© 2010 McGraw Hill Ryerson 10-1 COMPENSATION Third Canadian Edition Milkovich, Newman, Cole

© 2010 McGraw Hill Ryerson 10-2 STRATEGIC POLICIES TECHNIQUES STRATEGIC OBJECTIVES EFFICIENCY  Performance  Quality  Customers  Stockholders  Costs FAIRNESS COMPLIANCE ALIGNMENT COMPETITIVENESS CONTRIBUTORS MANAGEMENT INTERNAL STRUCTURE PAY STRUCTURE INCENTIVE PROGRAMS EVALUATION THE PAY MODEL

© 2010 McGraw Hill Ryerson 10-3 Employee Performance Employee performance = f (S,K,M) where: S = Skill and ability to perform task K = Knowledge of facts, rules, principles, and procedures M = Motivation to perform

© 2010 McGraw Hill Ryerson 10-4 Performance Measurement Relates to Compensation Strategy Variability in Organizational Performance Low Variability: few swings in overall corporate performance High Variability: regular and large swings in overall corporate performance. Cell A – provide wide range of rewards beyond just money. Include significant incentive component. Cell B – provide wide range of rewards beyond just money. Emphasize base pay with low incentive portion. Cell C – emphasize monetary rewards with large incentive component. Cell D – emphasize monetary rewards. Large base pay with low incentive portion. Stable and easily measured Unstable, unclear, and changing objectives Variability and ease of measurement in individual performance

© 2010 McGraw Hill Ryerson 10-5 What Behaviours Do Employers Care About?  How do we get good employment prospects to join our company?  How do we retain these good employees once they join?  How do we get employees to develop skills for current and future jobs?  How do we get employees to perform well on their current job?

© 2010 McGraw Hill Ryerson 10-6 What Motivates Employees? In the simplest sense, motivation involves three elements: 1. what is important to a person, and 2. offering it in exchange for some 3. desired behaviour

© 2010 McGraw Hill Ryerson 10-7 What Motivation Theories Say  Content Theories (what is important to a person) Maslow’s Need Hierarchy Herzberg’s 2-Factor Theory  Process Theories (the nature of the exchange) Expectancy Theory Equity Theory Agency Theory  Reinforcement Theories (desired behaviour) Goal Setting Reinforcement

© 2010 McGraw Hill Ryerson 10-8 Does Compensation Motivate Behaviour?  Do people join a firm because of pay?  Do people stay in a firm (or leave) because of pay?  Do employees more readily agree to develop job skills because of pay?  Do employees perform better on their jobs because of pay?

© 2010 McGraw Hill Ryerson 10-9  Process of evaluating or appraising an employee’s performance on the job  Often plagued by errors Performance Appraisal

© 2010 McGraw Hill Ryerson Common Errors in the Appraisal Process  halo error  negative halo error  first impression error  recency error  leniency error  strictness error  central tendency error  similar-to-me error  spillover error

© 2010 McGraw Hill Ryerson Strategies to Better Understand and Measure Job Performance (and reduce errors)  Improve appraisal formats  Select the right raters  Understand how raters process information  Train raters to rate more accurately 10-11

© 2010 McGraw Hill Ryerson Performance Appraisal Formats  Comparative ranking alternation ranking paired comparison  Attribute graphic rating scales  Behavioural BARS  Results/outcomes MBO

© 2010 McGraw Hill Ryerson An Evaluation of Performance Appraisal Formats Format Administration HR Research CostValidity Ranking Standard Rating Scale BARS MBO poor average good excellent average pooraverage good poor good poor averagegood average excellent Employee Development CRITERIA

© 2010 McGraw Hill Ryerson Select the Right Raters  supervisors  peers  self  customers  subordinates  360-degree feedback (may include all five of the above raters)

© 2010 McGraw Hill Ryerson Errors in observation (attention) Errors in storage and recall Errors in actual evaluation Information Processing Errors Errors in rating process Information Processing Errors

© 2010 McGraw Hill Ryerson Training Raters to Rate More Accurately  rater-error training to reduce psychometric errors  performance dimension training reviews dimensions to be used in rating  performance-standard training provides frame of reference

© 2010 McGraw Hill Ryerson Effective Performance Evaluation Process 1.Performance dimensions should be relevant to the organization’s strategy 2.Involve employees at every stage 3.Raters need to be trained 4.Raters must be motivated to rate accurately 5.Raters should maintain a diary of employee performance 6.Raters should diagnose in advance whether problems are due to motivation, skill deficiency, or external environment

© 2010 McGraw Hill Ryerson Designing a Pay-For- Performance Plan Efficiency Strategy Structure Standards -Objectives -Measures -Eligibility -Funding Equity or Fairness Distributive justice Procedural justice Compliance Comply with existing laws Enhance and maintain firm’s reputation

© 2010 McGraw Hill Ryerson Linking Pay with Performance Merit pay grids combine 3 variables: 1.Level of performance 2.Distribution of employees within pay ranges 3.Merit budget increase percentage

© 2010 McGraw Hill Ryerson Merit Pay Grid Performance Position in Salary Range UnsatisfactorySatisfactoryVery goodExcellent 4 th quartile0%1%2%3% 3 rd quartile0%2%3%4% 2 nd quartile0%3%4%5% 1 st quartile0%4%5%6%

© 2010 McGraw Hill Ryerson Conclusion  employee performance depends on skill, knowledge, and motivation  process of performance appraisal can be time- consuming and stressful  training supervisors in performance appraisal can improve the quality of appraisals  designing a pay-for-performance plan involves efficiency in setting clear standards that support strategic objectives; fairness; and legislative compliance  merit guidelines and promotional increases are forms of pay for performance