Performance Management and Compensation MANA 4328 Dr. Jeanne Michalski

Problems at RightNow!

 Marketing: New hires making more than “old timers”.  Programmers: Arkady $38k Josh $75k  Controller Edith makes 1/3 rd of CFO Harriett  Allan in Store Relations with “Big Company” salary  Max Dir of International Marketing makes less than others at his level – and is a golfing buddy

Merits of Secrecy? Should pay be secret? Should performance evaluations be secret?

Equity Theory  Comparison of my input / reward ratio with that of similar others.  Employees may seek to address imbalance by changing their inputs.  Fairness of pay differentials between different performance levels depends large part on the content and process of performance appraisal.

“Monkeys Demand Equal Pay” A recent study shows brown capuchin monkeys refused to play along when they saw another monkey get a better payoff for performing the same work. The monkeys were trained to trade a granite token for a piece of cumber. When the reward was the same for both monkeys, they took the cucumber 95 percent of the time. But it was a different story when one monkey was given something better -- namely, a grape. Then, the other monkey often pitched a fit -- either throwing the token, refusing to eat the cucumber or giving it to the other monkey. Associated Press 2003

Linking Evals and Merit Raises  How to get employees to view merit raises as linked to performance?  Types of raises:  Across the board or COLA (cost of living adjustments)  Seniority pay  Pay for performance

Pay for Performance Requires 1. Definition of performance  How are we going to measure and compare people? 2. Distribution of performance  Can we distinguish high and low performers? 3. Decide the increase for each level of performance.  How large a difference between high and low performers?

Questions  Should low performers be paid an increase?  Should average performers be paid an increase?  What about cost of living?  What about existing difference in pay distribution?  Promote the top performers?

Does Pay for Performance Work? “Managers must come to see pay for what it is: just one element in a set of management practices that can either build or reduce commitment, teamwork, and performance. Make sure pay practices are congruent with other management practices and reinforce rather than oppose their effects.” Jeffrey Pfeffer

Linking Pay to Performance  U.S. organizations often use “merit” pay to determine employee pay increases  Straightforward logic: if pay is made contingent upon performance, then employee motivation to achieve high performance is increased.  Founded in motivational theories  Expectancy  Equity  Reinforcement  Goal setting

Merit Pay Increases  Fundamental feature is an established budget amount not-to-be-exceeded bottom line usually computed as a % of payroll  Key decisions:  Size of the budget  How to allocate to different business units  Factors that may influence budgets:  Organizational financial results  Cost of living/inflation rates  Industry trends  Cost of labor and the competitive position of the organization’s pay in the marketplace

 Base Salary:$60k/yr.  Mgr Quality Poor  Health BenefitsGreat  Sr. Executive QualityFair Pay Brings Talent into Organization Job Offer #1Job Offer #2  Base Salary:$45k/yr.  Mgr Quality Great  Health BenefitsGreat  Sr. Executive QualityGreat Candidates Value: Compensation and Benefits4.3 Development and Work Environment3.85 Work-Life Balance3.57 Company Environment3.46 Corporate Leadership Council 2004

Pay Keeps Talent Total CompensationBase Pay

Alternatives  Market driven pay  Variable pay plan linked to organizational performance.  Year end bonuses rather than raises.  Use promotion to reward top performers.  Specific incentives for each job.

“Manhattan restaurant opts for 20% automatic” Per Se, one of the most highly rated Manhattan restaurants, is instituting a 20 percent service charge to all checks in lieu of a tip. The service charge will then be used by the restaurant to help pay all hourly employees -- kitchen staff, waiters, and busboys -- a flat hourly wage. Servers and other floor people make upward of $100,000 a year, while those in the kitchen take home $30,000. The new policy means the waiters are going to have to take a pay cut. With a cut in pay, or even the tip incentive removed from the equation, service could suffer. A spokesman for Per Se said the stable salary -- which also comes with benefits like vacation and health insurance -- would create a more professional environment and increase motivation. CNN