Chapter 9 - Recognizing Employee Performance with Pay Flashcards
What is agency theory?
a theory focusing on the divergent interests and goals of the organization’s stakeholders and the ways the employee compensation can be used to align these interests and goals.
What are principals?
In agency theory, people who seek to direct another person’s behaviour.
What are Agents?
In agency theory, people who are expected to act on behalf of a principal.
What is reinforcement theory?
EL Thorndike’s law of effect states that a response followed by a reward is more likely to recur in the future. Therefore, a good response with a lack of a reward makes it less likely to recur.
What is expectancy theory?
Motivation is a function of valence, instrumentality, and expectancy
- Expectancy theory emphasizes expected rewards.
- It focuses on the effects of incentives.
What is the concept of “pay at risk”?
Pay at risk is pay-for-performance. The risk part is the variation in pay based on the performance of an employee.
What are the different types of pay-for-performance?
There are 6 different types of pay for performance:
Merit pay Incentive pay Profit Sharing Ownership Gain sharing Skill based pay
How does merit pay work?
- there are changes in base pay given performance
- these changes occur annually
- performance is measured through a supervisors appraisal of individual performance
- over time pays better performers
- the relationship between pay and performance varies
- stems a culture of individual competition
How does incentive pay work?
- through weekly bonuses, based on individual output
- there is a clear performance-reward connection
- pays higher performance more
- stems a culture of individual competition
- costs to set and maintain acceptable standards
- sales positions most common type of compensation
How does profit sharing work?
- paid through semi-annual or annual bonuses based on organizational profit
- strong motivation in small firms
- benefits all employees if plan works out
- creates a culture of knowledge and cooperation
- relates costs to ability to pay
- can be used in all work
How does ownership compensation work?
- Through awarded equity changes when shares are sold, based on company share returns
- strong motivation in small firms
- creates a culture of ownership and cooperation
- relates costs to ability to pay
- can be effective in all types of work
How does gain sharing work?
- through monthly or quarterly bonuses based on production of the unit
- strong motivation in small firms
- cultivates cooperation and problem solving within unit
- cost to set and maintain acceptable standards
- effective for all types of work
How does skill-based pay work?
- through changes in base pay when skills or competencies are acquired
- encourages learning
- attracts learning oriented employees
- creates a learning and flexible org.
- costs are the training and certification employees need
- only works for jobs with significant skill depth or breadth
What are incentive effects?
Incentive effects are the observed increase (or decrease) in productivity due to switching to an incentive based pay structure
What are sorting effects?
Sorting is a type of incentive effect that happens when an incentive program is implemented. It’s the productivity gained from high performers remaining in the company, while low level employees are replaced by new high or medium performers.
