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