IRWI N Pay for Individual Contributions ©a Times Mirror Higher Education Group, Inc., company, 1997 © Nancy Brown Johnson, 1999

From the field of finance, Baker, Jensen, and Murphy (1988: p. 597) observe, We believe that careful examination of the criticisms of monetary pay-for-performance systems indicates not that they are ineffective but rather that they are too effective: strong pay- for-performance motivates people to do exactly what they are told to do. Large monetary incentives generate unintended and sometimes counterproductive results because it is difficult to adequately specify exactly what people should do and therefore how their performance should be measured.

MOTIVATION

©a Times Mirror Higher Education Group, Inc., company, 1997 IRWI N Expectancy Theory Motivation = Expectancy X Instrumentality X Valence Expectancy - can I do the work? Instrumentality - if I work, will I be rewarded? Valence - do I value the reward?

Compensation & Expectancy Valence Instrumentality Perceptions

Agency Theory Owners are principals Managers are agents

Types of Agency Costs  Agents have discretion to implement policies  Self serving behaviors  Shift risk into the future

©a Times Mirror Higher Education Group, Inc., company, 1997 IRWI N Techniques to Align Principal & Agent Interests Techniques to Align Principal & Agent Interests Monitor  Contracts Incentive Alignment reward behaviors in principal’s interest pay above market wages to  cost of leaving

©a Times Mirror Higher Education Group, Inc., company, 1997 IRWI N Merit Pay Programs: Characteristics Merit Pay Programs: Characteristics Rewards past individual performance Pay is linked to performance appraisal results Feedback is infrequent

©a Times Mirror Higher Education Group, Inc., company, 1997 IRWI N Merit Pay Programs: Criticisms Poor performance appraisal system Performance differences due to SYSTEM Discourages teamwork Pay increases not representative of performance Contributes to entitlement mentality

1Most jobs have no physical output 2Individuals focus only on the incentive 4Does not fit with team approach 5Rewards output at the expense of quality or service 1Most jobs have no physical output 2Individuals focus only on the incentive 4Does not fit with team approach 5Rewards 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  Does not make instrumentality connection  Few plans pay out during business downturns Advantages  Encourages employees to think like OWNERS  Payments are not part of base pay Disadvantages  Does not make instrumentality connection  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 Team Goals Performance controllable by employee Distributes payouts frequently Conditions for success include: –acceptance of employee input –cooperation and information sharing –agreement on productivity standards –employment security Team Goals Performance controllable by employee Distributes payouts frequently Conditions for success include: –acceptance of employee input –cooperation and information sharing –agreement on productivity standards –employment security

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

Matching Pay Strategy to Operating Strategy Pay Strategy Dimension Business Unit Strategy CostInnovation 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.

Toyota “Community of Fate”

The Pay System Goal Achievement Community of Fate Rewards Work Team Relationships

Toyota Compensation Monetary –Regular pay –Bonus pay (given routinely based upon salary) Special Monetary Rewards Kaizen – suggestion system rewards distributed equally among team members Not given in cash but gift certificates to create memory Recognition important Assumes that money is not a motivator Job security is a key feature Training

Toyota Assumes that money is not a motivator

Summary Need to be careful not to reward undesirable behaviors Need to be concerned with the whole system Balance equity components