(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 systems reward employee performance on the basis of these assumptions: 1.Individual employees and work teams differ in how much they contribute – not only in what they do it but how they do it 2.Company overall performance depends to a large extent on the performance of individuals and groups 3.To attract, retain and motivate high performers and be fair to all employees a company needs to reward employees on the basis of their relative performance

(c) 2007 by Prentice Hall11-5 The “do only what you get paid for” syndromeThe “do only what you get paid for” syndrome Unethical behaviorUnethical behavior 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 Individual-based plans Merit payMerit pay Bonus programsBonus programs Lump-sum paymentsLump-sum payments AdvantagesAdvantages Rewarded performance is likely to be repeated – expectancy theory Financial incentives can shape an individual's goals Help the firm achieve individual equity Fit in with an individualistic culture DisadvantagesDisadvantages May promote single-mindedness Employees do not believe pay and performance are linked They may work against achieving quality goals, and they may promote inflexibility. Types of Pay-for-Performance Plans - Individual

(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 - Individual

(c) 2007 by Prentice Hall11-11 Team-based plans attempt to support other efforts to increase the flexibility of the work force within a firm. These plans normally reward all team members equally based on group outcomes. Advantages –Foster group cohesiveness –Facilitate performance measurement Disadvantages –Possible lack of fit with individualistic cultural values –Free-riding effect –Social pressures to limit performance –Difficulties in identifying meaningful groups –Inter-group competition leading to a decline in overall performance. Types of Pay-for-Performance Plans - Teams

(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 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 Types of Pay-for-Performance Plans - Teams

(c) 2007 by Prentice Hall11-13 Plant-wide plans Generally referred to as gainsharing programs because they return a portion of the company's cost savings to the workers, usually in the form of a lump-sum bonus. Advantages –eliciting active employee input –increasing the level of cooperation –fewer measurement difficulties –improved quality Disadvantages –protection of low performers – free riders –problems with the criteria used to trigger rewards –management-labor conflict Types of Pay-for-Performance Plans – Plant-Wide

(c) 2007 by Prentice Hall11-14 Conditions favoring Plant-Wide Plans: –Firm size – small to medium sized plants –Technology – does not limit improvements –Historical performance – takes into account different plants’ varying levels of efficiency so as to not penalize efficient plants –Corporate culture – less likely to succeed in firms with a traditional hierarchy –Stability of product market – demand for product is relatively stable Types of Pay-for-Performance Plans – Plant-Wide

(c) 2007 by Prentice Hall11-15 Corporate-wide Plans –macro type of incentive program and is based on the entire corporation's performance Differences between Corporate-wide Plan and Gainsharing –no attempt is made to reward workers for productivity improvements –they are very mechanistic –they may used to fund retirement programs although there are exceptions Types of Pay-for-Performance Plans – Corporate-Wide

(c) 2007 by Prentice Hall11-16 Corporate-wide Types of Plans Profit-sharing plans –Cash plans Employees receive cash shares of the firm’s profits at regular intervals. –Deferred profit-sharing plans A predetermined portion of profits is placed in each employee’s account under a trustee’s supervision. Employee stock ownership plans (ESOPs) –A corporation annually contributes its own stock—or cash (with a limit of 15% of compensation) to be used to purchase the stock—to a trust established for the employees. –The trust holds the stock in individual employee accounts and distributes it to employees upon separation from the firm if the employee has worked long enough to earn ownership of the stock. Types of Pay-for-Performance Plans – Corporate-Wide

(c) 2007 by Prentice Hall11-17 AdvantagesAdvantages –Financial flexibility for the firm –Increased employee commitment –Tax advantages DisadvantagesDisadvantages –Risk for employees –Limited effect on productivity –Long-run financial difficulties. Types of Pay-for-Performance Plans – Corporate-Wide

(c) 2007 by Prentice Hall11-18 Conditions favoring corporate-wide plansConditions favoring corporate-wide plans –Firm size –Interdependence of different parts of the business –Market conditions –The presence of other incentives Types of Pay-for-Performance Plans – Corporate-Wide

(c) 2007 by Prentice Hall11-19 Bonus Plans that are designed to motivate short-term performance of managers and are tied to company profitability Designing Pay-for-Performance Plans Managers and Executives

(c) 2007 by Prentice Hall11-20 Stock option –The right to purchase a specific number of shares of company stock at a specific price during a specific period of time. –Options have no value (go “underwater”) if the price of the stock drops below the option’s strike price (the option’s stock purchase price). Perks- non-cash incentives Designing Pay-for-Performance Plans Managers and Executives

(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