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Pay-for-Performance.pptx
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In Chapter 1, we talked about compensation objectives complementing overall human resource objectives and both of these helping an organization achieve its overall strategic objectives. But this begs the question, “How does an organization achieve its overall strategic objectives?” In this part of the book, we argue that organizational success ultimately depends on human behavior. Our compensation decisions and practices should be designed to increase the likelihood that employees will behave in ways that help the organization achieve its strategic objectives. This chapter is organized around employee behaviors. First, we identify the four kinds of behaviors organizations are interested in. Then we note what theories say about our ability to motivate these behaviors. And, finally, we talk about our success, and sometimes lack thereof, in designing compensation systems to elicit these behaviors. Exhibit 9.1 shows how organizational strategy is the guiding force that determines what kinds of employee behaviors are needed. As an illustration, Nordstrom’s department stores are known for extremely good quality merchandise and high levels of customer satisfaction—this is the organization strategy they use to differentiate themselves from competitors. Nordstrom’s success isn’t a fluke. You can bet that some of their corporate goals, strategic business unit goals (SBU goals, where a strategic business unit might be a store), department-level goals, and indeed individual employee goals are linked to pleasing customers and selling high-quality products. The job of Human Resources is to devise policies and practices (and compensation falls in this mix) that lead employees (the last box in Exhibit 9.1) to behave in ways that ultimately support corporate goals. Walk into a Nordstrom, you see employees politely greeting you, helping without suffocating, and generally making the shopping experience a pleasant one. These are behaviors that support Nordstrom’s strategic plan. Every organization, whether they realize it or not, has Human Resource practices that can either work together, or conflict with each other, in trying to generate positive employee behaviors. One way of looking at this process is evident from Exhibit 9.2. Wanting to succeed isn’t enough. Having the ability but not the motivation also isn’t enough. Many players with lots of talent doesn’t have the motivation to endure thousands of hours of repetitive drills, or to endure weight training and general physical conditioning. Even with both ability and motivation, a player’s work environment (both physical and political) must be free of obstacles. A home run hitter drafted by a team with an enormous ball park (home run fences set back much farther from home plate) might never reach his full potential. The same thing is true in more traditional jobs. with ability—that’s the primary job of recruitment, selection, and training. on Once good people are hired, they need to be motivated to behave in way
Pay-for-Performance.pptx
- Pay-for-Performance: The Evidence
- Exhibit 9.1: The Cascading Link Between Organization Strategy and Employee Behavior Nordstrom’s Organization Strategy • extremely good quality merchandise • high levels of customer satisfaction Exhibit 9.1
- Exhibit 9.2: The Big Picture, or Compensation Can’t Do It Alone! His performance depends on three things: 1. Physical abilities and skills 2. Motivation 3. Absence of environmental obstacles Exhibit 9.2
- In the 1980s, Nabisco was slow to recognize customer demand for cookies. Why? They had a centralized organization structure that took a long time to get sales information up to the top decision makers. What did Nabisco do? They decentralized (organization design) the company, creating divisions responsible for different product lines. Now when sales people say consumer preferences are changing, response is much more rapid.
- COMPENSATION CAN’T DO IT ALONE • Compensation should be sufficient for recruiting and hiring. • Compensation needs to retain good employees. • After hiring and retaining, focus on building knowledge and skills. • Employers must motivate employees to perform well on their jobs.
- Exhibit 9.3: Performance Measurement Relates to Compensation Strategy
- WHAT BEHAVIORS DO EMPLOYERS CARE ABOUT? 1. Attract of good employment prospects to join the company. 2. Retain good employees once they join. 3. Get employees to develop competencies for current/future jobs. 4. Get employees to perform well while at the company.
- WHAT BEHAVIORS DO EMPLOYERS CARE ABOUT? (cont.) 1. How do we attract good employment prospects to join our company? • The long-run success of any company depends on getting good people to accept employment.
- WHAT BEHAVIORS DO EMPLOYERS CARE ABOUT? (cont.) 2. How do we retain these good employees once they join? • It doesn’t do much good to attract exceptional employees to the company only to lose them a short time later. • Once the compensation practices get a good employee in the door, company needs to figure out ways to ensure it’s not a revolving door.
- WHAT BEHAVIORS DO EMPLOYERS CARE ABOUT? (cont.) 3. How do we get employees to develop skills for current and future jobs? • The compensation challenge is to get employees, traditionally resistant to change, to willingly develop skills that may not be vital on the current job but are forecast to be critical as the company’s strategic plan adjusts to change.
- WHAT BEHAVIORS DO EMPLOYERS CARE ABOUT? (cont.) 4. How do we get employees to perform well on their current job? • The compensation challenge is to design rewards that enhance job performance.
- WHAT DOES IT TAKE TO GET THESE BEHAVIORS? WHAT THEORY SAYS In the simplest sense, motivation involves three elements: 1. what is important to a person, and 2. offering it in exchange for some 3. desired behavior As to the first element, what’s important to employees, data suggest employees prefer pay systems that are influenced by: • Individual performance • Changes in cost of living • Seniority • Market rate
- WHAT DOES IT TAKE TO GET THESE BEHAVIORS? WHAT THEORY SAYS (cont.) Content Theories (what is important to a person) Hertzberg’s Two Factor Theory Maslow’s Hierarchy of Needs
- WHAT DOES IT TAKE TO GET THESE BEHAVIORS? WHAT THEORY SAYS (cont.) Process Theories (the nature of the exchange) Expectancy Theory Equity Theory Agency Theory
- • In the past, compensation people didn’t ask this question very often. • Now, progressive companies ask, “What do we want our compensation package to do?” WHAT DOES IT TAKE TO GET THESE BEHAVIORS? WHAT PRACTITIONERS SAY
- WHAT DOES IT TAKE TO GET THESE BEHAVIORS? WHAT PRACTITIONERS SAY (cont.) Exhibit 9.4: Components of a Total Reward System
- WHAT DOES IT TAKE TO GET THESE BEHAVIORS? WHAT PRACTITIONERS SAY (cont.) Recently completed a worldwide “employment branding” exercise. Three things emerged as strengths at McDonald’s: 1. An emphasis on family and friends in a social work environment 2. Flexibility in work assignments and work schedules 3. Development of skills that helped launch future careers Promotes a business culture of fun and encourages employees to find ways to make their jobs more interesting and relevant to them personally. • Southwest “pays by the trip,” meaning employees earn more the more flights they work. • Employees also have significant ownership in the company through a discount stock purchase program and receive profit- sharing checks when the airline is profitable, which is has been for 45 years in a row. • In one year, Southwest paid out $543 million in profit-sharing to its 56,110 employees, working out to an average of almost $10,000 per employee.
- WHAT DOES IT TAKE TO GET THESE BEHAVIORS? WHAT PRACTITIONERS SAY (cont.) Wage Components A variety of wage components, listed from least risky to most risky (stability of income):
- DOES COMPENSATION MOTIVATE BEHAVIOR? • Do people join a firm because of pay? • Do people stay in a firm (or leave) because of pay? • Do employees more readily agree to develop job skills because of pay? • Do employees perform better on their jobs because of pay?
- DO PEOPLE JOIN A FIRM BECAUSE OF PAY? DOES COMPENSATION MOTIVATE BEHAVIOR? (cont.)
- DO PEOPLE STAY IN A FIRM (OR LEAVE) BECAUSE OF PAY? • Poor performers leave when pay is based on individual performance. • Group incentives may lead to more turnover of better performers. • Dissatisfaction with pay may cause turnover. • Even the way an organization pays may impact turnover. DOES COMPENSATION MOTIVATE BEHAVIOR? (cont.)
- Other rewards also influence the decision to stay Job Satisfaction Socializatio Organizationa commitment Organizationa Prestige DOES COMPENSATION MOTIVATE BEHAVIOR? (cont.) DO PEOPLE JOIN A FIRM BECAUSE OF PAY? (CONT.) Besides money, other rewards also influence the decision to stay (retention) in a firm.
- DO EMPLOYEES MORE READILY AGREE TO DEVELOP JOB SKILLS BECAUSE OF PAY? • The answer is not known. • New skills will help employees on current and future job demands. • Evidence points to paying for skill may not increase productivity but may improve quality. DOES COMPENSATION MOTIVATE BEHAVIOR? (cont.)
- DO EMPLOYEES PERFORM BETTER ON THEIR JOBS BECAUSE OF PAY? DOES COMPENSATION MOTIVATE BEHAVIOR? (cont.) Research Studies Result of the Study Study at the HR practices of over 3,000 companies Organizations significantly above the mean (by one standard deviation) on these and other “high- performance work practices” had annual sales that averaged $27,000 more per employee Heneman Comprehensive Review Heneman reports that 40 of 42 studies looking at merit pay show performance increases when pay is tied to performance. One study of 841 union and nonunion companies They found that gain-sharing and profit- sharing plans (both designed to link pay to performance) increased individual and team performance 18 to 20%. Review of 26 studies The study gives high marks to profit-sharing plans: Organizations with such plans had 3.5 to 5% higher annual performance. Practitioner/s Practitioners' Perception Gerhart and Milkovich Across 200 companies they found a 1.5% increase in return on assets for every 10% increase in the size of a bonus. Numerous critics, led by Alfie Kohn His conclusion, based heavily on the work of Deci and colleagues, 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). Employees/Managers Perception Dyer and colleagues Substantial evidence indicates that management and workers alike believe pay should be tied to performance. Dyer and colleagues asked 180 managers from 72 different companies to rate nine possible factors in terms of the importance they should receive in determining the size of salary increases. This group believed the most important factor for salary increases should be job performance. Other research supports these findings Both college students and a second group of managers ranked job performance as the most important variable in allocating pay raises. Another way to make the pay-for-performance argument is to look at the ways HR professionals try to cut costs. At the top of the list: Create greater distinction between high and low performers! In other words, really pay Employee responses overwhelmingly say yes. Research overwhelmingly says yes. Practitioner perceptions overwhelmingly say yes.
- DESIGNING A PAY-FOR-PERFORMANCE PLAN The pay model suggests effectiveness depends on three things: 1. Efficiency. 2. Equity. 3. Compliance.
- DESIGNING A PAY-FOR-PERFORMANCE PLAN (CONT.) EFFICIENCY Efficiency involves three areas of concern: 1. Strategy: The plan must support corporate objectives. E.g., organizational strategies fit the compensation strategy and HR plan. 2. Structure: The organizational structure and the compensation plan should be aligned. E.g., decentralized structure and flexible plans. 3. Standards: E.g., objectives, measures, eligibility, and funding.
- DESIGNING A PAY-FOR-PERFORMANCE PLAN (CONT.) EQUITY/FAIRNESS There are two types of equity, or fairness: 1. Distributive justice: Amount that is distributed to employees. 2. Procedural justice: Procedures used to determine the amount of rewards. A key element in fairness is communication.
- DESIGNING A PAY-FOR-PERFORMANCE PLAN (CONT.) COMPLIANCE • A pay-for-performance system should comply with existing laws. • Firms want a reward system that maintains and enhances their reputation.