Pay-for-Performance: The Evidence Chapter 9 Pay-for-Performance: The Evidence © 2014 by McGraw-Hill Education.  This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner.  This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part. 

Learning Objectives What behaviors do employers care about? Linking organization strategy to compensation and performance What does it take to get these behaviors? What theory says 9-2

Learning Objectives What does it take to get these behaviors? What practitioners says Does compensation motivate behavior? Designing pay-for-performance plans 9-3

Exhibit 9.1 - The Cascading Link between Organization Strategy and Employee Behavior 9-4

Exhibit 9.2 - The Big Picture, or Compensation Can't Do It Alone! 9-5

What Behaviors Do Employers Care About? Compensation should: Reinforce desired behaviors Be sufficiently attractive to recruit and hire good potential employees Make sure the good employees stay with the company (retention) Build further knowledge and skills Motivate employees to perform well on their jobs 9-6

What Behaviors Do Employers Care About? Performance: Must be accurately measured to tell if compensation efforts are working 9-7

Exhibit 9.3 - Performance Measurement Relates to Compensation Strategy See Exhibit 9.2, pages 284 – 286 in the text 9-8

What Does It Take To Get These Behaviors? What Theory Says Elements of motivation What is important to a person? Employees prefer pay systems that are influenced by: Individual performance Change in cost of living Seniority Market rate Flexible compensation: Individuals know what rewards would best suit personal needs Offering it in exchange for some desired behavior 9-9

Exhibit 9.4 - Motivation Theories See Exhibit 9.2, pages 284 – 286 in the text 9-10

Exhibit 9.4 - Motivation Theories See Exhibit 9.2, pages 284 – 286 in the text 9-11

Exhibit 9.4 - Motivation Theories 9-12

Exhibit 9.4 - Motivation Theories 9-13

Exhibit 9.4 - Motivation Theories 9-14

Exhibit 9.4 - Motivation Theories 9-15

Exhibit 9.4 - Motivation Theories 9-16

Exhibit 9.5 - Components of a Total Reward System See text, Exhibit 9.3 on page 289 9-17

Exhibit 9.6 - Wage Components 9-18

Exhibit 9.6 - Wage Components 9-19

Exhibit 9.6 - Wage Components 9-20

Exhibit 9.6 - Wage Components 9-21

Does Compensation Motivate Behavior? Factors influencing a person’s decision to join a firm Level of pay Pay system characteristics Reward systems should be designed to attract people with desired Personalities and values 9-22

Do People Stay in a Firm (Or Leave) Because of Pay? Factors impacting turnover Pay based on individual performance Group incentive plans Level of employee satisfaction with pay Changing base pay 9-23

Do People Stay in a Firm (Or Leave) Because of Pay? Other rewards that influence the decision to stay Work variety and challenge Development opportunity Social Status recognition Work importance Benefits 9-24

Do Employees More Readily Agree to Develop Job Skills Because of Pay? Skill-based pay is intended to encourage employees: To learn new skills To turn out significantly higher quality products 9-25

Do Employees Perform Better on Their Jobs Because of Pay? Employees perform better when: A well-designed plan links pay to behaviors of employees The incentive depends on individual performance Team-based incentives are less attractive 9-26

Do Employees Perform Better on Their Jobs Because of Pay? Linking pay to performance occurs through: Incentive effect- Pay can motivate people to perform better Sorting effect- People sort themselves by what is important to them 9-27

Designing A Pay-For-Performance Plan Efficiency Strategy Structure Standards Objectives Measures Eligibility Funding 9-28

Designing A Pay-For-Performance Plan Equity/Fairness Distributive justice Procedural justice Communications Compliance Comply with existing laws Enhance and maintain firm’s reputation 9-29