1. Pay for Performance © Nancy Brown Johnson, 2002

2. Seniority/Longevity Based Pay Rewards employees for tenure Rewards employees for tenure Way to keep investment in human capital Way to keep investment in human capital Advantages Advantages Objective Objective Fair Fair Disadvantages Disadvantages Fails to distinguish performance differences Fails to distinguish performance differences Difficult to use strategically Difficult to use strategically

3. Pay for Performance Motivation to perform well Motivation to acquire skills

4. Expectancy Theory Motivation = Expectancy X Instrumentality X Valence Expectancy - can I do the work? Instrumentality - if I do the work, will I be rewarded? Valence - do I value the reward?

5. Implications for Compensation Valence Instrumentality Perceptions

6. Required Conditions for Performance Based Pay Employees must be able to control performance is performance dependent on others? Better performance must help organization Must be able to measure performance cheaply and accurately Organization must give meaningful increases Pay increases must be tied to performance

7. Agency Theory principals as owners agents as managers pay motivates performance if performance can be monitored  pay based on work if performance cannot be monitored  pay aligned with organizations goals

8. Agency Theory: Implications Performance based pay can induce employee performance Performance based pay linked to organization’s objectives Employees will need premium for pay at risk

9. Can Compensation Motivate? On average, organizations with pay for performance have better overall performance Which way is causality??

10. Decision to Join Firm People join because of pay Depends on individual characteristics MaterialisticPay level Low self-esteemNo pay for performance Risk takersPay for performance IndividualistsPlans based on individual performance

11. Pay and Retention Absenteeism reduced when tied with pay Reduced turnover when skill based pay Group incentives lead to turnover Individual incentives lead to retention

12. Merit Pay Characteristics Rewards past individual performance Pay is linked to performance appraisal results Feedback is infrequent

13. Merit Pay Implications Doesn’t work when performance differences due to system Discourages teamwork Poor performance appraisal system will undermine Pay increases not representative of performance Contributes to entitlement mentality

14. Individual Incentives – – Most jobs have no physical output – – Individuals focus only on the incentive – – Does not fit with team approach – – Rewards output at the expense of quality or service

15. Group Incentives Advantages   Encourages employees to think like OWNERS   Payments are not part of base pay   Encourages teamwork Disadvantages   Does not make instrumentality connection   Many plans defer actual payments   Few plans pay out during business downturns   Often costs more

16. Summary Pay can motivate Remember the problem with incentives isn’t that they don’t work, they work too well Incentives must be set in a context that encourages employees not to just pay attention to rewarded behaviors