chapter 9 - pay for performance (the evidence) Flashcards
class question: the primary solution of compensation…
is to develop a fair and competitive pay structure.
class question: what is part of the total compensation strategy/strategic compensation choices
- internal alignment
- external competitiveness
part four (chapters 9-11) main topics
Part Four (Ch 9-11) we bring people into the equation, which complicates things (people aren’t robots) – we need to consider performance or other criteria for how we pay people and how employee contributions factor into differentiate pay based on things like performance, behaviors, impact, seniority
Chapter 9 & 10
- How do we measure and reward employees who hold the same job and perform differently?
- If we do differentiate, what behaviors do employers care about and what does it take to get these behaviors?
- What performance standard should be measured? Results, impact, attitude, behaviors, potential,…
- Does compensation motivate behavior?
- Designing a Pay-for-Performance Plan
PERFORMANCE IMPACT: THE WHAT AND THE HOW
Organizational strategy is the guiding force that determines what
employee behaviors are needed
HR and our rewards strategies and practices should be designed to help employees behave in a way that
support achievement of the company’s strategic
Organizational success ultimately depends on human behavior which
which is influenced by HR practices (remember HR practices are a cascade from org strategy)
Goals of Compensation
Reinforce desired behaviors and well-designed pay systems:
ARM
- Make it easier to recruit and hire good employees (attraction)
- Ensure good employees stay with the company (retention)
- Motivate:
a. Encourage employees to perform well on their jobs - take their knowledge & abilities and apply in ways that contribute to organizational performance
b. In addition, part of compensation is to motivated employees to build further knowledge and skills so they remain relevant (development)
The Big Picture, or
Compensation Can’t Do It Alone!
** Behavior (or Performance) = f (A,M,E) **
selection = ability
performance management = motivation
environment (opportunity) = org design
take-away: compensation alone can’t change behavior
Herzberg’s Two-Factor Principles
Basic pay must be enough to provide individuals with the economic means to meet hygiene needs but it won’t motivate
Do Incentives Work?
Incentives work in some situations and not in others:
- A low-incentive component is appropriate in organizations with highly variable annual performance
- Larger-incentive components are appropriate in companies with stable annual performance
- Individual employee performance varies
- Companies offering an array of rewards as part of the compensation package are better able to get employees to adjust, be flexible, and show commitment
Organizations should address the following four questions:
- How do we attract good employment prospects to join our company?
Job characteristics, company brand, selection process are also key elements - How de 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 (motivate them) to perform well while they are there?
The compensation challenge is to design rewards that enhance job performance
From the Research: What is Important to Today’s Workforce?
- Top motivating factor: Competitive base pay
- Strong motivating factors: Career opportunity and interesting/challenging work
- Weak motivating factor: Traditional merit increases
- Main issues to address: Tying competitive base pay and incentives to the value and results each employee brings to the company.
- Stock/equity is only a motivator if the company has competitive base pay, career opportunities and interesting/challenging work
Compensation is just
one of many rewards that influence employee behavior; letting employees “blend” their own rewards because different rewards have different value to different people
But ultimately, for most, compensation is the great equalizer – throw money at any problem or gap and it usually helps, at least in short term
Motivation Theories
One set of theories look at what’s important to people
A second set of theories focus on the nature of the exchange – company rewards in exchange for desired employee behaviors
Essential Compensation and Performance Practices that Drive Performance Optimization
performance optimization tools:
- market value: purpose of base pay
- measure results and demonstrate competencies - impact/results: purposes of variable pay
- align incentive plans to measure and reward results and impact on business success
Sorting and Incentive Effects
Pay for performance generally has a positive effect
Linking pay to performance can improve performance through two mechanisms:
1. Incentive effect: pay can motivate better performance
2. Sorting: people make decisions based on what’s important to them (risk adverse person won’t take a job with high mix of variable pay)
The incentive effect means pay can motivate current employees to perform better
The sorting effect means people sort themselves into and out of jobs based on what is important to them
Sorting effects are more important to the degree that high performers create a disproportionately high amount of value for organizations
do people join a firm because of pay?
Job candidates look for organizations with reward systems that fit their personalities:
Materialistic – more concerned about pay level
Low self-esteem – wants large, decentralized organization with little pay for performance
Risk takers – want more pay based on performance
Risk-averse – want less performance-based pay
Individualists – want pay plans based on individual performance, not group performance
Equity theory documented that workers who feel unfairly treated in pay react by leaving the firm
Dissatisfaction with pay may be a key factor in turnover
Even the way an organization pays can impact turnover
Poor performers leave when the pay systems are based on individual performance; converse true too, group incentives may lead to higher turnover for high performers
Besides money, other rewards influencing the decision to stay:
- Job satisfaction – work enjoyment
- Bonuses and benefits
- Social – coworkers are fun
- Organizational commitment – not a job jumper, loyal
- Organizational prestige – company or industry respect
NOT ALL TURN OVER IS BAD
do employees perform better because of pay?
A well-designed plan linking pay to behaviors generally results in better individual and organizational performance
Numerous studies and evidence shows a correlation between performance and pay, merit pay, bonuses, and profit-sharing
Research also shows:
- Better individual performance if rewards are tied to performance
- Incentives based on individual performance vs. team-based incentives are more attractive to high performers
- Variable pay had much stronger influence on performance than base pay
- Many say intrinsic rewards (self-motivation, enjoying the work) generally more impactful on performance than extrinsic rewards (money, recognition), but not for all
Again, Employers Want:
- To attract good employment prospects to join our company
- To retain these good employees once they join
- To motivate employees to perform well while they are working for the company
- To motivate employees to develop skills for current and future jobs
attract, retain, motivate
Should Pay be Tied to Performance?
How does performance improvement occur?
One view suggests the incentive effect and the sorting effect
Experts estimate that for every dollar spent on any performance-based pay plan, it yields $2.34 more in organizational earnings
Recognize that such plans can, and do, fail; poorly implemented incentive pay plans can hurt rather than help
last word…
pay unfairly, it’s more fair
Compensation is but one of many rewards influencing behavior
Employers may overpay in cash and miss the opportunity to let employees construct a satisfying and less-expensive reward package
