1. Copyright  2005 McGraw-Hill Australia Pty Ltd PPTs t/a Human Resource Management in Australia 2e by De Cieri, Kramar, Noe, Hollenbeck, Gerhart & Wright. Slides prepared by Helen De Cieri Chapter Fourteen Performance-related pay

2. Copyright  2005 McGraw-Hill Australia Pty Ltd PPTs t/a Human Resource Management in Australia 2e by De Cieri, Kramar, Noe, Hollenbeck, Gerhart & Wright. Slides prepared by Helen De Cieri 14-2 Performance-related pay Objectives 1 Describe three theories that explain the dynamics of performance-related pay. 2 Identify a number of performance-related pay programs. 3 List the major factors to consider in matching the pay strategy to the organisation’s strategy. 4 Describe the way the rewards of managers and executives can be tied to company performance. 5 Explain the importance of process issues, such as communication, in compensation management.

3. Copyright  2005 McGraw-Hill Australia Pty Ltd PPTs t/a Human Resource Management in Australia 2e by De Cieri, Kramar, Noe, Hollenbeck, Gerhart & Wright. Slides prepared by Helen De Cieri 14-3 Three theories to explain the effects of compensation Reinforcement theory Expectancy theory Agency theory

4. Copyright  2005 McGraw-Hill Australia Pty Ltd PPTs t/a Human Resource Management in Australia 2e by De Cieri, Kramar, Noe, Hollenbeck, Gerhart & Wright. Slides prepared by Helen De Cieri 14-4 Performance-related pay programs Merit pay Incentive pay Profit sharing Ownership Gainsharing, group incentives and team awards Skill-based See Table 14.1 on page 498 for more detail

5. Copyright  2005 McGraw-Hill Australia Pty Ltd PPTs t/a Human Resource Management in Australia 2e by De Cieri, Kramar, Noe, Hollenbeck, Gerhart & Wright. Slides prepared by Helen De Cieri 14-5 Performance-related pay programs Programs differ according to four design features: Payment method Frequency of payout Ways of measuring performance Choice of which employees are covered

6. Copyright  2005 McGraw-Hill Australia Pty Ltd PPTs t/a Human Resource Management in Australia 2e by De Cieri, Kramar, Noe, Hollenbeck, Gerhart & Wright. Slides prepared by Helen De Cieri 14-6 Performance-related pay programs Programs differ according to potential consequences for: Performance motivation of employees Attraction of employees Organisation culture Costs

7. Copyright  2005 McGraw-Hill Australia Pty Ltd PPTs t/a Human Resource Management in Australia 2e by De Cieri, Kramar, Noe, Hollenbeck, Gerhart & Wright. Slides prepared by Helen De Cieri 14-7 Performance-related pay programs Three contingencies may influence whether each program fits the situation: Organisation structure Management style Type of work

8. Copyright  2005 McGraw-Hill Australia Pty Ltd PPTs t/a Human Resource Management in Australia 2e by De Cieri, Kramar, Noe, Hollenbeck, Gerhart & Wright. Slides prepared by Helen De Cieri 14-8 Merit pay programs Annual pay increases are usually linked to performance appraisal ratings. Merit increase grid: A grid that combines an employee’s performance rating with his/her position in a pay range, to determine the size and frequency of his/her pay increases.

9. Copyright  2005 McGraw-Hill Australia Pty Ltd PPTs t/a Human Resource Management in Australia 2e by De Cieri, Kramar, Noe, Hollenbeck, Gerhart & Wright. Slides prepared by Helen De Cieri 14-9 Criticisms of traditional merit pay programs It is unfair to rate individual performance. The individual focus of merit pay discourages team work. Exclusive reliance on supervisor for performance ratings may restrict accuracy. If merit increases are too small, they will not motivate workers. Merit pay may lead to an ‘entitlement mentality’.

10. Copyright  2005 McGraw-Hill Australia Pty Ltd PPTs t/a Human Resource Management in Australia 2e by De Cieri, Kramar, Noe, Hollenbeck, Gerhart & Wright. Slides prepared by Helen De Cieri 14-10 Individual incentive programs Individual incentives reward individual performance, but differ from merit pay. Incentives are not rolled into base pay. They must be continuously earned. Performance is usually measured as physical output, rather than by subjective ratings.

11. Copyright  2005 McGraw-Hill Australia Pty Ltd PPTs t/a Human Resource Management in Australia 2e by De Cieri, Kramar, Noe, Hollenbeck, Gerhart & Wright. Slides prepared by Helen De Cieri 14-11 Profit sharing and ownership programs Profit sharing A group compensation plan in which payments are based on a measure of organisation performance (profits) and do not become part of the employees’ base salary. Ownership Stock option. An employee ownership plan that gives employees the opportunity to buy the company’s stock at a previously fixed price. Employee stock ownership plan (ESOP). An employee ownership plan that provides employers certain tax and financial advantages when stock is granted to employees.

12. Copyright  2005 McGraw-Hill Australia Pty Ltd PPTs t/a Human Resource Management in Australia 2e by De Cieri, Kramar, Noe, Hollenbeck, Gerhart & Wright. Slides prepared by Helen De Cieri 14-12 Gainsharing, group incentives and team awards Gainsharing A form of group compensation based on group or plant performance (rather than organisation-wide profits) that does not become part of the employee’s base salary. For example, the Scanlon plan. Group incentives Tend to measure performance in terms of physical output. Team awards Use a broader range of performance measures (e.g. cost savings, meeting deadlines).

13. Copyright  2005 McGraw-Hill Australia Pty Ltd PPTs t/a Human Resource Management in Australia 2e by De Cieri, Kramar, Noe, Hollenbeck, Gerhart & Wright. Slides prepared by Helen De Cieri 14-13 Balanced scorecard A means of performance measurement that gives managers a chance to look at their company from the perspectives of internal and external customers, employees and shareholders.

14. Copyright  2005 McGraw-Hill Australia Pty Ltd PPTs t/a Human Resource Management in Australia 2e by De Cieri, Kramar, Noe, Hollenbeck, Gerhart & Wright. Slides prepared by Helen De Cieri 14-14

15. Copyright  2005 McGraw-Hill Australia Pty Ltd PPTs t/a Human Resource Management in Australia 2e by De Cieri, Kramar, Noe, Hollenbeck, Gerhart & Wright. Slides prepared by Helen De Cieri 14-15 Managerial and executive pay How can executive pay be linked to organisation performance? Less emphasis on base salary and more emphasis on outcome-oriented contracts. Greater reliance on short-term bonuses and long-term incentive programs.

16. Copyright  2005 McGraw-Hill Australia Pty Ltd PPTs t/a Human Resource Management in Australia 2e by De Cieri, Kramar, Noe, Hollenbeck, Gerhart & Wright. Slides prepared by Helen De Cieri 14-16 Figure 14.3 Fixed annual reward, short- and long-term incentive (as a percentage of total annual reward)

17. Copyright  2005 McGraw-Hill Australia Pty Ltd PPTs t/a Human Resource Management in Australia 2e by De Cieri, Kramar, Noe, Hollenbeck, Gerhart & Wright. Slides prepared by Helen De Cieri 14-17 Process and context issues Employee participation in decision making Communication Pay and process: intertwined effects

18. Copyright  2005 McGraw-Hill Australia Pty Ltd PPTs t/a Human Resource Management in Australia 2e by De Cieri, Kramar, Noe, Hollenbeck, Gerhart & Wright. Slides prepared by Helen De Cieri 14-18 Table 14.7 Matching pay strategy and organisation strategy

19. Copyright  2005 McGraw-Hill Australia Pty Ltd PPTs t/a Human Resource Management in Australia 2e by De Cieri, Kramar, Noe, Hollenbeck, Gerhart & Wright. Slides prepared by Helen De Cieri 14-19 Summary Performance-related pay programs vary as to whether they link pay to individual, group or organisation performance. A balance of individual, group and organisation objectives may be sought. An effective pay strategy can have a substantial, positive impact on an organisation’s success. The importance of pay means that employees care a great deal about the fairness of the pay process. Pay programs must be explained and administered in such a way that employees understand their underlying rationale and believe it is fair.