© 2001 by Prentice Hall 11-1 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 Easily measured stuff swamps important but hard to measure stuff  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 u Demotivating when pay is influenced by factors outside Ee’s control  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

© 2001 by Prentice Hall 11-2 Pay for Performance: The Challenges (cont.)  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  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 u May reduce “organizational citizenship” behaviors that are not explicitly compensated  Academic advising???

© 2001 by Prentice Hall 11-3 Meeting the Challenges of Pay for Performance Systems  Link Pay and Performance Appropriately u So that situational factors are not significant.  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  E.g., reliable and valid performance appraisals  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 11-4 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  Individual, team, department, plant or store, organization…  Increase Employee Involvement u Will increase trust in plan  Use Motivation and Nonfinancial Incentives u Some people are more interested in the nonfinancial aspects of their work

© 2001 by Prentice Hall 11-5 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 11-6 Advantages and Disadvantages

© 2001 by Prentice Hall 11-7 Key Strategic Pay Questions

© 2001 by Prentice Hall 11-8 “Bottom-Up Pay”  Some companies (~20%) tie executive compensation to Ee satisfaction data u Similar to faculty merit pay???  Gordon Bethune, CEO, Continental Airlines: u “Being an effective leader and having a company where people enjoy coming to work is not a popularity contest. When you run popularity contests, you tend to do things that may get you more points. That may not be good for shareholders and may not be good for the company.” –Source: Wall Street Journal, 4/6/00

© 2001 by Prentice Hall 11-9 “Stock Options Lose Appeal as an Option”  Accounting standard requiring firms to book stock options (Fig 11.5) as an expense expected to be made final within six months by FASB u Options for most part simply referenced in footnotes in annual reports u In July, House passed bill that would block FASB standard and replace it with requirement that companies count only their top five executives' stock options as an expense.  Bill faces uncertain future in Senate  Big firms turning away from stock options to other types of compensation u Many favoring restricted stock (Fig 11.5)  Requires continued service by Ee  Cost booked as shares “vest” –Source: Wall Street Journal, 10/12/04, 10/14/04

© 2001 by Prentice Hall Faculty Merit Pay Exercise  You are department chair  There are 10 faculty in your department, earning $70k on average, and you have a 3% merit pay pool ($21K)  Teaching performance as measured by the item, “I would recommend this instructor to other students considering this course” (where 1=SD and 5=SA) is as follows  A: 3.1  B: 3.3  C:3.5  D: 3.7  E: 3.8  F: 3.9  G: 4.0  H: 4.2  I: 4.4  J: 4.6  Your task: Determine the merit pay increase each faculty member should receive