Chapter 11: Rewarding Performance MGT 3513 “The absence of alternatives clears the mind marvelously.” Henry Kissinger

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Compensating executives 1.How is a stock grant different from a stock option? 2.How will Apple’s performance be measured? 3.How much of Cooks compensation is tied to performance?

Compensating executives  Short-term incentives  Long-term incentives  “Perks”

Common use of incentive systems  Sales representatives  Professional athletes  Restaurant servers

When do incentive systems work?  Incentive (pay-for-performance) systems are based on three assumptions. Individuals and teams differ in terms of ________________________________ Firm performance depends on ________________________________ To _____________ & ____________high performers  Note: If these assumptions hold true, then an incentive system is appropriate. If not, another type of system should be implemented.

Expectancy Theory  Example: Effort = Performance = Outcomes = Effort Performance Outcomes

Expectancy Theory Valence Expectancy Instrumentality Effort Performance Outcomes

Expectancy Theory  Employees need to believe that 1. their level of effort makes a difference in their performance (_______________) 2. that performance will be rewarded (_______________) 3. they will receive attractive outcomes for their hard work (_______________)

Practice with Expectancy Theory I put forth effort at work because I believe it will improve my performance. This is an example of _______________. It seems like no matter how hard I try my performance doesn’t change. This is an example of _______________. Valence Expectancy Instrumentality Effort Performance Outcomes

Practice with Expectancy Theory At my company, if you have high performance you will get a raise. This is an example of _______________. I really don’t trust the management at my company. Some years even the top performers do not get a raise. This is an example of _______________. Valence Expectancy Instrumentality Effort Performance Outcomes

Practice with Expectancy Theory I really like that my company gives big bonuses at Christmas time. This is an example of _______________. My company gives us a subscription to jelly of the month club this Christmas, and I’m not a big fan of jelly. This is an example of _______________. Valence Expectancy Instrumentality Effort Performance Outcomes

Effort  Performance Charles attaches refrigerator door hinges. The line moves at a constant rate that Charles cannot control; therefore, Charles feels that no matter how hard he tries, he cannot work faster. How would you rate the expectancy in this situation? A. High expectancy B. Low expectancy

Performance  Outcome Charles knows that each year his bonus is based upon the # of products he has assembled. The more he produces, the higher his bonus. How would you rate instrumentality? A. High Instrumentality B. Low Instrumentality

Practical take-away  Employee perceptions & outcomes How do you think Charles feels about this incentive system?

What’s the take away from expectancy theory?  Employees need to believe that 1. their level of effort makes a difference in their performance 2. that performance will be rewarded 3. they will receive attractive outcomes for their hard work

Problems that Occur when We Pay Employees for Performance  Explain the following: “Do only what you get paid for” syndrome Unethical behaviors Negative effects on the spirit of cooperation Lack of control

EXAMPLE  Insurance companies often outsource the processing of MRI claims to Medical Software Solutions (MSS). When a patient needs an MRI approved by their insurance company, they call MSS rather than the insurance provider. MSS has a large call center staffed by employees across the nation. Due to rising health care costs, the insurance companies want MSS to recommend low-cost MRI providers. MSS told their employees that they would receive pay incentives based on the number of times they were able to get a patient to choose a low-cost provider.  Consider the list of problems we discussed. Which are likely to arise in the above situation? “Do only what you get paid for” syndrome Unethical behaviors Negative effects on the spirit of cooperation Lack of control

Meeting the Challenges  Ways to make pay for performance work: Link pay and performance appropriately  What you _________ matters! Use multiple layers of rewards  Example:___________________________ Increase employee involvement in system development Consider how to motivate with nonfinancial incentives

4 Types of Pay Plans  Individual  Team  Plantwide  Corporatewide

Potential issue with bonuses  Why does Clark expect to get a Christmas bonus?  What is a potential problem for employers who give bonuses annually? atch?v=1K8-kNuDgoA

Individual-based incentive plans  What is merit pay?  What are bonus programs? How do they differ from merit pay?

Individual-based incentive plans  Explain some of the advantages of individual level incentive plans  What are the 2 dangers for organizations using individual plans?

Individual-based incentive plans  Situations in which individual plans are more likely to succeed

Team-based incentive plans  Explain team-based incentive plans  What are some advantages of team-based incentive plans?  What are some disadvantages of team-based incentive plans?

Plantwide incentive plans  What are plantwide pay-for-performance plans?  Describe the basic concept behind gainsharing?

Corporatewide incentive plans  What is profit-sharing?  How is profit-sharing different from gainsharing?  What is an employee stock ownership plan (ESOP)?  Stock Options (we will discuss as a class)

Practice identifying pay plans My organization is comprised of 4 factories in different locations. If each factory receives incentives based on its productivity, then a ____________ plan is in place.

Practice identifying pay plans My organization is comprised of 4 factories in different locations. If all employees receive a percentage of the company’s earnings for the year, then a ____________ plan is in place.

Practice identifying pay plans My organization gives the employees a chance to become stockholders by offering shares at a discounted price. This is an example of _____________.