1. Copyright  2003 McGraw-Hill Australia Pty Ltd. PPTs t/a Human Resource Management in Australia: Strategy-People-Performance by De Cieri & Kramar 1 1 Performance-related pay Chapter 13

2. Copyright  2003 McGraw-Hill Australia Pty Ltd. PPTs t/a Human Resource Management in Australia: Strategy-People-Performance by De Cieri & Kramar 13-2 Performance-related pay  Objectives ÙDescribe three theories that explain the dynamics of performance-related pay. ÙIdentify a number of performance-related pay programs. ÙList the major factors to consider in matching the pay strategy to the organisation’s strategy. ÙDescribe the way the rewards of managers and executives can be tied to company performance. ÙExplain the importance of process issues, such as communication, in compensation management.

3. Copyright  2003 McGraw-Hill Australia Pty Ltd. PPTs t/a Human Resource Management in Australia: Strategy-People-Performance by De Cieri & Kramar 13-3 Three theories to explain the effects of compensation  Reinforcement theory  Expectancy theory  Agency theory

4. Copyright  2003 McGraw-Hill Australia Pty Ltd. PPTs t/a Human Resource Management in Australia: Strategy-People-Performance by De Cieri & Kramar 13-4 Performance-related pay programs  Merit pay  Incentive pay  Profit-sharing  Ownership  Gainsharing  Skill-based  See Table 13.1 for more detail

5. Copyright  2003 McGraw-Hill Australia Pty Ltd. PPTs t/a Human Resource Management in Australia: Strategy-People-Performance by De Cieri & Kramar 13-5 Performance-related pay programs  Programs differ according to four design features: ÙPayment method ÙFrequency of payout ÙWays of measuring performance ÙChoice of which employees are covered

6. Copyright  2003 McGraw-Hill Australia Pty Ltd. PPTs t/a Human Resource Management in Australia: Strategy-People-Performance by De Cieri & Kramar 13-6 Performance-related pay programs  Programs differ according to potential consequences for: ÙPerformance motivation of employees ÙAttraction of employees ÙOrganisation culture ÙCosts.

7. Copyright  2003 McGraw-Hill Australia Pty Ltd. PPTs t/a Human Resource Management in Australia: Strategy-People-Performance by De Cieri & Kramar 13-7 Performance-related pay programs  Three contingencies may influence whether each program fits the situation: ÙOrganisation structure ÙManagement style ÙType of work

8. Copyright  2003 McGraw-Hill Australia Pty Ltd. PPTs t/a Human Resource Management in Australia: Strategy-People-Performance by De Cieri & Kramar 13-8 Merit pay programs  Annual pay increases are usually linked to performance appraisal ratings.  Merit increase grid ÙA 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  2003 McGraw-Hill Australia Pty Ltd. PPTs t/a Human Resource Management in Australia: Strategy-People-Performance by De Cieri & Kramar 13-9 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  2003 McGraw-Hill Australia Pty Ltd. PPTs t/a Human Resource Management in Australia: Strategy-People-Performance by De Cieri & Kramar 13-10 Individual incentive programs  Individual incentives reward individual performance, but differ from merit pay. ÙIncentives are not rolled into base pay. They must be continuously earned. ÙPerformance is usually measured as physical output, rather than by subjective ratings.

11. Copyright  2003 McGraw-Hill Australia Pty Ltd. PPTs t/a Human Resource Management in Australia: Strategy-People-Performance by De Cieri & Kramar 13-11 Profit sharing and ownership programs  Profit sharing ÙA 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 ÙStock option. An employee ownership plan that gives employees the opportunity to buy the company’s stock at a previously fixed price. ÙEmployee stock ownership plan (ESOP). An employee ownership plan that provides employers certain tax and financial advantages when stock is granted to employees.

12. Copyright  2003 McGraw-Hill Australia Pty Ltd. PPTs t/a Human Resource Management in Australia: Strategy-People-Performance by De Cieri & Kramar 13-12 Gainsharing, group incentives and team awards  Gainsharing ÙA 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. ÙE.g. the Scanlon plan  Group incentives ÙTend to measure performance in terms of physical output.  Team awards ÙUse a broader range of performance measures (e.g. cost savings, meeting deadlines).

13. Copyright  2003 McGraw-Hill Australia Pty Ltd. PPTs t/a Human Resource Management in Australia: Strategy-People-Performance by De Cieri & Kramar 13-13 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  2003 McGraw-Hill Australia Pty Ltd. PPTs t/a Human Resource Management in Australia: Strategy-People-Performance by De Cieri & Kramar 13-14

15. Copyright  2003 McGraw-Hill Australia Pty Ltd. PPTs t/a Human Resource Management in Australia: Strategy-People-Performance by De Cieri & Kramar 13-15 Managerial and executive pay  How can executive pay be linked to organisation performance? ÙLess emphasis on base salary and more emphasis on outcome-oriented contracts. ÙGreater reliance on short-term bonuses and long-term incentive programs.

16. Copyright  2003 McGraw-Hill Australia Pty Ltd. PPTs t/a Human Resource Management in Australia: Strategy-People-Performance by De Cieri & Kramar 13-16 Source: G. O’Neill, ‘Lies, damned lies, statistics … and CEO pay’, H R Monthly, February 2000, p.31. Figure 13.3 Fixed annual reward, short- and long-term incentive (as a percentage of total annual reward)

17. Copyright  2003 McGraw-Hill Australia Pty Ltd. PPTs t/a Human Resource Management in Australia: Strategy-People-Performance by De Cieri & Kramar 13-17 Process and context issues  Employee participation in decision making  Communication  Pay and process

18. Copyright  2003 McGraw-Hill Australia Pty Ltd. PPTs t/a Human Resource Management in Australia: Strategy-People-Performance by De Cieri & Kramar 13-18

19. Copyright  2003 McGraw-Hill Australia Pty Ltd. PPTs t/a Human Resource Management in Australia: Strategy-People-Performance by De Cieri & Kramar 13-19 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.