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Gerhart14e chap9
1.
Because learning changes
everything.® Chapter 9 Pay-for-Performance: Theory and Evidence © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
2.
© McGraw-Hill Education EXHIBIT
9.1 The Cascading Link Between Organization Strategy and Employee Behavior Organizational strategy is the guiding force that determines what kinds of employee behaviors are needed. Access text alternative for this image. 2
3.
© McGraw-Hill Education EXHIBIT
9.2 The Big Picture, or Compensation Can’t Do It Alone! One way of looking at this process says that behavior is a function of the ability, motivation, and opportunity to perform. Access text alternative for this image. 3
4.
© McGraw-Hill Education EXHIBIT
9.3 Performance Measurement Relationship to Compensation Strategy The cells help explain why incentives work in some situations and not in others. The rows note that individual employee performance also varies. Access text alternative for this image. 4
5.
© McGraw-Hill Education What
Behaviors Do Employers Care About? Linking Organization Strategy to Compensation and Performance Management There are four questions that organizations should address. • How do we attract good employment prospects to join our company? • 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 here? 5
6.
© McGraw-Hill Education What
Does It Take to Get These Behaviors? What Theory Says In the simplest sense, motivation involves three elements: • What’s important to a person, and • Offering it in exchange for some • Desired behavior. To narrow down employee preferences, there is flexible compensation. • Based on the idea that only the individual employee knows what package of rewards would best suit their personal needs. • The key ingredient is careful cost analysis. Otherwise, we need to answer these questions by relying on theories of motivation. 6
7.
© McGraw-Hill Education Motivation
Theories Several theories focus on content—identifying what is important to people. • These theories often drive compensation decisions about the breadth and depth of compensation offerings. A second set of theories focus on the nature of the exchange – company rewards in exchange for desired employee behaviors. • Expectancy theory argues that employers choose behaviors that yield the most satisfactory exchange. • Equity theory argues that people are highly concerned about fairness of the exchange process. • Agency theory uses compensation to keep employees in line. Goal setting theory focuses on desired behavior, while self determination theory looks to integrate motivation theories under a large umbrella. 7
8.
© McGraw-Hill Education What
Does It Take to Get These Behaviors? What Practitioners Say Compensation is but one of many rewards that influence behavior. • Employers may be overpaying in cash and missing the opportunity to use a less-expensive reward package. If employers don’t think about rewards other than money, they may find the compensation process producing unintended consequences. • Millennial workers are concerned about compensation at risk. • The trend is toward less stable, less secure compensation packages. Risk is variance of income and/or the inability to predict income level from year to year. • Base pay is the guaranteed portion of income. • Companies are increasingly using variable pay. • Which is higher on the risk continuum. New pay forms are less entitlement-oriented and more linked to the uncertainties of individual, group, and corporate performance. 8
9.
© McGraw-Hill Education Do
People Join a Firm Because of Pay? Pay is one of the more visible rewards in the recruitment process. Person Characteristics Preferred Reward Characteristics Materialistic More concerned about pay level Low self-esteem Want 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 Evidence suggests talented employees are attracted to companies that have strong links between pay and performance. 9
10.
© McGraw-Hill Education Do
People Stay in a Firm (or Leave) Because of Pay? Much of the equity theory research documented that workers who feel unfairly treated in pay react by leaving the firm. • Pay for individual performance leads to poor performers leaving. • Group incentive plans may lead to more turnover of better performers. Data suggest dissatisfaction with pay can be a key factor in turnovers. • Even the way an organization pays can impact turnover. • Bonuses may retain high-performing employees. • A pay-for-performance combination may appeal to scarce talent. Besides money, other rewards also influence the decision to stay. • Job satisfaction, pay and benefits, social, organizational commitment and/or prestige. Reminder: not all turnover is bad, and some is necessary. 10
11.
© McGraw-Hill Education Do
Employees More Readily Agree to Develop Job Skills Because of Pay? The answer to this question is not known. • Skill-based pay is intended to pay employees for learning new skills. • That hopefully will help them perform better on current jobs. • And adjust more rapidly to demands on future jobs. One complaint about skill-based pay centers on cost implications. • Poorly administered plans creates cost inefficiencies, often leading to plan abandonment. • Evidence suggests that while pay for skill may sometimes but not always increase productivity. • It does focus people on believing in the importance of quality and in turning out significantly higher quality products. 11
12.
© McGraw-Hill Education Do
Employees Perform Better on Their Jobs Because of Pay for Performance? A well-designed plan linking pay to behaviors of employees generally results in better individual and organizational performance. • Rewarding employees for performance pays off. One study looking at merit pay shows performance increases when pay is tied to performance. • Strong evidence suggests that linking pay to performance does increase motivation of workers and lead to improved performance. How does this translate into corporate performance? • A review of 26 studies gives high marks to profit-sharing plans. • Organizations with such plans had 3.5 to 5% higher annual performance. 12
13.
© McGraw-Hill Education Pay
for Performance: Harmful Effects on Intrinsic Motivation (Claims and Evidence) Critics argue that incentives are both morally and practically wrong. • The counterargument is that employment is a reciprocal arrangement. Kohn suggests that incentive systems can actually harm productivity. • Rewarding a person for performing a task reduces interest in that task. • Extrinsic rewards (money) reduce intrinsic rewards (enjoyment of the task for its own sake). Should we tie pay to performance? • When performance is difficult to measure, employers say “no.” • Substantial evidence indicates that management and workers alike believe pay should be tied to performance. • HR tries to cut costs by creating a greater distinction between high and low performers. 13
14.
© McGraw-Hill Education Sorting
and Incentive Effects Pay for performance generally has a positive effect. • The incentive effect means pay can motivate current employees to perform better. • The sorting effect means people sort themselves into and out of jobs based on what is important to them. The most obvious sorting factor is ability. • Any management practice can cause stress or other negative reactions. Sorting effects are more important to the degree that high performers create a disproportionately high amount of value for organizations. When we look at pay and group performance, the evidence is more mixed. 14
15.
© McGraw-Hill Education Risk
(Unintended Consequences) Employers should recognize that variable-pay components in compensation plans can, and do, fail. • Sometimes the failure arises, ironically, because the incentive works too well. • Poorly implemented incentive pay plans can hurt rather than help. 15
16.
© McGraw-Hill Education Designing
a Pay-for-Performance Plan Efficiency Efficiency involves three general areas of concern—strategy, structure, and standards. Strategy. • A pay-for-performance plan must support corporate objectives. • The plan should address the most difficult question of all—how much of an increase makes a difference? Structure. • Is the organizational structure decentralized to allow operating units to create flexible variations on a general pay-for-performance plan? Standards. • Employers must be concerned with: objectives, measures, eligibility, and funding – and remember standards are not static. 16
17.
© McGraw-Hill Education Designing
a Pay-for-Performance Plan Equity/Fairness Two types of fairness are concerns for employees. • Distributive justice—fairness in the amount that is distributed to employees. • Procedural justice—employees are concerned about the fairness of the procedures used to determine the amount of rewards they receive. 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. • Employees want a mechanism for appeals. • Executives perform better when told what the linkage is between pay and performance. A pay-for-performance system should comply with existing laws. 17
18.
Because learning changes
everything.® www.mheducation.com © McGraw Hill LLC. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill LLC.
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