© 2001 by Prentice Hall Rewarding Performance

© 2001 by Prentice Hall 11-2 Challenges  Recognize individual and group contributions to the firm by rewarding high performers.  Develop pay-for-performance plans that are appropriate for different levels in an organization.  Identify the potential benefits and drawbacks of different pay-for- performance systems and choose the plan that is most appropriate for a particular firm.  Design an executive compensation package that motivates executives to make decisions that are in the firm’s best interests.  Weigh the pros and cons of different compensation methods for sales personnel and create an incentive plan that is consistent with the firm’s marketing strategy.  Design an incentive system to reward excellence in customer service.

© 2001 by Prentice Hall 11-3 Pay for Performance Systems  Pay-for-performance systems, also called incentive systems, reward employee performance on the basis of three assumptions: u Individual employees and work teams differ in how much they contribute to the firm—not only in what they do, but also in how well they do it. u The firm’s overall performance depends to a large degree on the performance of individuals and groups within the firm. u To attract, retain, and motivate high performers and to be fair to all employees, a company needs to reward employees on the basis of their relative performance.

© 2001 by Prentice Hall 11-4 Pay for Performance: The Challenges  The “Do Only What You Get Paid For” Syndrome u The closer pay is tied to particular performance indicators, the more employees tend to focus on those indicators and neglect other important job components u Negative Effects on the Spirit of Cooperation u Employees may withhold information from a colleague if they believe that it will help the other person get ahead  Lack of Control u Employees often cannot control all of the factors affecting their performance  Difficulties in Measuring Performance u Assessing employee performance is one of the thorniest tasks a manager faces, particularly when the assessments are used to dispense rewards  Psychological Contracts u Once implemented, a pay-for-performance system creates a psychological contract between the employee and firm, and it is very resistant to change

© 2001 by Prentice Hall 11-5 Pay for Performance: The Challenges (cont.)  The Credibility Gap u Employees often do not believe that pay-for- performance programs are fair or that they truly reward performance  Job Dissatisfaction and Stress u Pay-for-performance systems may lead to greater productivity but lower job satisfaction  Potential Reduction of Intrinsic Drives u Pay-for-performance systems may push employees to the point of doing whatever it takes to get the promised monetary reward and in the process stifle their talents and creativity

© 2001 by Prentice Hall 11-6 Meeting the Challenges of Pay for Performance Systems  Link Pay and Performance Appropriately u There are few cases in which managers can justify paying workers according to a preestablished formula or measure.  Use Pay for Performance as Part of a Broader HRM System u Pay-for-performance programs are not likely to achieve the desired results unless they are accompanied by complementary HRM programs  Build Employee Trust u Even the best conceived pay-for-performance program can fail if managers have a poor history of labor relations or if the organization has a cutthroat culture

© 2001 by Prentice Hall 11-7 Meeting the Challenges of Pay for Performance Systems (cont.)  Promote the Belief that Performance Makes a Difference u Unless an organization creates an atmosphere in which performance makes a difference, it may end up with a low- achievement organizational culture  Use Multiple Layers of Rewards u Because all pay-for-performance systems have positive and negative features, providing different types of pay incentives for different work situations is likely to produce better results than relying on a single type of pay incentive  Increase Employee Involvement u When employees do not view a compensation program as legitimate, they will usually do whatever they can to subvert the system  Use Motivation and Nonfinancial Incentives u Some people are more interested in the nonfinancial aspects of their work

© 2001 by Prentice Hall 11-8 Pay-for-Performance Programs Microlevel Merit pay Bonuses Awards Piece rate IndividualTeam Macrolevel Business Unit/PlantOrganization Bonuses Awards Gainsharing Bonuses Awards Profit sharing Stock plans Unit of Analysis

© 2001 by Prentice Hall 11-9 Advantages of Individual- Based Pay-for-Performance Plans  Performance that is rewarded is likely to be repeated.  Individuals are goal-oriented and financial incentives can shape an individual’s goals over time.  Assessing the performance of each employee individually helps the firm achieve individual equity.  Individual-based plans fit in with an individualistic culture.

© 2001 by Prentice Hall Disadvantages of Individual- Based Pay-for-Performance Plans  Tying pay to goals may promote singe- mindedness.  Many employees do not believe that pay and performance are linked.  Individual pay plans may work against achieving quality goals.  Individual-based programs promote inflexibility in some organizations.

© 2001 by Prentice Hall Conditions Under Which Individual-Based Plans Are Most Likely to Succeed  When the contributions of individual employees can be accurately isolated.  When the job demands autonomy.  When cooperation is less critical to successful performance or when competition is to be encouraged.

© 2001 by Prentice Hall Advantages of Team-Based Pay-for-Performance Plans  They foster group cohesiveness.  They aid performance measurement.

© 2001 by Prentice Hall Disadvantages of Team-Based Pay-for-Performance Plans  Possible lack of fit with individualistic cultural values.  The free-riding effect.  Social pressures to limit performance.  Difficulties in identifying meaningful groups.  Intergroup competition leading to a decline in overall performance.

© 2001 by Prentice Hall Conditions Under Which Team- Based Plans Are Most Likely to Succeed  When work tasks are so intertwined that it is difficult to single out who did what.  When the firm’s organization facilitates the implementation of team-based incentives.  When the objective is to foster entrepreneurship in self-managed work groups.

© 2001 by Prentice Hall Advantages of Plantwide Pay- for-Performance Plans (Gainsharing)  Gainsharing plans can provide a vehicle to elicit active employee input and improve the production process.  Gainsharing plans can increase the level of cooperation across workers and teams by giving everyone a common goal.  Gainsharing plans are subject to fewer measurement difficulties than individual- or team-based incentives.  Because gainsharing plans do not require managers to sort out the specific contributions of individuals or interdependent teams, it is easier both to formulate bonus calculations and to achieve acceptance of these plans.

© 2001 by Prentice Hall Disadvantages of Plantwide Pay-for-Performance Plans  Protection of low performers.  Problems with the criteria used to trigger rewards.  Management-labor conflict.  Individuals may not feel they can have an impact

© 2001 by Prentice Hall Conditions Favoring Plantwide Plans  Gainsharing is more likely to work well in small to midsize plants.  When technology limits improvements in efficiency, gainsharing is less likely to be successful.  If a firm has multiple plants with varying levels of efficiency, the plan must take this variance into account so that efficient plants are not penalized and inefficient plants rewarded.  Gainsharing is less likely to be successful in firms with a traditional hierarchy of authority.  Gainsharing is most appropriate in situations where the demand for the firm’s product or service is relatively stable.

© 2001 by Prentice Hall Differences Between Gainsharing Plans and Profit Sharing Plans  In a profit-sharing program, no attempt is made to reward workers for productivity improvements. Many factors that affect profits have little to do with productivity, and the amount of money employees receive depends on all of these factors.  Profit-sharing plans are very mechanistic, and do not attempt to elicit worker participation.  In a typical profit-sharing plan, profit distributions are used to fund employees’ retirement plans. As a result, employees seldom receive profit distributions in cash.

© 2001 by Prentice Hall Advantages of Corporatewide Pay-for-Performance Plans  Financial flexibility for the firm.  Increased employee commitment.  Tax advantages.

© 2001 by Prentice Hall Disadvantages of Corporatewide Pay-for- Performance Plans  Employees may be at considerable risk.  Limited effect on productivity  Long-run financial difficulties.

© 2001 by Prentice Hall Conditions Favoring Corporatewide Plans  Profit sharing and ESOPs are the plans of choice for larger organizations.  Corporations with multiple interdependent plants or business units often find corporatewide plans most suitable because it difficult to isolate the financial performance of any given segment of the corporation.  Unlike gainsharing, profit-sharing and ESOP programs are attractive to firms facing highly cyclical ups and downs in the demand for their product.  When used in conjunction with other incentives, corporatewide programs can promote greater commitment to the organization by creating common goals and a sense of partnership among managers and workers.

© 2001 by Prentice Hall Key Strategic Pay Policy Questions in the Design of Executive Long-Term Income Programs 1.How long should the time horizon be for dispensing rewards? 2.Should length of service be considered in determining the amount of the awards? 3.Should the executive be asked to share part of the costs and, therefore, increase his or her personal risk? 4.What criteria should be used to trigger the award? 5.Should there be a limit on how much executives can earn or a formula to prevent large unexpected gains? 6.How often should the awards be provided? 7.How easy should it be for the executive to convert the award into cash?

© 2001 by Prentice Hall Most Common Perks Received by U.S. Senior Executives Financial Counseling Club Memberships Personal Liability Ins. Cellular Phone Airline VIP Clubs Home Security System Home Computer Physical Exams Company Car First-Class Air Travel Company Plane Chauffeur Service Reserved Parking Executive Dining Room Loans 85% 70% 63% 62% 57% 53% 47% 45% 35% 30% 29% 26% 20% 9% 6% Perk Percentage of Surveyed Companies Offering to Senior Executives

© 2001 by Prentice Hall Rewarding Performance— Keys to Success  Link incentives to the results you want.  Make sure measures are specific, clear, and as objective as possible.  Maximize employee or group control over outcomes.  Build employee trust and enthusiasm

© 2001 by Prentice Hall Keys to Success (continued) Build employee trust and enthusiasm  Include employees in design  Make sure employees understand impact of their achievements on overall goals  Make sure employees understand the potential impact of items that may be beyond their control  Set up feedback systems that keep them informed on a continuous basis  Be flexible—change the system if appropriate

© 2001 by Prentice Hall Keys to Success (continued)  Customize program to the organization and units within u use most effective mix of levels, types, and timing  Don’t underestimate value of non-cash awards.  Keep incentive programs in perspective as only part of overall compensation and HRM.