2. MGTO 231 Human Resources Management Pay for performance Dr. Kin Fai Ellick WONG

3. Prologue How “pay for performance” is different from base compensation and benefits? Why such difference(s) is(are) important? Why don’t we design a compensation system that totally follows the “pay for performance” notion?  Any potential drawbacks of the idea of “pay for performance”?

4. Outline Some basic concepts Types of pay- for-performance plans Potential drawbacks

5. An incentive system A component of a compensation system Rewards are given on the basis of performance Those who contribute more to the firm deserve better rewards An incentive system specifies the regulations to execute the rewards

6. Assumptions Individual employees and work teams differ in how much they contribute to the firm A large degree of the firm’s overall performance depends on the performance of individuals and groups within the firm To attract, retain, and motivate high performers and to be fair to all employees, the firm needs to reward employees on the basis of their relative performance

7. Outline Some basic concepts Types of pay- for-performance plans Potential drawbacks

8. Four basic types Individual-based plans Team-based plans Plantwide plans Corporatewide plans

9. Four basic types Individual-based plans Team-based plans Plantwide plans Corporatewide plans

10. Individual-based plans Identify and reward the contributions of individual employees Most widely used plans in industry Three basic components  Merit pay  Piece-rate system  Awards

11. Merit pay  An increase in base pay, normally given once a year (remember what we have discussed in Performance Appraisal) Piece-rate system  A compensation system in which employees are paid per unit produced

12. Awards  A one-time reward, usually given in the form of tangible prize  Paid vacation, a television set, service medal ( 十年金牌 )

13. Advantages Performance that is rewarded is likely to be repeated (reinforced)  Expectancy theory: people tend to do those things that are rewarded Can shape an individual’s goals over time Helps the firm achieve individual equity

14. Disadvantages What potential disadvantages will there be?  Discuss with your group members and each group should try to give one disadvantage.  Try your best to explain why the disadvantage you suggest is a disadvantage.

15. Disadvantages The quantity-quality tradeoff The power of supervisors becomes very influential  For survival, employees will follow the orders of the supervisors  獻媚, 奉承 (doing what they think the top- management want them to do in order to impress top-management)

16. Four basic types Individual-based plans Team-based plans Plantwide plans Corporatewide plans

17. Individual-based plans are most likely to succeed when The contributions of individual employees can be accurately isolated The job demands autonomy Cooperation is less critical to successful performance OR competition is to be encouraged

18. Team-based plans Normally reward all team members equally based on group outcomes  In forms of bonuses and/or awards  Very common in team ballgame: soccer, basketball (Man. United, LA Lakers, South China, etc.)  Some may be allowed to decide how the bonus will be distributed within group

19. Advantages Foster group cohesiveness  Imagine how Man. United will be if only those who make the goal will be awarded The performance measure on groups has shown to be more accurate and reliable than that on individuals

20. Disadvantages What potential disadvantages will there be?  Discuss with your group members and each group should try to give one disadvantage.  Try your best to explain why the disadvantage you suggest is a disadvantage.

21. Disadvantages Problems of social loafing  The sum of individuals’ output is higher than the whole group output  Free-riding effect Inter-group competition leading to a decline in overall performance  We have important information and you are not allowed to access it

22. Team-based plans are most likely to succeed when It is difficult to single out who did what or identify the relative contribution In flat organizations where team works are common and highly emphasized Employees are committed to their work and are intrinsically motivated  Social-loafing is less likely

23. Four basic types Individual-based plans Team-based plans Plantwide plans Corporatewide plans

24. Plantwide plans Rewards all workers in a plant or business unit based on the performance of the entire plant or unit Not the performance of the whole corporation, but the efficiency within a unit Normally measured in terms of labor or material cost savings compared to an earlier period

25. Three common types  Bonuses  Awards  Gainsharing A portion of the company’s cost savings is returned to workers Usually in the form of a lump-sum bonus

26. Advantages Unlike other forms of incentives, which motivate employees to produce ( 開源 ) more, plantwide plan motivates employees to save ( 節流 ) more Competition between individuals and teams are likely avoided May increase the level of cooperation across workers and teams by giving everyone a common goal

27. Disadvantages What potential disadvantages will there be for the idea of gainsharing?  Discuss with your group members and each group should try to give one disadvantage.  Try your best to explain why the disadvantage you suggest is a disadvantage.

28. Disadvantages What potential disadvantages will there be for the idea of gainsharing?  Protection of low performers because they are hardly detected  Not fair for those units which have long been cost effective

29. Four basic types Individual-based plans Team-based plans Plantwide plans Corporatewide plans

30. The most macro type of incentive programs Reward employees based on the entire corporation’s performance In the forms of  Profit sharing  Employee stock ownership plan

31. Profit sharing  Uses a formula to allocate a portion of declared profits to employees  It is not to directly reward workers for productivity improvements  Some may be given in terms of retirement benefits, other may be given in terms of bonuses

32. Employee stock ownership plan (ESOP)  Rewards employees with company stocks  An outright grant or a favorable price that may be below market value Next media, PCCW, etc.

33. Advantages Financially flexible for the firms – they can automatically adjust the labor downward during economic downturns Increase employee commitment  The employees become part of the owners under the concept of profit sharing and ESOP

34. Disadvantages What potential disadvantages will there be?  Discuss with your group members and each group should try to give one disadvantage.  Try your best to explain why the disadvantage you suggest is a disadvantage.

35. Disadvantages Employees may have little sense of control on their compensation Limited effect on productivity  The connection between individual goal and firm performance is not so tight

36. Outline Some basic concepts Types of pay- for-performance plans Potential drawbacks

37. Potential Drawbacks Do only what you get paid for Decrease intrinsic motivation Decrease job satisfaction Increase stress Negative effects due to competitions between individuals or groups

38. Problems of measurement  Judgment bias, and not all performance can be easily measured Credibility Gap  Some workers do not believe in the performance-reward contingency

39. Conclusion “Pay for performance” is unique in the sense that there is a very clear performance-reward contingency Why don’t we design a compensation system that totally follows the “pay for performance” notion?  Any potential drawbacks of the idea of “pay for performance”?