IRWI N CHAPTER 16 Recognizing Individual Contributions with Pay ©a Times Mirror Higher Education Group, Inc., company, 1997

Equity Theory - chapter 15 Reinforcement Theory Expectancy Theory - chapter 11 Agency Theory – principals as owners – agents as managers Equity Theory - chapter 15 Reinforcement Theory Expectancy Theory - chapter 11 Agency Theory – principals as owners – agents as managers ©a Times Mirror Higher Education Group, Inc., company, 1997 IRWI N How Does Pay Influence Individuals?

1Perquisites 2Attitudes toward risk 3Decision-making horizons 1Perquisites 2Attitudes toward risk 3Decision-making horizons ©a Times Mirror Higher Education Group, Inc., company, 1997 IRWI N Types of Agency Costs

Risk Aversion Outcome Uncertainty Job Programmability Measurable Job Outcome Ability to Pay Tradition Risk Aversion Outcome Uncertainty Job Programmability Measurable Job Outcome Ability to Pay Tradition ©a Times Mirror Higher Education Group, Inc., company, 1997 IRWI N Factors in the Choice of a Compensation Package Factors in the Choice of a Compensation Package

EXPECTANCY THEORY EFFORT PERFORMANCE expectancy?instrumentality? valence

Tries to identify individual performance differences Supervisor provides most performance information Pay is linked to performance appraisal results Feedback is infrequent Feedback is mostly one way - supervisor to subordinate Tries to identify individual performance differences Supervisor provides most performance information Pay is linked to performance appraisal results Feedback is infrequent Feedback is mostly one way - supervisor to subordinate ©a Times Mirror Higher Education Group, Inc., company, 1997 IRWI N Merit Pay Programs: Characteristics Merit Pay Programs: Characteristics

Individual performance differences are due largely to SYSTEM Discourages teamwork System is not fair Too much reliance on supervisor for rating –procedural issue Pay increaes are not representative of performance –distributive issue Contributes to entitlement mentality Individual performance differences are due largely to SYSTEM Discourages teamwork System is not fair Too much reliance on supervisor for rating –procedural issue Pay increaes are not representative of performance –distributive issue Contributes to entitlement mentality ©a Times Mirror Higher Education Group, Inc., company, 1997 IRWI N Merit Pay Programs: Criticisms Merit Pay Programs: Criticisms

1Most jobs have no physical output 2Many administrative problems 3Individuals focus only on the incentive 4Does not fit with team approach 5Does not reward obtaining multiple skills 6Rewards output at the expense of quality or service 1Most jobs have no physical output 2Many administrative problems 3Individuals focus only on the incentive 4Does not fit with team approach 5Does not reward obtaining multiple skills 6Rewards output at the expense of quality or service ©a Times Mirror Higher Education Group, Inc., company, 1997 IRWI N Individual Incentives Used rarely for the following reasons:

Advantages Encourages employees to think like OWNERS Payments are not part of base pay Disadvantages Many plans defer actual payments Few plans pay out during business downturns Advantages Encourages employees to think like OWNERS Payments are not part of base pay Disadvantages Many plans defer actual payments Few plans pay out during business downturns ©a Times Mirror Higher Education Group, Inc., company, 1997 IRWI N Profit Sharing

©a Times Mirror Higher Education Group, Inc., company, 1997 IRWI N Gainsharing Encourages pursuit of broader(team) goals Measures performance that is controllable by employee Distributes payouts frequently Conditions for success include: –management commitment –commitment to continuous improvement and change –willingness to accept employee input –high level of cooperation and information sharing –agreement on productivity standards –employment security Encourages pursuit of broader(team) goals Measures performance that is controllable by employee Distributes payouts frequently Conditions for success include: –management commitment –commitment to continuous improvement and change –willingness to accept employee input –high level of cooperation and information sharing –agreement on productivity standards –employment security

Individual Pay Programs: Design Features Source: Adapted from E.E. Lawler III, “Pay for Performance: A Strategic Analysis,” in Compensation and Benefits, ed. L. R. Gomez-Mejia (Washington, D. C.: Bureau of National Affairs, 1989). Programs Merit Pay Incentive Pay Profit Sharing Ownership Gainsharing Skill-based Payment Method Performance Measures Frequency of Payout Coverage - Change in base - Bonus - Equity changes - Bonus - Change in base - Annually - Weekly - Semiannual or annual - Sale of stock - Monthly / quarterly - when skill is acquired - Boss’ appraisal - Output, productivity - Profit - Stock value - Production costs - Skill acquisition - All - Direct labor - All - Production /service unit - All

Individual Pay Programs: Consequences Source: Adapted from E.E. Lawler III, “Pay for Performance: A Strategic Analysis,” in Compensation and Benefits, ed. L. R. Gomez-Mejia (Washington, D. C.: Bureau of National Affairs, 1989). Programs Merit Pay Incentive Pay Profit Sharing Ownership Gainsharing Skill-based Performance Motivation CultureAttractionCosts - Little - Clear connection - Little - Little - somein small units - Learning - High performers - High performers - All - All - Retain employees - those who want to learn - Intra-group competition - Individual competition - Knowledge of business - Sense of ownership - Cooperation - Learning - Good system of appraisal - maintenance costs high - Ability to pay - Costs not to variable - Costs are variable - can be high

Individual Pay Programs: Contingencies Source: Adapted from E.E. Lawler III, “Pay for Performance: A Strategic Analysis,” in Compensation and Benefits, ed. L. R. Gomez-Mejia (Washington, D. C.: Bureau of National Affairs, 1989). Programs Merit Pay Incentive Pay Profit Sharing Ownership Gainsharing Skill-based Organization Structure Management Style Type of Work - Independent jobs - Measurable jobs / units - Autonomous units - Any company - Most companies - Control - Participation desirable - Participation - Participation - Participation - Participation - Individual, easy to measure - Individual appraisal - All types - All types - Professional

Sales Product Life Cycle and Operation Strategies ProspectorsDefenders ©a Times Mirror Higher Education Group, Inc., company, 1997 IRWI N

Matching Pay Strategy to Operating Strategy Pay Strategy Dimension Business Unit Strategy DefendersProspectors Risk Sharing (variable pay) Time Orientation Pay level (short run) Pay level (long run) Benefits Level Where Pay Decision Made Pay Unit of Analysis Low Short-term Above market Centralized Job High Long-term Below market Above market Below market Decentralized Skills Source: Adapted from L.R. Gomez-Mejia and D. B. Balkin, Compensation, Organizational Strategy, and Firm Performance (Cincinnati:South-Western), Appendix 4b.