8 - Rewarding Talent: Pay for Performance

Question 1

The three general factors upon which employee behavior depends are:

• (1) M = ______
• (2) A = ______
• (3) E = ______

This is expressed in an equation that says: Employee behavior = f (__,__,__).

Answer 1

• Motivation
• Ability
• Environmental obstacle

M,A,E

Question 2

what four questions should organizations ask themselves regarding the compensation of their employees?

• (1) How do we _____ good employment prospects to join our company?
• (2) How do we _____ these good employees once they join?
• (3) How do we get employees to _______ for current and future jobs?
• (4) How do we get employees to _______ while they are here?

Answer 2

1. attract
2. retain
3. develop skills
4. perform well

Question 3

Motivation involves three elements as follows:

(1) what is _______ to a person, and
(2) offering it in ______ for
(3) some ________

On the first element, some data suggest employees prefer pay systems that recognize individual performance, changes in cost of living, seniority and the market rate, to name the most important factors. to narrow down specific employee preferences though, there has been some work on what is important to employees. called ______-style or flexible compensation, it develops the idea that only the individual employee knows what package of rewards would best suit his or her personal needs. employees who hate risk could opt for more base pay and less incentive pay. trade-offs between pay and benefits also could be selected.

Answer 3

important

exchange

desired behavior.

cafeteria

Question 4

Maslow’s Needs Hierarchy

1. People are motivated by ______.
2. Needs form a ______ from most basic to higher order needs.
3. Needs are never _____; they operate cyclically.
4. Higher order needs become _______ after lower order needs have been met.
5. When needs are not met, they become ______.

SO:

• 1. Base pay must be set high enough to provide individuals with the ______ means to meet their basic living needs.
• 2. An ____ program will not be motivating since it restricts em- ployees’ ability to meet lower order needs.
• 3. _______ plans may be motivating to the extent they help employees pursue higher order needs.

Answer 4

1. inner needs
2. hierarchy
3. fully met
4. motivating
5. frustrating
6. economic
7. at-risk
8. Success-sharing

Question 5

Herzberg’s two-factor theory

Two types of motivators drive employees. These are hygiene factors and satisfiers.

• Hygiene, or ______, factors in their absence prevent behaviors, but in their presence cannot motivate performance. These are related to basic living needs, se-curity and fair treatment.
• Satisfiers, such as _______, _______ and achievement motivate performance.

SO:

• Base pay must be set high enough to provide individuals with the economic means to meet hygiene needs, but it cannot motivate _______.
• Performance is obtained through ______—payments in excess of that required to meet basic needs.
• Performance-based pay is motivating to the extent it is connected with meeting employees’ needs for recognition, pleasure attainment, achievement and the like.
• Other factors such as _______ atmosphere, responsibility, type of work and working conditions influence the efficacy of performance-based pay.

Answer 5

• maintenance
• recognition
• promotion
• performance
• rewards
• interpersonal

Question 6

Expectancy theory

• 1. Motivation is the product of three perceptions: ______, ______, ______.
• 2. _______ is employees’ assessment of their ability to perform required job tasks.
• 3. ________ is employees’ beliefs that requisite job perfor- mance will be rewarded by the organization.
• 4. ______ is the value employees attach to the organization re- wards offered for satisfactory job performance.

SO:

• 1. Job tasks and responsibilities should be ______
• 2. The _____ link is
• critical.
• 3. Performance-based pay returns must be large enough to be seen as _____.
• 4. People choose the behavior that leads to the ______.

Answer 6

1. expectancy, instrumentality and valence.
2. Expectancy
3. Instrumentality
4. Valence
5. clearly defined.
6. pay-performance
7. rewards
8. greatest reward

Question 7

equity theory

1. Employees are motivated when perceived outputs, that is pay, are equal to _______, that is effort, work behaviors.
2. A disequilibrium in the output-to- input balance causes ______.
3. If employees perceive that others are paid more for the same effort, they will react negatively to correct the output-to-input balance.

SO:

1. The ________ is critical. Increases in performance must be matched by commensu- rate increases in pay.
2. Performance inputs and expected outputs must be clearly ______ and identified.
3. Employees evaluate the adequacy of their pay via ________ with other employees.

Answer 7

• perceived inputs
• discomfort
• pay-performance link
• defined
• comparisons

Question 8

Reinforcement theory

• Rewards reinforce ________.
• Rewards must follow directly after ______ to be reinforcing.
• Behaviors that are not rewarded will be _______.

SO:

• 1. ________ payments must follow closely behind performance.
• 2. Rewards must be ________ to desired performance objectives.
• 3. Withholding _______ can be a way to discourage unwanted behaviors.
• ______of payouts is very important.

Answer 8

• performance
• behaviors
• discontinued
• Performance-based
• tightly coupled
• payouts
• Timing

Question 9

goal-setting theory

• Challenging performance goals influence greater ______ and duration in employee performance.
• Goals serve as ______ standards to which employees can compare their performance.
• Individuals are motivated to the extent that goal achievement is combined with receiving ________.
• 1. Performance-based pay must be ______ upon achievement of important performance goals.
• 2. Performance goals should be ______ and specific.
• 3. The amount of the incentive reward should match the goal _____.
• ________ is important. Employees must believe they can influence performance targets.
• Performance targets should be communicated in terms of specific, _______ goals.

Answer 9

• intensity
• feedback
• valued rewards
• contingent
• challenging
• difficulty
• Line-of-sight
• difficult

Question 10

Agency theory

• _____ directs and motivates employee performance.
• Employees prefer ______ wages to performance-based pay.
• If performance can be accurately _______, payments should be based upon satisfactory completion of work duties.
• If performance cannot be monitored, pay should be aligned with achieving __________
• 2. Employees dislike risky pay and will demand a _______ in exchange for accepting performance-based pay.
• 3. Performance-based pay can be used to direct and induce employee performance.
• 1. Performance-based pay is the optimal compensation choice for more _______ jobs where monitoring employees’ work is difficult.
• 2. Performance targets should be tied to organizational ____.
• 3. Use of performance-based pay will require higher _____
• opportunity.

Answer 10

• Pay
• static
• monitored
• organizational objectives
• wage premium
• complex
• goals
• total pay

Question 11

Maslow’s and Herzberg’s theories fall in the category of theories that focus on _______. People have certain needs, such as physiological, security and self-esteem, that influence behavior. Although neither theory is clear on how these needs influence behavior, presumably if organizations offer rewards that satisfy one or more needs, employees will behave in desired ways. The issue of ______ clearly drives flexible pay, with employees choosing from a menu of pay and benefit choices.

Answer 11

content

needs

Question 12

A second set of theories, best exemplified by expectancy theory, equity theory and agency theory, focus on the nature of the _______.

Jobs are evaluated using a common set of compensable factors in part to let employees know that an explicit set of rules governs the evaluation process. Expectancy theory argues that people behave as if they cognitively evaluate what behaviors are possible in relation to the value of rewards offered in exchange for those behaviors. According to this theory, people choose the behaviors that yield the most satisfactory exchange.

Equity theory also focuses on what goes on inside an employee’s head. Equity theory argues that people are highly concerned about equity or fairness of the exchange process. Employees look at the exchange as a ratio between what is expected and what is received.

Under agency theory, employees are depicted as agents who enter an exchange with principals. It is assumed that both sides to the exchange seek the most favorable exchange possible and will act opportunistically if given a chance. That is, they try to get by with doing as little as possible to satisfy the contract. ______ is a major element in this theory, because it is used to keep employees in line. Employers identify important behaviors and important outcomes and pay specifically for achieving desired levels of each.

Answer 12

exchange

Compensation

Question 13

Finally, at least one of the theories focuses on the third element of motivation—desired behavior. A review of this literature indicates that the vast majority of studies on goal setting find a positive impact of goal setting on ______. Workers assigned “hard” goals consistently do better than workers told to “________.”

Answer 13

performance

“do their best”

Question 14

in the past, employees learned what behaviors were important as part of the _________ process or as part of the performance management process. compensation might have rewarded people for meeting certain expectations, but usually the compensation package was not designed to be one of the signals about expected performance.

Today, progressive companies ask questions, such as, “what do we want our compensation package to do in terms of _________ to behave in desired ways?” compensation is then designed to support this behavior.

Answer 14

socialization

“motivating employees”

Question 15

A total rewards system consists of the following:

(a) Compensation—Wages, commissions, bonuses
(b) Benefits—Vacations, health insurance, retirement plans and other types of bene ts
(c) ________ Interaction—Friendly workplace
(d) ________—Stable, consistent position and rewards
(e) Status/Recognition—Respect, prominence due to work
(f) Work ______—Opportunity to experience different things
(g) ______—Right amount of work (not too much, not too little)
(h) Work ______—Work is valued by society
(i) Authority/Control/Autonomy—Ability to in uence others; control own destiny
(j) Advancement—Chance to get ahead
(k) Feedback—Receive information helping to improve performance
(l) Work Conditions—Hazard-free
(m) _______ Opportunity—Formal and informal training to learn new knowledge/skills/abilities.

Answer 15

Social

Security

Variety

Workload

Importance

Development

Question 16

aspects of a total rewards system

Some business organizations have discovered fun, or a good social environment, as a reward. Some companies promote a business culture of fun that encourages employees to find ways to make their jobs more interesting and relevant to them personally. In some cases this has been accomplished without using ______ incentives as a major source of competitive advantage.

______ as an issue is creeping into the domain of compensation. The trend today is toward less stable and secure compensation packages. The very design of compensation systems today contributes to employee instability and insecurity. There is evidence that compensation at risk leaves employees both less satisfied with the pay level and with the process used to determine pay. We define risk in terms of _______ of income and the ability to accurately predict income level from year to year.

Employees increasingly are expected to bear a share of the risks that businesses have solely borne in the past. It’s not entirely clear what impact this shifting of risk will have in the long run, but some authors are already voicing concerns that efforts to build employee loyalty and commitment may be an early casualty of these pay systems. Some research suggests that employees may need a ________ (higher pay) to stay and perform in a company with pay at risk. Even a premium might not work for employees who are particularly risk-averse. Security-driven employees actually might accept lower wages if they come in a package that is more stable.

Answer 16

monetary

Security

stability

risk premium

Question 17

A generic category of pay add-on (variable pay) which is tied to some measure of group performance, not individual performance.
Not added into base pay. Distinguished from risk- sharing plans below because employees share in any success—performance above standard—but are not penalized for performance below standard.

All of these plans have risks noted in above pay components plus the risk associated with group performance measures. Now individual worker is also dependent upon the performance of others included in the group.

Answer 17

Success-Sharing Plans

Question 18

Differs from profit sharing in that goal to exceed is not financial performance of organization, but some cost index (e.g., labor cost is most common, might also include scrap costs, utility costs).

Less risk to individual than profit sharing because performance measure is more controllable.

Answer 18

Gain-sharing

Question 19

Generic category of pay add-on (variable pay) that differs from success sharing in that employee shares not only in the successes, but is also penalized during poor performance years. Penalty is in form of lower total com- pensation in poor corporate performance years. Reward, though, is typically higher than for success-sharing programs in high-performance years.

Greater risk than success- sharing plans. Typically, employees absorb a “temporary” cut in base pay. If performance targets are met, this cut is neutralized by one component of variable pay. Risk to employee is increased, though, because even base pay is no longer totally predictable.

Answer 19

Risk-Sharing Plans

Question 20

do people join a rm because of pay?

Answer 20

Yes - Pay is perceived as being more objective than other aspects of the total pay package

Question 21

do people stay in a firm or leave it because of pay?

There is clear evidence that poor performers are more likely to leave an organization than good performers. ______ theory research suggests that workers who feel unfairly treated in pay react by leaving the firm for better situations. This is particularly true under ______ conditions. Turnover is much higher for poor performers when pay is based on individual performance.

Conversely, group incentive plans may lead to more turnover of ________. Data suggest dissatisfaction with pay can be a key factor in turnovers. Too little pay triggers feelings of unfair treatment. Pay that employees find reasonable can help reduce turnover. Recent efforts to use different types of compensation as a tool for retaining workers have focused on what is called _______. One way to retain these workers is to develop a variable pay component for each project.

Answer 21

Equity

incentive

better performers

scarce talent

Question 22

do employees more readily agree to develop job skills because of pay?

The answer to this question is _______. Skill-based pay is intended, at least partially, to pay employees for learning new skills. These skills will help employees perform better on current jobs and adjust more rapidly to demands on future jobs. Evidence is starting to accumulate that pay for skill may not increase productivity but does focus people on believing in the importance of quality and in turning out significantly higher quality products.

Answer 22

not known

Question 23

Although there are exceptions, generally, linking pay to behaviors of employees results in better individual and organizational performance. A comprehensive review reports that ____ of 42 studies looking at merit pay claimed performance increases when __________

Answer 23

40

pay is tied to performance.

Question 24

do employees perform better on their jobs because of pay? ____

Evidence exists that management and workers alike believe pay should be tied to performance. The role that performance levels should assume in determining pay increases is less clear-cut for _______ workers. Unionized workers prefer ______ rather than performance as a basis for pay increases. Part of this preference may stem from a distrust of subjective performance mea- surement systems.

When the impact of pay on group performance is considered, the evidence is _______. Most well-controlled studies where companies base part of pay on some measure of corporate or division performance report increases in performance of about __to ____% per year. Sometimes the failure arises, ironically, because the incentive works too well, leading employees to exhibit rewarded behaviors to the exclusion of other desired behaviors.

Answer 24

Yes

blue-collar

seniority

mixed

4-5

Question 25

pay-for-performance plan (efficiency, equity and compliance):

Efficiency involves three general areas of concern. These are strategy, structure and standards.

Strategy must answer the question: Do pay-for-performance plans support corporate _______? The most difficult question of all—How much of an ______ makes a difference?—must be ascertained.

Regarding structure, we must answer the question: Is the structure of the organization sufficiently _______ to allow different operating units to create exible variation on a general pay-for-performance plan?

Standards are the third unit under efficiency we must be concerned about. Specifically, standards need to be concerned about _______—Are they specific yet flexible?

Answer 25

objectives

increase

decentralized

objectives

Question 26

pay-for-performance plan (efficiency, equity and compliance):

The second design objective is to ensure the system is fair or has equity for employees. Two types of fairness are concerns for employees. The first type is fairness in the amount that is distributed to employees. This type of fairness is labeled ________ justice. Does an employee view the amount of compensation received as fair? Perceptions of fairness here depend on the amount of compensation actually received relative to ______ compared against some relevant standard.

Several of the components of this equity equation are frustratingly removed from the control of the typical supervisor or manager working with employees. This is influenced by external market conditions, pay policy decisions of the organization and the occupational choice made by the employee.

The second type of equity over which managers do have somewhat more control is labeled ______ justice. Employees are also concerned about the fairness of procedures used to determine the amount of rewards they receive. Evidence suggests that organizations that use fair procedures and supervisors who are viewed as fair in the means they use to allocate rewards are perceived as more trustworthy and command higher levels of _______. A key element in fairness is ________. Employees want to know in advance what is expected of them. They want the opportunity to provide input into those standards or expectations.

Answer 26

distributive

input

procedural

commitment

communications