CMS 2 Assignment 8: Rewarding Talent - Pay for Performance
Describe a pay-for-performance plan.
According to the pay model developed in Assignment 1, attention should be paid to three major items. These are efficiency, equity and compliance in designing a pay system. Efficiency involves three general areas of concern. These are strategy, structure and standards. Strategy must answer the question: Do pay-for-performance plans support corporate objectives? The most difficult question of all—How much of an increase makes a difference?—must be ascertained. Regarding structure, we must answer the question: Is the structure of the organization sufficiently decentralized to allow different operating units to create flexible variation on a general pay-for-performance plan? Standards are the third unit under efficiency we must be concerned about. Specifically, standards need to be concerned about objectives—Are they specific yet flexible? Can employees see that their behavior influences ability to achieve objectives? This is called the "line-of-sight" issue in industry. Do employees know what measures will be used to assess whether performance is sufficiently good to merit a payout? How far down the organization will the plan run? This falls under the general term eligibility. Funding asks the basic question: Will the organization fund the program out of extra revenue generated above and beyond some preset standard? If so, what happens in a bad year? The second design objective is to ensure the system is fair or has equity for employees. Two types of fairness are concerns for employees. The first type is fairness in the amount that is distributed to employees. This type of fairness is labeled distributive justice. Does an employee view the amount of compensation received as fair? Perceptions of fairness here depend on the amount of compensation actually received relative to input compared against some relevant standard. Several of the components of this equity equation are frustratingly removed from the control of the typical supervisor or manager working with employees. This is influenced by external market conditions, pay policy decisions of the organization and the occupational choice made by the employee. The second type of equity over which managers do have somewhat more control is labeled procedural justice. Employees are also concerned about the fairness of procedures used to determine the amount of rewards they receive. Evidence suggests that organizations that use fair procedures and supervisors who are viewed as fair in the means they use to allocate rewards are perceived as more trustworthy and command higher levels of commitment. A key element in fairness is communications. Employees want to know in advance what is expected of them. They want the opportunity to provide input into those standards or expectations. The third design objective is to ensure the system is in compliance with existing laws. Companies want a rewards system that maintains and enhances the reputation of the firm.
Do people join a firm because of pay? Explain.
Level of pay and pay system characteristics influence a job candidate's decision to join a firm. Pay is one of the more visible rewards in the whole recruitment process. Job offers spell out level of compensation and may even include discussions about kinds of pay such as bonuses and profit sharing participation. Pay is perceived as being more objective than other aspects of the total pay package. It is more easily communicated in the employment offer. Recent research suggests job candidates look for organizations with rewards systems that fit their personalities.
Do employees more readily agree to develop job skills because of pay? Explain.
The answer to this question is not known. Skill-based pay is intended, at least partially, to pay employees for learning new skills. These skills will help employees perform better on current jobs and adjust more rapidly to demands on future jobs. Evidence is starting to accumulate that pay for skill may not increase productivity but does focus people on believing in the importance of quality and in turning out significantly higher quality products.
What four questions should organizations ask themselves regarding the compensation of their employees?
(1) How do 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 while they are here?
What are the three general factors upon which employee behavior depends?
(1) M = Motivation (2) A = Ability (3) E = Environmental obstacle This is expressed in an equation that says: Employee behavior = f (M,A,E)
Although there are exceptions, generally, linking pay to behaviors of employees results in ...
... better individual and organizational performance. A comprehensive review reports that 40 of 42 studies looking at merit pay claimed performance increases when pay is tied to performance.
In the past, employees learned what behaviors were important as part of ...
... the socialization process or as part of the performance management process. Compensation might have rewarded people for meeting certain expectations, but usually the compensation package was not designed to be one of the signals about expected performance. Today, progressive companies ask questions, such as, "What do we want our compensation package to do in terms of motivating employees to behave in desired ways?" Compensation is then designed to support this behavior.
Identify the components of a total rewards system.
A total rewards system consists of the following: (a) Compensation—Wages, commissions, bonuses (b) Benefits—Vacations, health insurance, retirement plans and other types of benefits (c) Social Interaction—Friendly workplace (d) Security—Stable, consistent position and rewards (e) Status/Recognition—Respect, prominence due to work (f) Work Variety—Opportunity to experience different things (g) Workload—Right amount of work (not too much, not too little) (h) Work Importance—Work is valued by society (i) Authority/Control/Autonomy—Ability to influence others; control own destiny (j) Advancement—Chance to get ahead (k) Feedback—Receive information helping to improve performance (l) Work Conditions—Hazard-free (m) Development Opportunity—Formal and informal training to learn new knowledge/skills/abilities.
Do employees perform better on their jobs because of pay? Explain.
Evidence exists that management and workers alike believe pay should be tied to performance. The role that performance levels should assume in determining pay increases is less clear-cut for blue-collar workers. Unionized workers prefer seniority rather than performance as a basis for pay increases. Part of this preference may stem from a distrust of subjective performance measurement systems. Nevertheless, in general, workers do believe that pay should be tied to performance. This link does make a difference according to research. Strong evidence from many meta-analyses suggests that linking pay to performance does increase motivation of workers and lead to improved performance. When the impact of pay on group performance is considered, the evidence is mixed. Most well-controlled studies where companies base part of pay on some measure of corporate or division performance report increases in performance of about 4-5% per year. Sometimes the failure arises, ironically, because the incentive works too well, leading employees to exhibit rewarded behaviors to the exclusion of other desired behaviors.
Motivation involves three elements as follows:
(1) What is important to a person, and (2) offering it in exchange for (3) some desired behavior. On the first element, some data suggest employees prefer pay systems that recognize individual performance, changes in cost of living, seniority, and the market rate. To narrow down specific employee preferences though, there has been some work on what is important to employees. Called cafeteria-style or flexible compensation, it develops the idea that only the individual employee knows what package of rewards would best suit his or her personal needs. Employees who hate risk could opt for more base pay and less incentive pay. Tradeoffs between pay and benefits also could be selected.
Compare and contrast the theories that focus on (a) content, (b) the nature of the exchange and (c) motivation.
(a) Maslow's and Herzberg's theories fall in the category of theories that focus on content. People have certain needs, such as physiological, security and self-esteem, that influence behavior. Although neither theory is clear on how these needs influence behavior, presumably if organizations offer rewards that satisfy one or more needs, employees will behave in desired ways. The issue of needs clearly drives flexible pay, with employees choosing from a menu of pay and benefit choices. (b) A second set of theories, best exemplified by expectancy theory, equity theory and agency theory, focus on the nature of the exchange. Jobs are evaluated using a common set of compensable factors in part to let employees know that an explicit set of rules governs the evaluation process. 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 for those behaviors. According to this theory, people choose the behaviors that yield the most satisfactory exchange. Equity theory also focuses on what goes on inside an employee's head. Equity theory argues that people are highly concerned about equity or fairness of the exchange process. Employees look at the exchange as a ratio between what is expected and what is received. Under agency theory, employees are depicted as agents who enter an exchange with principals. It is assumed that both sides to the exchange seek the most favorable exchange possible and will act opportunistically if given a chance. That is, they try to get by with doing as little as possible to satisfy the contract. Compensation is a major element in this theory, because it is used to keep employees in line. Employers identify important behaviors and important outcomes and pay specifically for achieving desired levels of each. (c) Finally, at least one of the theories focuses on the third element of motivation—desired behavior. A review of this literature indicates that the vast majority of studies on goal setting find a positive impact of goal setting on performance. Workers assigned "hard" goals consistently do better than workers told to "do their best."
Briefly discuss some aspects of a total rewards system.
Compensation is only one of many rewards that influence employee behavior. If businesses don't think about the presence or absence of rewards other than money in an organization, they may find the compensation process producing unintended consequences. Some business organizations have discovered fun, or a good social environment, as a reward. Some companies promote a business culture of fun that encourages employees to find ways to make their jobs more interesting and relevant to them personally. In some cases this has been accomplished without using monetary incentives as a major source of competitive advantage. Security as an issue is creeping into the domain of compensation. The trend today is toward less stable and secure compensation packages. The very design of compensation systems today contributes to employee instability and insecurity. There is evidence that compensation at risk leaves employees both less satisfied with the pay level and with the process used to determine pay. We define risk in terms of stability of income and the ability to accurately predict income level from year to year. Employees increasingly are expected to bear a share of the risks that businesses have solely borne in the past. It's not entirely clear what impact this shifting of risk will have in the long run, but some authors are already voicing concerns that efforts to build employee loyalty and commitment may be an early casualty of these pay systems. Some research suggests that employees may need a risk premium (higher pay) to stay and perform in a company with pay at risk. Even a premium might not work for employees who are particularly risk-averse. Security-driven employees actually might accept lower wages if they come in a package that is more stable.
Do people stay in a firm or leave it because of pay? Explain.
There is clear evidence that poor performers are more likely to leave an organization than good performers. Equity theory research suggests that workers who feel unfairly treated in pay react by leaving the firm for better situations. This is particularly true under incentive conditions. Turnover is much higher for poor performers when pay is based on individual performance. Conversely, group incentive plans may lead to more turnover of better performers. Data suggest dissatisfaction with pay can be a key factor in turnovers. Too little pay triggers feelings of unfair treatment. Pay that employees find reasonable can help reduce turnover. Recent efforts to use different types of compensation as a tool for retaining workers have focused on what is called scarce talent. One way to retain these workers is to develop a variable pay component for each project.
