exam 3- Gupta

improshare plan

(IMproved PROductivity through SHARing) -a gain-sharing plan in which a standard is developed to identify the expected hours required to produce an acceptable level of output. -any savings arising from production of agreed-upon output in fewer-than-expected hours are shared by the firm and the worker.

spot bonus

(aka a spot award) a one-time award for exceptional performance

types of innovative incentive plans

(speaking loosely), -quality improvement plans -benefits plans -attendance plans -skill-based pay plans -participation plans -employee stock ownership plans

how do we improve rater motivation? (in relation to the expectancy theory)****

*E-->P* expectancies can be increased through focus on rater ability and through giving raters adequate resources *P-->O(V)* expectancies require different kind of work -we must figure out what raters want. (money, promotion, more resources, etc.?) -we should make sure the rewards are tied to the extent that raters provide accurate appraisals -negatively valent outcomes (penalties for not producing a bell curve, angry subordinates, reduced resources) should be tied to accurate appraisals *are P-->O expectancies for negatively valent outcomes higher than those for positively valent outcomes? in most instances... -negative outcomes are more likely than positive ones -positive outcomes are based on factors other than accurate appraisals (production records, desirable distribution, etc. -time spent on performance appraisals is time not available for rewards activities -thus, *raters have a stronger motivation to do inaccurate than accurate appraisals*

importance of (uses of) accurate performances appraisals:

*administrative*: performance appraisals are used for numerous critical HR decisions (pay raises, promotions, terminations, etc.) *developmental*: employee performance cannot improve without accurate assessment and feedback *legality/research*: lawsuits often require demonstrations of performance appraisal validity (it is difficult to do all three with one performance appraisal)

disadvantages of participation incentive plans

-management discomfort (most managers don't want to delegate responsibilities to lower levels) -time-consuming -can be prohibitively expensive -must be willing to give employees a lot of information

advantages of a piecework incentive system:

-simple to administer -easy to calculate productivity costs/unit -establishes direct link between output and pay

constraints and critical issues of incentive systems

-unions must be involved from the beginning (if unionized you have to deal with the union the whole time) -legal issues, e.g., employee committees, may be similar to labor management committees -type of industry and technology -local cultures -consistency with prevailing managerial philosophy -simultaneous use of many incentive plans

benefit incentive plans

-use benefits, not pay, as the incentive

expectancy theory

E-->P expectancy: what is the probability that i can perform at the required level if i try? P-->O expectancy: what is the probability that performance at a certain level will lead to various outcomes? valence (V): how important are these outcomes to me? (effort--> performance--> outcomes) -in any situation, the action a person chooses to take is determined by the person's expectancies and valences at that time (i.e., the action with the highest motivational force) -motivational force can be represented as MF = (E-->P) * Σ [(P-->O)(V)] -values of (E-->P) and Σ [(P-->O)(V)] must both be non-zero for a person to be motivated

advantages and disadvantages of quality improvement incentive plans

advantages: -encourage desired behavior -can be used together with suggestion systems disadvantages: -no immediate dollar gain, necessitating alternative means for reward allocation -quality issues must be balanced with quantity issues -measurement of quality improvement

advantages and disadvantages of employee stock ownership incentive plans

advantages: -low cost, because usually tax exempt -incentive for employees to improve the company -commitment and morale disadvantages: -jobs and savings with the same company -declining stock prices when market goes down

advantages and disadvantages of attendance incentive plans

advantages: -useful supplementary incentive system -typically cannot produce if you are absent disadvantages: -one absence erases incentive for further attendance -may conflict with cultures -is simple presence enough? -union conflicts? -is reward large enough?

advantages and disadvantages of benefit incentive plans

advantages: -using over one-third of payroll to encourage desired behaviors -increasingly salient to and valued by employees disadvantages: -may conflict with union contracts -administrative difficulties -may be too complex to explain to employees

criterion contamination

allowing nonperformance factors to affect performance scores -we want to minimize this -ratings tend to suffer from contamination

what is team-based pay?

group incentive restricted to team members with payout usually based on improvements in productivity, customer satisfaction, financial performance, or quality of goods and services directly attributable to the team.

individual incentive systems do not factor in...

group norms and pressures

is skill-based pay suitable for any organization?

if the conditions are right, yes. if the conditions are not right, no.

merit pay

links pay raises to performance ratings

what is the main difference between merit pay and other types of pay-for-performance plans?

merit pay incentive plans reward performance by increasing the employee's salary on a long-term basis. other forms of pay for performance reward employees without increasing their salary.

which compensation approach is the best?

no one approach is superior to all others

is a "how to" manual on designing a skill-based pay plan useful?

no, each plan must be tailored to the specific situation (in a how to manual we should write questions and not answers because the answers have to be answered in a specific context)

does the use of skill-based pay do away with job evaluations?

no, skills and skill units must still be priced in some fashion.

can a skill-based pay system be installed flawlessly?

no, there are always problems and kinks.

does skill-based pay increase the potential for EEO lawsuits?

no, there are no reports of a successful challenge. in fact, may offer better protection.

skill-based pay

non-traditional compensation system that encourages the development of a multi-skilled work force by basing employees' pay rates on the number of jobs in the organization that they can do, rather than on the specific job employees may be doing at a particular time. (pay is tied to the number of jobs you can do) -AKA pay for knowledge, knowledge based pay, and multi skilled compensation -violates "you pay the person, not the job" -each SBP is unique -in order to motivate people to be able to learn many different jobs within the organization they tie it to pay -horizontal based pay (you're now working toward moving up in the organization e.g. manager)

how long does it take to implement skill-based pay from start to finish?

on average, about 18 to 24 months of preparatory work before installation

merit pay links pay to...

performance ratings, as opposed to objective measures of performance. -an individual incentive system -most common system in the US -type of performance based pay -piece rate and profit sharing are not merit pay

B f(M, A)

rater behavior f(rater motivation, rater ability) -in other words, rater behavior is a function of rater motivation and rater ability

what is the preferred strategy for selecting which standards/measures to use in performance-based pay systems?

reasoned selection followed by an empirical evaluation of the standards selected

if performance appraisal accuracy is not cost-effective then we should:

recognize the limitations of sub-optimal performance appraisals, and... -base HR actions (raises, terminations, etc.) on measures other than performance appraisals -make fewer rather than more distinctions among employees (e.g., sort people into two rather than five groups)

what is the "topping out" component of skill-based pay plans?

situation in which employees in a skill-based compensation plan attain the top pay rate in a job category by accumulating and/or becoming certified for the top-paid skill block(s). ex: in typical skill-based pay plans employees top out in about three years. this means that about three years is how long it will take to learn all of the skills in the system

controversial measures of employee performance for merit pay:

some specific measures of employee performance are very controversial and need to be carefully considered before being used for merit pay. these measures include: -promotions -seniority* -organizational citizenship behavior -maximum versus typical performance -job level

what does validity mean when we are talking about performance measures?

the extent to which performance standards measure what they purport to measure

criterion relevance

the overlap between ideal performance and actual performance -we want to maximize this -we want to measure the understanding of material and how to apply it

"locking in" employees

the pay rates are higher (if you pay employees a higher rate they'll want to stay with the company)

skill-based pay must be consisted with...

the prevailing management philosophy

skill-based pay must have...

the support and commitment of organizational personnel at all levels

a merit pay system is only as good as...

the underlying performance appraisal system

how do control systems influence behaviors?

they specify appropriate behaviors and gather information about the adequacy of that behavior.

control systems fail when...

they use proxy measures when they give you part of the desirable behavior

you must design your compensation system to...

to fit with company goals and context

do people need special training in skill-based pay systems?

yes, additional training is needed in terms of: -interpersonal skills -team and participation skills -technical skills within SBP itself

can skill-based pay work in unionized settings?

yes, assuming there is a reasonable working relationship between labor and management

are there additional costs associated with skill-based pay use?

yes, there are higher costs related to: -administration -training -labor/hour

control systems are designed to ___________. how do they do this?

*influence behavior* (encourage certain kinds of behaviors) they do this by specifying appropriate behaviors and by gathering information about the adequacy of that behavior

what is the first and foremost step in the development of a merit pay plan?

*the adequate measure of performance* -it is impossible to have an effective merit pay plan if performance is not measured adequately -this is true regardless of the desirability and feasibility of merit pay

rucker plan

-a group cost savings plan in which *cost reductions due to employee efforts* are shared with the employees. -it involves a somewhat more complex formula than a scanlon plan for determining employee incentive bonuses.

scanlon plan

-a group cost-savings plan designed to lower labor costs without lowering the level of a firm's activity. -any saving (computed per unit of output) compared with an agreed upon standard labor cost is shared equally between the workers and the firm. -savings are derived as the ratio between labor costs and sales value of production.

suggestion systems

-an individual-level incentive system -*offer bonuses for suggestions to improve quality or quantity of output* -focus on organizational productivity, and bonuses awarded for cost-saving ideas

skill-based pay incentive plans

-base pay on number of skills employee has mastered -focus not on productivity per se, but rather on employee flexibility -about paying the person

quality improvement incentive plans

-base rewards on improvements in quality rather than quantity (if you improve your quality you improve your profits) -may be target at individual or group level -can be paired with suggestion systems

what are skill units?

-collections of tasks, duties, and/or responsibilities assembled to represent a compensable package -the foundation on which SBP plans are built -in most plans, employees can learn skill units in any order.

the validity of performance measures can be assessed with various indicators, including:

-content validity: how well it measures what its supposed to measure -convergent validity: measures that should be related are in reality related -discriminant validity: measures that should not be related are in reality not related -accuracy -rating errors -reliability -relevance (these indicators are not substitutes, but provide unique information to make validity inferences.)

issues in skill-based pay design

-context issues -design issues -identifying skills required for effective operation -identifying optimal skill profiles -pricing skills -sequencing skill acquisition -evaluating skill acquisition- how, when, by whom -developing procedures for decertification

disadvantages of a piecework incentive system:

-difficult to establish standard -ignores other behaviors (e.g. quality) -difficult to incorporate machine downtime -little security or continuity from organization and employee perspective -ignores group norms -exacerbates distrust of management (raising standards or laying off people) -may be susceptible to union pressures -does not address interdependent jobs

participation incentive plans

-do not specify behaviors or rewards -instead, focuses on the process through which the reward system is derived (in other words, they're participating in developing the incentive plan, its not about how much they participate) -you want the company to do well (people behave reasonably if they have the same goals as the company) -if employees design the system they'll be more committed

advantages of participation incentive plans

-employees understand the system -employees are committed to effective implementation -little employee resistance -often have lower costs than management options

advantages of merit pay

-employes can see link between pay and performance -complexities of performance are factored in

advantages of suggestion systems

-encourages innovation and creativity -employees are most familiar with day-to-day operations, thus most able to offer suggestions -small suggestions can result in major savings

types of group-level incentive systems:

-group bonuses -gain sharing and profit-sharing plans

advantages of group incentive systems

-group norms working for the organization (norms makes everyone want to produce more) -easier to measure group than individual performance -use of social as well as financial rewards to motivate productivity -can focus on all aspects of group performance

costs and difficulties in skill-based pay design

-higher average pay rates -higher training costs -demands on the performance appraisal system -higher administrative costs -difficulty in setting pay rates -topping out -problems of skill retention -problems of obsolete skills

in developing successful incentive systems, we must:

-identify desired behaviors -determine whether desirable behaviors are measurable and quantifiable -assess fairness or equity -determine whether employees have the resources and/or ability to succeed -determine whether employees accept the plan -recognize differences in employee needs and cultures -assess all costs (direct and indirect) -determine the consistency of the incentive system with other organizational dynamics -determine the organizational level most appropriate for targeting inventive systems (used to motivate performance) (E-->P) (Valence-recognizes differences in employee needs and culture)

gainsharing plans and profit-sharing plans

-incentive plans that are based on some measure of group performance rather than individual performance. -taking data on a past year as a base, group incentive plans may focus on cost savings (e.g., the Scanlon, Rucker, and Improshare plans) or on profit increases (profit-sharing plans) as the standard for distributing a portion of the accrued funds among relevant employees. -distribution of some part of a company's profits and/or savings from cost reductions (earnings are shared back to the employees so its in their interest for the organization to do well.) -gainsharing usually involves employee participation and suggestions

if performance appraisal accuracy is desirable and cost-effective then we should:

-increase rater accountability -tie desired outcomes to accuracy and undesired outcomes to inaccuracy -increase rater ability

advantages of skill-based pay systems for employees

-increased satisfaction and motivation -increased self-esteem and feelings of self-worth -greater identification with organization's goals -greater commitment and loyalty -increased job security

advantages of skill-based pay systems for employers

-increased work force flexibility (biggest benefit) -leaner staffing -reduced overall labor costs due to lean staffing -higher quality output -lower absenteeism and turnover -fewer management and administrative personnel -employees react well

special issues in transitioning to a skill-based pay plan:

-initial assessment of skill levels -credit for prior education and skills -role of seniority in the system -dilemma of high pay/low skill employee -interim training delivery

advantages of gain sharing and profit-sharing plans

-integration of employee and organizational goals -intra and inter group cooperation -easy to measure performance (harder to measure individual performance than group performance. it's harder to measure organizational than group performance) -profits are not always in control of the employees

conditions for success of a skill-based pay plan

-managerial support, both local and corporate -used for "right" decisions (flexibility, employee growth, etc., not for union avoidance, quick fix, following fads, locking in employees, etc.) -managerial culture and philosophy of employee participation and empowerment -comprehensive approach to organizational functioning within which SBP is embedded -long term perspective on organizational success -careful planning and analysis preceding and following installation -employee support for the use of SBP -design elements (number of skill units, length of skill units, etc.) not related to success

piecework

-most common system -get paid for the number produced -quality is not as important as quantity (people will produce things very fast so if quality is important to the company then you may have to throw some out) -job is not standardized (the whole is that when people value things they will modify)

typical dysfunctional effects of control systems: (4)

-most control systems, including pay systems, can produce dysfunctional behaviors among employees. -typical dysfunctional behaviors can be classified into four broad categories: 1. rigid bureaucratic behavior 2. strategic behavior 3. invalid data reporting 4. resistance

disadvantages of gain sharing and profit-sharing plans

-no connection between individual behavior and rewards -little employee control over size of bonus -profits versus gains

rigid bureaucratic behavior

-occurs when people attend only to those behaviors that are measured and rewarded by the organization -depending on how the system is set up, this can be functional or dysfunctional

resistance

-occurs when people show resistance to the control system and the measures used in the control system. -particularly strong when there are changes in the control system -essentially, people do't want to have to figure out new games.

strategic behavior

-occurs when people try to look good on a measure for a certain period of time -the temporal dimension is what distinguishes strategic behavior from rigid bureaucratic behavior

legal issues of performance appraisals:

-performance appraisals are difficult to defend because supervisors introduce so much contamination -if the performance appraisal leads to disparate impact, you may have to demonstrate the validity of the performance appraisal (disparate impact: adversely affects one group of people of a protected characteristic more than another) -behavior based assessments are more defensible

skill-based pay features

-person based, rather than job based -focuses on skill units, rather than jobs, as compensable units -skill unit mastery is assessed and certified -pay changes do not necessarily coincide with job changes -emphasis on job seniority (a tangential concern) -provides greater advancement opportunities and higher wages -you're focusing on parts of the job, not the job as a whole. (e.g. tasks, skills, responsibilities) -as you move from job to job your pay does not change

methods to improve rating validity:

-ratings should be tied to the strategic mission of the firm -appraisals should be based on a job analysis -multiple sources of performance information should be used -raters and ratees should participate in the development of the performance standards -rater training should be provided -delay between observation and ratings should be minimized -opportunity for rater to observe ratee is maximized -the rater keeps a diary organized by ratee -rater should have social comparison information -raters should be held accountable for their ratings

disadvantage of suggestion systems

-since size of bonus is usually computed as a percentage of savings, small suggestions may not get aired -can increase number of suggestions by paying a bonus for each, but bad suggestions may increase -costs of processing, retraining, evaluating, etc. in addition to costs of bonuses themselves -ownership of suggestions -rejection of suggestions -competition and hostility -bypassing chain of command

individual level incentive systems include:

-straight piecework -differential piece rate -merit pay -suggestion systems -group bonuses -gainsharing and profit sharing

straight piecework vs. differential piece rates

-straight piecework: individual incentive plan in which rate determination is based on units of production per time period; wages vary directly as a constant function of production level. -differential piece rates: this is different than the straight piecework, as here incentive payment is designed as per the task, and the worker receives a high piece rate for doing the job in task time and a lower piece rate if he takes longer than task time (higher rate for work over standard)

disadvantage of merit pay

-subjective measurement (ex: got drunk last night and didn't study for the test) -"merit" often includes cost of living adjustments (COLAs) -fixed pie, zero sum game (a zero-sum game is a mathematical representation of a situation in which each participant's gain or loss of utility is exactly balanced by the losses or gains of the utility of the other participants) -if not designed and administrated correctly, can increase undesired behaviors

typical control system characteristics:

-they collect, store, and transmit information. -abstract information is transmitted in a specific form with a specific frequency. -information is distributed to a specific, usually predetermined, group.

invalid data reporting

-this is the basic lying, cheating, and stealing category -occurs when people provide false information to look good on the measure -can occur about: a. what you can do, or b. what you did do

when developing a performance-based pay system, a variety of performance measures can be used, such as...

-traits -behaviors -results -rankings: require that the rater compare employees against each other to determine the relative ordering of the group on some performance measure. straight ranking: employees are ranked relative to each other. alternation ranking : recognizes that raters are better at ranking people at extreme ends of the distribution. raters are asked to indicate the best employee and then the worst employee. -comparisons: a ranking method that simplifies the ranking process by forcing raters to make ranking judgments about discrete pairs of people. each individual is compared separately with all others in the work group.

piecework incentive systems are more likely to succeed if...

-units of output can be measured directly -quality is not important -job is not standardized -a constant flow of production can be maintained -the employee controls output

frame-of-reference training

-uses fictitious examples that an employee might exhibit -has been shown to improve appraisal accuracy. -aims at establishing common reference among assessors as to what constitutes effective appraisal by establishing the rating standards and showing behavioral examples on various rating dimensions.

how can we improve rater ability?

-using behaviorally-based rating forms -providing raters with training in doing accurate appraisals (frame of reference training is often used) -ensuring that raters have adequate opportunities to observe ratees doing the job -encouraging the use of performance diaries (to minimize memory effects

skill-based pay characteristics

-usually 9 to 10 skill units (people usually hold 9 to 10 skills) -average learning time of 20 weeks/unit -employees top out after about 3 years (the typical employee, however, masters only about 2/3 of the skill units and does so in about two years) -emphasize production-related skill breadth and depth -include mechanisms to ensure skill retention -skill obsolescence is rarely penalized -usually a flat organizational structure -usually not implemented through a whole organization but in one part, such as production -typically designed by managers -payback times range from one week to two years but most have payback times of less than 6 months

disadvantages of group incentive systems

-weaken link between individual behaviors and rewards -the larger the size of the group, the weaker the link -you don't see the connection between what you are doing and your reward

control systems are most effective when: (6)

-when measures are complete -when measures are influenceable -when measures are objective -when employees participate in standard-setting -when judgements are made by both supervisors and subordinates -when employees get performance feedback

causes of dysfunctional behaviors: (4)

1. *incomplete measures* -complete measures produce fewer dysfunctional rigid bureaucratic behaviors and strategic behaviors -complete measures may, however, increase invalid data reporting and resistance 2. *unrealistic standards* -when goals are seen as unreasonably difficult, all four forms of dysfunctional consequences are likely to be higher 3. *source of judgments* -self-assessments may reduce rigid bureaucratic behavior and resistance -use of extrinsic rewards may increase invalid data reporting -external assessments increase all four forms 4. *type of activity* -the more important the activity to the organization, the more likely that dysfunctional behaviors will occur (aka people care about it more so they'll care more to influence it)

the many variations in the design of skill-based pay plans are typically classified into three categories:

1. breadth plans 2. depth plans 3. vertical plans

skill-based pay systems require employees to maintain proficiency in the skill units for which they're paid. this is done through: (3)

1. refresher examinations (28% of the plans) 2. refresher training (67% of of the plans) 3. other formalized procedures (45% of the plans)

group incentive systems

base pay raises or bonuses on group performance

why do most companies not have merit pay systems?

because most performance appraisal systems (which merit pay is based off of) are deficient/ contaminated.

why are performance appraisals inaccurate?

because raters lack the motivation, lack the ability, or lack both, for doing accurate appraisals

what is broad-banding?

collapsing a number of salary grades into a smaller number of broad grades with wide ranges -popular

there must be a _______________ of the effectiveness of skill-based pay.

comprehensive calculation

SBP breadth plans

concern the development of a repertoire of skills whereby employees can ably perform two or more skill units or "jobs" at the same horizontal level in the organization. -when staffing flexibility is important, breadth plans may prove most useful

SBP vertical plans

concern the development of skills typically associated with higher organizational levels. -encompass managerial skills such as scheduling, leading group problem-solving meetings, training, communication with other units, and performance appraisal -when internal career development and devision making are necessary, vertical plans may offer the most benefits

SBP depth plans

concern the development of specialized expertise in a particular skill , discipline, or area of knowledge -when technical expertise is desired, depth plans may provide the most benefits

supporting systems of skill-based pay systems

sbp systems are usually accompanied by many other innovative practices, such as, -survey feedback -employee participation -self-managing groups -job enrichment -information-sharing with employees -flat organizational structures -immense local and corporate commitment to the plan

riddling

tying lots of smaller rewards to a variety of desired behaviors

criterion deficiency

using objective measures that don't truly represent all of the key dimensions of the job (failing to include all of the dimensions relevant to job performance) -we want to minimize this -objective measures tend to suffer from deficiency -Ex: excluding keyboarding skills for a secretary's job performance -Ex: a secretary who is measured solely on words per minute would complain that he/she does other things that are far more vital to job performance

does skill-based pay create resentment among non-covered employees?

yes it can. this issue must be handled very carefully before and during implementation