HR 202 Chapter 09

1. Compensation
Chapter 09
Pay-For-Performance: The Evidence
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What Behaviors Do Employers Care About?
Employers want employees to perform in ways that lead to
better organizational performance.
• HR’s job is to devise policies that lead employees to behave in ways
that support the corporate goals.
Employee behavior is a function of motivation, ability, and
environment.
• Success depends on finding people with ability.
• Pay and other rewards should reinforce desired behaviors.
• The culture should point in the same direction.
If employers fail to recognize skills requirements (HR planning),
it is difficult to arrange training and develop compensation to
reward these new skills.

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Exhibit 9.1: The Cascading Link Between
Organization Strategy and Employee Behavior

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Exhibit 9.2: The Big Picture, or Compensation
Can’t Do It Alone!

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What Behaviors Should Be Reinforced?
Compensation should reinforce the following behaviors.
• Attraction - It should make recruiting and hiring easier.
• Retention – It needs to make sure good employees stay.
• Development – After attracting and retaining good employees,
concentrate on building further knowledge and skills.
• Performance – Compensation should motivate employees to apply
their abilities in ways that contribute to organizational performance.
The impact on performance measures a sound compensation
package.

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Exhibit 9.3: Performance Measurement
Relationship to Compensation Strategy

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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.

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What Is the Conclusion?
Organizations should address the following four questions.
• How do we attract good employment prospects to join our company?
• Job characteristics and recruiter behaviors are 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 to perform well while they are there?
• The compensation challenge is to design rewards that enhance job
performance.

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How to Get These Behaviors – What Theory Says
In the simplest sense, motivation involves what’s important to a
person, and offering that in exchange for some desired behavior.
Data suggests employees prefer pay systems influenced by:
• Individual performance.
• Changes in the cost of living.
• Seniority.
• Market rate.
Flexible compensation allows employees to choose rewards
which best suit their personal needs.

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Motivation Theories
Several theories focus on content – identifying what is important
to people – Maslow and Herzberg.
Other theories focus on rewards in exchange for behaviors.
• Expectancy theory holds that employers choose behaviors that yield
the most satisfactory exchange.
• Equity theory believes people are highly concerned with equity of the
exchange process.
• Agency theory depicts employees as agents who enter an exchange
with principals.
Goal-setting theory focuses on desired behavior.
Self Determination Theory integrates motivation theories under
a broad umbrella.

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What Practitioners Say
In the past, employees learned about expected behaviors
through socialization or performance management.
Now, companies ask, “What do we want our compensation
package to do?”
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.
If employers don’t offer rewards other than money, they may
find that compensation produces unintended consequences.

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Exhibit 9.5: Components of a Total Reward
System

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Wage Components and Risk
Risk is defined in terms of stability of income, or the ability to
accurately predict income level from year to year.
• Base pay is the guaranteed portion of income.
Companies have moved toward compensation programs higher
on the risk continuum.
• New forms of pay are less entitlement-oriented and more linked to the
uncertainties of individual, group, and corporate performance.
• Employees are increasingly expected to share the risks of the
company.
• Some research suggests employees may need a risk premium to stay
and perform in a company with pay at risk.

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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.
Talented employees are attracted to strong links between pay
and performance.
• There is a positive impact of reward choice as long as employees view
the choices available as attractive.

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Do People Stay (or Leave) Because of Pay?
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.
A scarce talent approach of retaining workers may use a pay-for-
performance pay to appeal to those few with the needed skills.
Besides money, other rewards influencing the decision to stay:
• Job satisfaction – work enjoyment.
• Pay and benefits.
• Social – coworkers are fun.
• Organizational commitment – not a job jumper, loyal.
• Organizational prestige – company or industry respect.

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Do Employees Develop Skills Because of Pay?
The answer is unknown.
Skill-based pay is intended to pay employees for learning new
skills that will help with current and future performance.
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.

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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.
Critics contend that incentives are both morally and practically
wrong.
• Alfie Kohn suggests that extrinsic rewards (money) reduces intrinsic
rewards (enjoyment of the task for its own sake).
• Critics of his interpretation point out that not all jobs are intrinsically
interesting and his studies looked at people in isolation.

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Should Pay be Tied to Performance?
Performance-based pay is less likely when the job involves
multitasking, important quality control issues, or teamwork.
Do employees think pay and performance should be linked?
• Evidence indicates management and workers alike say “Yes.”
How does this 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.

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Designing a Pay-for-Performance Plan
Efficiency involves three general areas of concern.
• Strategy – the plan must support corporate objectives and link well
with HR strategy.
• Structure – will it allow flexible variations on a general plan?
• Standards – employers should be concerned with objectives, measures,
eligibility, and funding.
Equity, or fairness, includes two types of concern to employees.
• Distributive justice – fairness in the amount distributed.
• Procedural justice – fairness in determining rewards.
• A key element in fairness is communication.
Compliance with existing laws is a must for a pay-for-
performance system.

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End of Chapter 09.