1. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved. 9-1 Pay for Performance: The Evidence Chapter 9

2. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved. 9-2 What Does Employee Performance Depend On? Employee performance = f (S,K,M) where: S = Skill and ability to perform task K = Knowledge of facts, rules, principles, and procedures M = Motivation to perform

3. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved. 9-3 What Behaviors Do Employers Care About?  How do we get good employment prospects to join our company?  How do we retain these good employees once they join?  How do we get employees to develop skills for current and future jobs?  How do we get employees to perform well on their current job?

4. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved. 9-4 In the simplest sense, motivation involves three elements: 1. What is important to a person, and 2. Offering it in exchange for some 3. Desired behavior What Motivates Employees?

5. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved. 9-5 Exhibit 9.2: Motivation Theories  Content Theories - Identify what is important to a person  Maslow’s Need Hierarchy  Herzberg’s 2-Factor Theory  Process Theories - Emphasis placed on nature of exchange  Expectancy Theory  Equity Theory  Agency Theory  Reinforcement Theories - Focus on desired behavior  Goal Setting  Reinforcement

6. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved. 9-6 Exhibit 9.3: Components of a Total Reward System 1. CompensationWages, commissions and bonuses 2.. BenefitsVacations, health insurance 3. Social interactionFriendly workplace 4. SecurityStable, consistent position and rewards 5. Status / recognitionRespect, prominence due to work 6. Work varietyOpportunity to experience different things 7. WorkloadRight amount of work (not too much, not too little) 8. Work importanceIs work valued by society 9. Authority / control / autonomyAbility to influence others; control own destiny 10. AdvancementChance to get ahead 11. FeedbackReceive information helping to improve performance 12. Work conditionsHazard free 13. Development opportunityTraining to learn new knowledge / skills / abilities

7. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved. 9-7 Wage Components Wage Components Across the Board Increase Across the Board Increase Cost of Living Increase Cost of Living Increase Base Pay Merit Pay Lump Sum Bonus Lump Sum Bonus Individual Incentive Plans Individual Incentive Plans Success Sharing Plans Success Sharing Plans Gain Sharing Profit Sharing Risk Sharing Plans Risk Sharing Plans Exhibit 9.4: Wage Components

8. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved. 9-8  Do people join a firm because of pay?  Do people stay in a firm (or leave) because of pay?  Do employees more readily agree to develop job skills because of pay?  Do employees perform better on their jobs because of pay? Does Compensation Motivate Behavior: Specific Comments

9. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved. 9-9 Exhibit 9.5: Examples of Group Incentive Plans Company Pay Component Corning Competitive Base Pay. Group Bonus based on meeting certain quality measures, customer satisfaction measures, and protection targets. Plant Manager base pay 25 percent below market. Five percent of excess over target goes to bonus. Bonus often equals base pay in amount. Competitive Base Pay. All employees get stock options equal to 10 percent of base pay. Employees share in corporate triumphs and failures as stock prices rise or fall. Nucor PepsiCo

10. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved. 9-10 Exhibit 9.7: Overall Effectiveness of Alternative Reward Plans

11. McGraw-Hill/Irwin © 2005 The McGraw-Hill Companies, Inc. All rights reserved. 9-11 Designing A Pay-For-Performance Plan  Efficiency  Strategy  Structure  Standards  Objectives  Measures  Eligibility  Funding  Equity/Fairness  Distributive justice  Procedural justice  Compliance  Comply with existing laws  Enhance and maintain firm’s reputation