MGMT 434 Compensation Chapter 9
Individual employee performance
varies
o Besides money, other rewards influencing the decision to stay:
§ Job satisfaction - work enjoyment. § Pay and benefits. § Social - coworkers are fun. § Organizational commitment - not a job jumper, loyal. § Organizational prestige - company or industry respect.
Do people Join Firm because of pay? Job candidates look for organizations with reward systems that fit their personalities
§ Materialistic - more concerned about pay level. § Low self-esteem - wants large, decentralized organization with little pay for performance. § Risk takers - want more pay based on performance. § Risk-averse - want less performance-based pay. § Individualists - want pay plans based on individual performance, not group performance.
Companies have moved toward compensation programs higher on the risk continuum
§ New forms of pay are less entitlement-oriented and more linked to the uncertainties of individual, group, and corporate performance. § Employees are increasingly expected to share the risks of the company. Some research suggests employees may need a risk premium to stay and perform in a company with pay at risk
Components of a total reward system
1) Compensation 2) Benefits 3) Social Interaction 4) Security 5) Status/Recognition 6) Work variety 7) Work load 8)work important 9) Authority/control/autonomy 10) Advancement 11) Feedback 12) Work conditions 13) Development opportunity
behavior formula
= f (M, A, E) M = Motivation A = Ability E = Environment
Authority/control/autonomy
Ability to influence others; control own destiny
Advancement
Chance to get ahead
Work conditions
Hazard free
Herzberg's Two-Factor Theory
Hygiene/maintenance factors (e.g., pay prevent dissatisfaction, but do not motivate or cause satisfaction. Hygiene factors, which include pay, help with basic living needs, security, and fair treatment. Satisfiers/motivators, such as recognition, promotion, and achievement, motivate performance.
Expectancy Theory - Implication for Pay and Pay for performance (PFP)
Job tasks and responsibilities should be clearly defined. Line of sight is critical -- employees must believe they can influence performance targets. Selection and training, as well as job design, matter here. Pay must be clearly linked to performance and this link must be perceived as strong. Rewards for high performance must be perceived as significant. People choose to put forth effort toward the behavior (e.g., low, average, high performance) with the highest motivational force. Selection, training, job design, and compensation decisions influence this choice.
Maslow's Need Hierarchy
People are motivated by needs. Needs form a hierarchy from most lower/basic (food and shelter) to higher order (e.g., self esteem, love, self actualization). Unmet needs motivate. Met needs do not. Unmet higher-order needs become motivating after lower-order needs have been met. `
Feedback
Receive information helping to improve performance
Workload
Right amount of work (not too much, not too little)
Security
Stable, consistent position and rewards
Benefits
Vacation, health insurance
Work importance
Work is valued by society
Companies offering an array of rewards as part of the compensation package are better able to get employees to
adjust, be flexible, and show commitment.
Agency Theory depicts employees as
agents who enter an exchange with principals.
Equity theory believes people
are highly concerned with equity of the exchange process.
If employers fail to recognize skills requirements (HR planning), it is difficult to
arrange training and develop compensation to reward these new skills.
hygiene factors
characteristics of the workplace, such as company policies, working conditions, pay, and supervision, that can make people dissatisfied
expectancy theory holds that employers
choose behaviors that yield the most satisfactory exchange.
Equity theory
employees experience equity and will be motivated to perform when the ratio of their perceived output (ex: pay) to perceived input (ex: effort, performance) is equal to the perceived outputs/inputs of a comparison person. If the two ratio above are not equal, perceived inequity results and the person is motivated to take action to restore equity. Some actions employees take (lower effort) to restore perceived equity are not helpful to organizations.
A low-incentive component is appropriate in organizations with
highly variable annual performance.
Maslow and Herzberg
identifying what is important to people
Wage Components and Risk, risk is defined
in terms of stability of income, or the ability to accurately predict income level from year to year.
Self Determination Theory
integrates motivation theories under a broad umbrella. · What Practitioners Say
Base pay
is the guaranteed portion of income.
· Designing a pay-for-performance plan Compliance
o Compliance with existing laws is a must for a pay-for-performance system.
·What behaviors do employers care about?
o Employers want employees to perform in ways that lead to better organizational performance. § HR's job is to devise policies that lead employees to behave in ways that support the corporate goals.
Goal Setting Theory
theory focuses on desired behavior. Challenging and specific performance goals generate the most employee effort. Goals serve as feedback standards to which employees can evaluate their performance. Employees must be motivated to choose and persevere in (be committed to) pursuing performance goals.
In the simplest sense, motivation involves what's important
to a person, and offering that in exchange for some desired behavior.
Flexible compensation allows employees
to choose rewards which best suit their personal needs.
Larger-incentive components are appropriate in companies
with stable annual performance.
· Designing a pay-for-performance plan o Equity, or fairness, includes two types of concern to employees.
§ Distributive justice - fairness in the amount distributed. § Procedural justice - fairness in determining rewards. § A key element in fairness is communication.
Alfie Kohn suggests that extrinsic rewards (money) reduce
intrinsic rewards (enjoyment of the task for its own sake). § Critics of his interpretation point out that not all jobs are intrinsically interesting, and his studies looked at people in isolation.
Do incentives work?
o Incentives work in some situations and not in others.
Do employees perform better because of pay?
· o A well-designed plan linking pay to behaviors generally results in better individual and organizational performance. o Numerous studies and evidence show a correlation between performance and pay, merit pay, bonuses, and profit-sharing. o Critics contend that incentives are both morally and practically wrong.
Motivation Triange
-Performance Mangement -Compensation -Culture
Herzberg's Two-Factor Theory - Implication for Pay and Pay for performance (PFP)
Base pay must be set high enough to provide individuals with the economic means to meet hygiene needs, but it alone cannot motivate performance. As with need hierarchy theory, performance-based pay is motivating to the extent it is connected with meeting employees' needs for recognition, attainment, achievement and the like. Low pay will cause dissatisfaction. High pay, by itself, does not motivate. It only motivates if it is instrumental in achieving higher-level needs.
Maslow's Need Hierarchy - Implication for Pay and Pay for performance (PFP)
Base pay must be set high enough to provide individuals with the economic means to meet their basic living needs. PFP works best when focused on unmet needs. In cases when basic needs are met, PFP is motivating to the extent that performance is instrumental in gaining achievement, recognition, and/or approval in addition to higher pay.
development opportunity
Formal and informal training to learn new knowledge skills/abilities
Social Interaction
Friendly workplace
Expectancy Theory
Motivation is the product of the following three perceptions: Expectancy is employees assessment of their ability to perform required job tasks. Instrumentality is employees' beliefs that higher job performance will be rewarded by the organization. Valence is the value employees attach to the organization rewards received for job performance.
Work Variety
Opportunity to experience different things
The cascading link between organization strategy and employee behavior
Organization Strategy → Corporate Goals→Department/Team Goal→Individual Goal Department/Team Goals → Employee Team Results Individual Goals → Employee Task Behaviors
Environmental Obstacle Triangle
Organizational Design, Org. Development, Hr Planning
Agency theory - Implication for Pay and Pay for performance (PFP)
Performance-based pay can be used to direct and induce employee performance. Depending on risk and monitoring challenges, a choice of efficient "contract" is made: either behavior-based or outcome-based. Employees are risk-averse meaning that a compensating differential (wage premium) is necessary when using an outcome-based contract. However, stronger incentives are typically possible under outcome-based contracts. In each situation, the question is whether the positive of strong incentives outweighs the negative of a compensating differential paid for risk-bearing by employees.
Goal Setting Theory - Implication for Pay and Pay for performance (PFP)
Performance-based pay that is contingent upon continued achievement of challenging, specific performance goals increases performances. Regular and specific feedback on performance/goal attainment is important.
Reinforcement Theory - Implication for Pay and Pay for performance (PFP)
Performance-based payments work best when they closely follow performance. Rewards tightly couples to desired performance objectives generate higher effort. Withholding payouts discourages unwanted behaviors.
Status/Recognition
Respect, prominence due to work
Reinforcement Theory
Rewards reinforce (motivate and sustain) performance. Rewards are most effective when they follow directly after behaviors to be reinforced. Behaviors that are not rewarded will be discontinued. (extinction)
Ability Triangle
Selection, Recruitment, Training
Equity theory - Implication for Pay and Pay for performance (PFP)
The pay/performance link is critical; increases in performance must be matched by commensurate increases in pay to achieve equity/fairness, particularly among high performers Employees evaluate the adequacy of their pay via comparisons with other employees. That means that relative pay. (And relative contribution) matters. Perceived inequity can lead to lower effort, theft, lawsuits, and/or turnover. Perceptions of pay and contribution may or may not be accurate. Organizations must focus on communicating accurate information on pay and contribution. Otherwise, inaccurate information and perceptions play a larger role and can influence motivation and behaviors.
· Do people stay (or leave) because of pay? A scarce talent approach of retaining workers may use a pay-for-performance pay to
appeal to those few with the needed skills.
What practitioners say
o In the past, employees learned about expected behaviors through socialization or performance management. o Now, companies ask, "What do we want our compensation package to do?" o Compensation is but one of many rewards influencing behavior. § Employers may overpay in cash and miss the opportunity to let employees construct a satisfying and less-expensive reward package. o If employers don't offer rewards other than money, they may find that compensation produces unintended consequences.
· Do people stay (or leave) because of pay? Equity theory documented that workers who feel unfairly treated in pay react by
o leaving the firm. § Dissatisfaction with pay may be a key factor in turnover. § Even the way an organization pays can impact turnover.
Employee behavior is a function
o of motivation, ability, and environment. § Success depends on finding people with ability. § Pay and other rewards should reinforce desired behaviors. § The culture should point in the same direction.
Agency theory
pay direct and motivate employee performance. Employees are risk-averse. They prefer certain/fixed income flows (wage, salary) to variable income flows (performance based pay) If performance can be accurately monitored without undue cost or if risk due to variability in outcomes. (e.g. profits) is large (increasing risk-bearing concerns among employees), payment should be based upon behaviors (satisfactory completion of work duties).
Compensation
wages, commissions, and bonuses
Compensation should reinforce the following behaviors
§ Attraction - It should make recruiting and hiring easier. § Retention - It needs to make sure good employees stay. § Development - After attracting and retaining good employees, concentrate on building further knowledge and skills. § Performance - Compensation should motivate employees to apply their abilities in ways that contribute to organizational performance.
· Designing a pay-for-performance plan o Efficiency involves three general areas of concern.
§ Strategy - the plan must support corporate objectives and link well with HR strategy. § Structure - will it allow flexible variations on a general plan? § Standards - employers should be concerned with objectives, measures, eligibility, and funding.
Talented employees are attracted to strong links between pay and performance.
§ There is a positive impact of reward choice as long as employees view the choices available as attractive.
· Should Pay be tied to performance?
o Performance-based pay is less likely when the job involves multitasking, important quality control issues, or teamwork. o Do employees think pay and performance should be linked? § Evidence indicates management and workers alike say "Yes." o How does this performance improvement occur? § One view suggests the incentive effect and the sorting effect. o Experts estimate that for every dollar spent on any performance-based pay plan, it yields $2.34 more in organizational earnings. o Recognize that such plans can, and do, fail. § Poorly implemented incentive pay plans can hurt rather than help. · Designing a pay-for-performance plan
· Do employee develop skills because of pay?
o The answer is unknown. o Skill-based pay is intended to pay employees for learning new skills that will help with current and future performance. o Evidence is starting to accumulate that pay for skill may not increase productivity. § But it does focus people on believing in the importance of quality. § And in turning out significantly higher quality products.
Organizations should address the following four questions.
§ How do we attract good employment prospects to join our company? · Job characteristics and recruiter behaviors are key elements. § How do we retain these good employees once they join? § How do we get employees to develop skills for current and future jobs? § How do we get employees to perform well while they are there? · The compensation challenge is to design rewards that enhance job performance.
Data suggests employees prefer pay systems influenced by
§ Individual performance. § Changes in the cost of living. § Seniority. § Market rate.