(c) 2007 by Prentice Hall11-1 Rewarding Performance Chapter 11

(c) 2007 by Prentice Hall11-2 Recognize individual and group contributions to the firm by rewarding high performersRecognize individual and group contributions to the firm by rewarding high performers Develop pay-for-performance plans that are appropriate for different levels in an organizationDevelop 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 firmIdentify the potential benefits and drawbacks of different pay-for-performance systems and choose the plan that is most appropriate for a particular firm Chapter 11 Overview

(c) 2007 by Prentice Hall11-3 Design an executive compensation package that motivates executives to make decisions that are in the firm’s best interestsDesign 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 strategyWeigh 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 serviceDesign an incentive system to reward excellence in customer service Chapter 11 Overview (cont’d)

(c) 2007 by Prentice Hall11-4 Pay-for-performance: The Challenges Pay-for-performance or Incentive SystemsPay-for-performance or Incentive Systems The “do only what you get paid for” syndromeThe “do only what you get paid for” syndrome

(c) 2007 by Prentice Hall11-5 Negative effects on the spirit of cooperationNegative effects on the spirit of cooperation Lack of controlLack of control Difficulties in measuring performanceDifficulties in measuring performance Psychological contractsPsychological contracts The credibility gapThe credibility gap Job dissatisfaction and stressJob dissatisfaction and stress Potential reduction of intrinsic drivesPotential reduction of intrinsic drives Pay-for-performance: The Challenges

(c) 2007 by Prentice Hall11-6 Link pay and performance appropriatelyLink pay and performance appropriately – Piece-rate system – A compensation system in which employees are paid per unit produced. Use pay-for-performance as part of a broader HRM systemUse pay-for-performance as part of a broader HRM system Build employee trustBuild employee trust Meeting the Challenges of Pay- for-performance Systems

(c) 2007 by Prentice Hall11-7 Promote the belief that performance makes a differencePromote the belief that performance makes a difference Use multiple layers of rewardsUse multiple layers of rewards Increase employee involvementIncrease employee involvement Use motivation and nonfinancial incentivesUse motivation and nonfinancial incentives Meeting the Challenges of Pay- for-performance Systems

(c) 2007 by Prentice Hall11-8 Types of Pay-for-performance Plans

(c) 2007 by Prentice Hall11-9 Types of Pay-for-performance Plans Individual-based plansIndividual-based plans –Merit pay –Bonus programs –Lump-sum payments Advantages and disadvantages of individual-based pay- for-performance plansAdvantages and disadvantages of individual-based pay- for-performance plans

(c) 2007 by Prentice Hall11-10 Conditions under which individual-based plans are most likely to succeed- When the contributions of individual employees can be accurately isolatedWhen the contributions of individual employees can be accurately isolated When the job demands autonomyWhen the job demands autonomy When cooperation is less critical to successful performance or when competition is to be encouragedWhen cooperation is less critical to successful performance or when competition is to be encouraged Types of Pay-for-performance Plans

(c) 2007 by Prentice Hall11-11 Team-based Plans Advantages and disadvantages to team-based pay-for- performance plansAdvantages and disadvantages to team-based pay-for- performance plans

(c) 2007 by Prentice Hall11-12 Conditions under which team-based plans are most likely to succeed- When work tasks are so intertwined it is difficult to single out who did whatWhen work tasks are so intertwined it is difficult to single out who did what When the firm’s organization facilitates the implementation of team-based incentivesWhen the firm’s organization facilitates the implementation of team-based incentives When the objective is to foster entrepreneurship in self-managed work groupsWhen the objective is to foster entrepreneurship in self-managed work groups Team-based Plans

(c) 2007 by Prentice Hall11-13 Advantages and Disadvantages

(c) 2007 by Prentice Hall11-14 GainsharingGainsharing Conditions favoring plantwide plansConditions favoring plantwide plans – Firm size – Technology – Historical performance – Corporate culture – Stability of the product market Plantwide Plans

(c) 2007 by Prentice Hall11-15 Corporatewide Plans Profit sharingProfit sharing Employee Stock Ownership Plan (ESOP)Employee Stock Ownership Plan (ESOP) Advantages and disadvantages of corporatewide pay- for-performance plansAdvantages and disadvantages of corporatewide pay- for-performance plans

(c) 2007 by Prentice Hall11-16 Conditions favoring corporatewide plans Firm sizeFirm size Interdependence of different parts of the businessInterdependence of different parts of the business Market conditionsMarket conditions The presence of other incentivesThe presence of other incentives Corporatewide Plans

(c) 2007 by Prentice Hall11-17 For Executives and Salespeople Salary and short-term incentivesSalary and short-term incentives Long-term incentivesLong-term incentives PerksPerks Directors and shareholders as equity partnersDirectors and shareholders as equity partners SalespeopleSalespeople Designing Pay-for-performance Plans

(c) 2007 by Prentice Hall11-18 Do you think it is ethical for a company to give its CEO and its other top executives multimillion-dollar pay packages that are not closely tied to the company’s performance?Do you think it is ethical for a company to give its CEO and its other top executives multimillion-dollar pay packages that are not closely tied to the company’s performance? A Question of Ethics -

(c) 2007 by Prentice Hall11-19 Key Strategic Pay Questions

(c) 2007 by Prentice Hall11-20 Rewarding Excellence in Customer Service Customer service rewards may be individual-, team-, or plant-basedCustomer service rewards may be individual-, team-, or plant-based

(c) 2007 by Prentice Hall11-21 Pay-for-performance: The ChallengesPay-for-performance: The Challenges Meeting the challenges of pay-for- performance systemsMeeting the challenges of pay-for- performance systems Types of pay-for-performanceTypes of pay-for-performance Designing pay-for-performance plans for executives and salespeopleDesigning pay-for-performance plans for executives and salespeople Summary and Conclusions