Chapter 9 - Pay for Performance, the Evidence Flashcards
Describe the link between organizational strategy and employee behavior (Exhibit 9.1, p. 314 or 308)
- Organizational strategy is the guiding force that determines what kind of employee behaviors are needed.
- Pay and other rewards should reinforce desired behaviors.
- Performance management should reinforce desired behaviors by making sure that what is expected of employees, is what is measured in regular performance reviews, is consistent with the compensation practices.
- The culture of the organization should point in the same direction.
- HR needs to establish policies and practices that minimize the chance that outside distractors hinder performance.
What are the 7 motivational theories?
• Maslow’s hierarchy of needs
• Herzberg’s two factor theory
• Expectancy theory
• Equity theory
• Reinforcement theory
• Goal setting theory
• Agency theory
Explain Maslow’s hierachy of needs.
Maslow’s hierarchy of needs - people are motivated by inner needs. He needs form a hierarchy from the most basic (food and shelter) to higher order (self-esteem, love commas self-actualization). Needs are never fully met; They operate cyclically. Higher order needs become motivating after lower needs have been met. When needs are not met, they become frustrating.
Predictions about performance-based pay:
1. Base pay must be set high enough to provide individuals with economic means to meet their basic living needs.
2. An at-risk program will not be motivating since it restricts employees ability to meet lower order needs.
3. Success sharing plans may be motivating to the extent they help employees pursue higher order needs.
Why it’s important:
1. Performance based pay may be demotivating if it impinges upon employees’ capacity to meet daily learning needs.
2. Incentive pay is motivating to the extent it is attached to achievement, recognition, or approval.
Explain Herzberg’s two factor theory.
Herzberg’s two factor theory - employees are motivated by two types of behaviors: hygiene factors and satisfiers. Hygiene, or maintenance, factors in their absence prevent behavior. But in their presence cannot motivate performance. They are related to the basic living needs, security, and fair treatment. Satisfiers such as recognition, promotion, and achievement, motivate behavior.
Predictions about performance-based pay:
1. base pay must be set high enough to provide individuals with the economic means to meet hygiene needs, but it cannot motivate performance.
2. Performance is obtained through rewards - payments in excess that required to meet basic needs.
3. Performance based pay is motivating to the extent it is connected with meeting employees needs for recognition, pleasure attainment, achievement, and the like.
4. Other factors such as interpersonal atmosphere, responsibility, types of work, and working conditions influence the efficacy of performance-based pay.
Why is it important:
1. pay level is important must meet minimum requirements before performance-based pay can operate as motivator.
2. security plans will include minimum, but not extra performance. Success sharing plans will be motivating. At risk plans will be demotivating.
3. Other working conditions in the working relationship influence the effectiveness of performance-based pay.
Explain Expectancy theory
Expectancy theory - Motivation is the product of 3 perceptions: expectancy, instrumentality, and valence. Expectancy: what is employees’ assessment of their ability to perform required job tasks. Instrumentality: is employee’s belief that requisite job performance will be rewarded by the organization. Valence: Is the value employees attached to the organization’s rewards offered through satisfactory job performance.
Predictions about performance-based pay:
1. job task and responsibilities should be clearly defined.
2. The pay performance link is critical.
3. Performance based pay returns must be large enough to be seen as rewards.
4. People choose the behavior that leads to the greatest reward.
Why is it important:
1. larger incentive payments are better than the smaller ones.
2. Line of sight is critical employees must believe they can influence performance targets.
3. Employee assessments of their own ability are important organizations should be aware of training and resource needs required to perform at Target levels.
Explain Equity theory.
Equity theory - employees are motivated when perceived outputs like pay are equal to perceived inputs like effort work and behavior. A disequilibrium in the output to input balance causes discomfort. If employees perceive that others are paid more for the same effort, they will react negatively to correct the output to input balance.
Predictions about performance-based pay:
1. the pay performance link is critical increase in performance must be matched by increases in pay.
2. Performance inputs and expected outputs must be clearly defined and identified.
3. Employees evaluate the adequacy of their pay via comparisons with other employees.
Why is it important:
1. performance measures must be clearly defined, and employees must be able to affect them their work behavior.
2. If payouts do not match expectations, employees will react negatively.
3. Fairness and consistency of performance-based pay across employees in an organization is important.
4. Since employees evaluate their pay effort balance in comparison to other employees’ relative pay matters.
Explain Reinforcement theory.
Reinforcement theory - rewards reinforce performance. Rewards must follow directly after behaviors to be reinforced. Behaviors are not rewarded will be discontinued.
Predictions about performance-based pay:
1. performance based payments must follow closely behind performance.
2. Rewards must be tightly coupled to desired performance objectives.
3. Withholding payouts can be a way to discourage unwanted behavior.
Why is it important:
1. timing of payouts is very important.
Explain Goal Stetting theory.
Goal setting theory - Challenging performance goals influence greater intensity and duration and employees performance. Goals serve as feedback standards to which employees can compare their performance. Individuals are motivated to the extent that goal achievement is combined with received value awards.
Predictions about performance-based pay:
1. performance based pay must be contingent upon achievements of important performance goals.
2. Performance goals should be challenging and specific.
3. The amount of the incentive reward should match the goal difficulty.
Why is it important:
1. line of sight is important employees must believe they can influence performance targets.
2. performance targets should be communicated in terms of specific difficult goals.
3. Feedback about performance is important.
4. Performance based payout should be contingent upon goal achievement.
Explain Agency theory.
Agency theory - pay directs and motivates employee performance. Employees prefer static wages to performance-based pay period if performance can be accurately monitored, payments should be based upon satisfactory completion of work duties. The performance cannot be monitored pay should be aligned with achieving organizational objectives.
Predictions about performance-based pay:
1. performance based pay must be tightly linked to organizational objectives.
2. Employees dislike risky pay and will demand a wage premium in exchange for accepting performance-based pay.
3. Performance based pay can be used to direct and induce employee performance.
Why is it important:
1. performance based pay is the optimal compensation choice for more complex jobs where monitoring employees work is difficult.
2. Performance targets should be tied to organizational goals.
3. Use of performance-based pay will require higher total pay opportunity.
Does compensation motivate employees to join a firm?
• Level of pay and pay system characteristics influence the job candidate’s decision to join a firm.
• Job candidates look for organizations with reward systems that fit their personality. Evidence suggests talented employees are attracted to companies that have strong links between pay and performance.
• Organizations should design the reward system to attract people with desired personalities and values.
Does compensation motivate employees to stay with (or leave) a firm?
• Poor performers are more likely to leave an organization than good performers.
• Turnover is higher for poor performers when pay is based on individual performance.
• Group incentive plans lead to more turnover for better performers.
• Pay can be a factor in deciding to stay or leave. Dissatisfaction with pay can be a key factor in turnover.
• Besides money, other rewards influence the decision to stay in a firm - Job satisfaction, pay and benefits, social, organizational commitment, and organizational prestige.
Does compensation motivate employees to be more agreeable toward developing job skills?
• Maybe the answer isn’t known. Skill-based pay is intended to pay employees for learning new skills. One complaint about skill-based pay centers on cost implications -m Employees request training, spurred by the promise of skill-based increments. Poorly administered plans, allowing more people to acquire certification and a skill than are actually required, create cost and efficiencies. Leads to plan abandonment.
• Evidence is starting to accumulate that pay for skill may not increase productivity, but it does focus people on believing in the importance of quality and in turning out significantly higher quality products.
Does compensation motivate employees to perform better within their jobs?
• Rewards motivate performance: Mercer - release study indicating which rewards motivate behavior. A well-designed plan linking pay to behaviors of employees generally results in better individual and organizational performance.
• Another report looked at merit pay showed performance increases when the pay was tied to performance.
• Critic, Alfie Kohn, argues that incentives are both morally and practically wrong. The moral argument suggests that incentives are flawed because they involve one person controlling another. Kohn also suggests that incentive systems can actually harm productivity comma a decidedly negative practical outcome. His conclusion is that rewarding a person for performing a task reduces interest in that task - extrinsic rewards (money) reduce intrinsic rewards (enjoyment of the task for its own sake).
o The counter argument to this note that employment is a reciprocal arrangement.
• Do employees think any link at all should be made between pay and performance? Evidence indicates that management and workers alike believe pay should be tied to performance.
• Linking pay to performance occurs through two mechanisms incentive effect and sorting effect.
o incentive effect - pay can motivate people to perform better.
o sorting effect – people sort themselves by what is important to them.
