Performance and Pay MANA 5341 Dr. George Benson

Strategic Objectives for Pay Systems Attraction / Retention Motivating Performance  Individuals respond to monetary incentives  Incentive pay increases productivity Organizational Culture  Pay shapes culture very early in organizations  Sends a strong message about what types of skills and behaviors are valued

Performance Management and Culture Bureaucratic vs. Flexible  Is the system perceived to be more important than the employee? “High Performance” expectations Attitudes towards risk or entrepreneurial behavior  How is “failure” regarded or punished? Individual vs. Team vs. Unit orientation Long-term vs. short-term orientation (ROI vs. growth) How important is each employee to performance?  Do employees perceive a connection between their work and organizational performance?  Do employees perceive that they change their performance and pay?

“Manhattan restaurant opts for 20% automatic” Per Se, one of the most highly rated Manhattan restaurants, is instituting a 20 percent service charge to all checks in lieu of a tip. The service charge will then be used by the restaurant to help pay all hourly employees -- kitchen staff, waiters, and busboys -- a flat hourly wage. "Historically in restaurants, the service staff is awarded significantly higher wages than cooks and other staff who prepare the food on which a restaurant's reputation is based," said Per Se chef/owner Thomas Keller in a statement. Servers and other floor people make upward of $100,000 a year, while those in the kitchen take home $30,000. The new policy means the waiters are going to have to take a pay cut. With a cut in pay, or even the tip incentive removed from the equation, service could suffer. A spokesman for Per Se said the stable salary -- which also comes with benefits like vacation and health insurance -- would create a more professional environment and increase motivation. CNN

Group Decisions 1.How did you allocate your pool? 2.What is the process that you used to allocate your pool? 3.Who were the top two and bottom two in your distribution? 4.What is the difference between the highest and lowest number of points awarded?

How is strategy related to performance management and compensation at Brainard, Bennis, & Farrell? What tradeoffs are involved in linking performance and pay? How important is consensus of values? Should there be fixed “weights” to the performance measures? Compensation as a Blunt Instrument

Pay for Performance Requires 1.Definition of performance  Organization needs to be able to identify and measure the behavior it wants to motivate.  Measures must be credible and have “line of sight”  How are we going to measure and compare people? 2.Distribution of performance  Can we distinguish high and low performers? 3.Decide the increase for each level of performance.  How large a difference between high and low performers?

Problems with Merit Pay Requires credible and comprehensive measures of performance – objective where possible. Subjective judgments of managers often seen as unfair or invalid. Managers tend toward similar ratings to avoid discomfort of differential treatment or disown the system. Weak systems actually drive good performers to turnover.

Should pay be linked to appraisals? Reasons for…. Reasons against…

Should pay be linked to appraisals? Reasons for….  Managers take the process more seriously  Better discussion of goals and expectations  Develops a performance-oriented culture  Can retain high performers if done well Reasons against…  Appraisal becomes all about money – no development  Subordinates tend to withhold negative information  Goals are set lower so that they are sure to be achieved  Can drive away high performers if done poorly

Problems at RightNow!

Marketing: New hires making more than “old timers”. Programmers: Arkady $38k Josh $75k Controller Edith makes 1/3 rd of CFO Harriett Allan in Store Relations with “Big Company” salary Max Dir of International Marketing makes less than others at his level – and is a golfing buddy

Fox Threatens Charges After Salaries Leaked It was unclear who sent the original , but it caused a serious uproar at Fox when it landed in the inboxes of staffers at the unit, which includes F/X, Fox Sports Net and National Geographic Channel. Tony Vinciquerra, president and CEO of the Fox Networks Group, sent an to the staff apologizing for the distraction the e- mail caused and asking that everyone delete it and not discuss it with anyone outside of the company. A former Fox executive noted that the revelation of staff salaries was likely to cause dissension in the ranks and predicted it would lead to a parade of executives looking to renegotiate their contracts. TelevisionWeek

Merits of Secrecy? Should pay be secret? Should performance evaluations be secret?

Equity Theory Comparison of my input / reward ratio with that of similar others. Employees may seek to address imbalance by changing their inputs. Fairness of pay differentials between different performance levels depends large part on the content and process of performance appraisal.

“Monkeys Demand Equal Pay” A recent study shows brown capuchin monkeys refused to play along when they saw another monkey get a better payoff for performing the same work. The monkeys were trained to trade a granite token for a piece of cumber. When the reward was the same for both monkeys, they took the cucumber 95 percent of the time. But it was a different story when one monkey was given something better -- namely, a grape. Then, the other monkey often pitched a fit -- either throwing the token, refusing to eat the cucumber or giving it to the other monkey. Associated Press 2003

Managers are paid to…. “We are paid to manage organizations. To manage means to elicit better performance from members of our organization. We managers need to stop rationalizing, and to stiffen our resolve to do what we are paid to do.” Andy Grove, Intel

Dividing up the bonus pool? Should low performers be paid an increase? Should average performers be paid an increase? What about cost of living? What about existing difference in pay distribution?

Pay and Motivation Evidence suggests that merit raises of 10-15% motivate changes in behavior. Typical merit raises range from 2-6% Rewards are more motivating if:  They are timely  They are public rather than secret  They are scarce rather than common

Pay and Motivation Reward systems affect individual behavior through employee’s beliefs and expectations about how they will be rewarded. High pay does not motivate – the expectation of high pay motivates behavior. Employees need to trust the company and see integrity in the systems.

Alternatives Market driven pay Variable pay plan linked to organizational performance. Year end bonuses rather than raises. Use promotion to reward top performers. Specific incentives for each job.