PAY FOR PERFORMANCE

1. CHAPTER 8
PAY FOR PERFORMANCE

2. Exhibit9.2: The Big Picture,or Compensation
Can't Do It Alone

3. What Behaviors Do Employers
Care About?
• Behaviors that compensation needs to reinforce
• Compensation should be sufficiently attractive to make recruiting
and hiring good potential employees possible (attraction)
• Need to make sure the good employees stay with the company
(retention)
• Need to find ways to motivate employees to perform well on
their jobs—to take their knowledge and abilities and apply them
in ways that contribute to organizational performance

4. What Behaviors Do Employers
Care About? (cont.)
• How do we get good employment prospects to join our
company?
• How do 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 on their current
job?

5. What Motivates Employees?
• In the simplest sense, motivation involves three elements:
1. What is important to a person?
2. Offering it in exchange for some
3. Desired behavior

6. Exhibit 9.4: Motivation Theories

7. Exhibit 9.4: Motivation Theories (con’t)

8. Exhibit 9.4: Motivation Theories (con’t)

9. Exhibit 9.5: Components of a
Total Reward System

10. Exhibit 9.6: Wage Components

11. Exhibit 9.6: Wage Components
(con’t)

12. Does Compensation Motivate
Behavior?
General Comments
• Organizations with “high-performance work practices” had annual
sales that averaged $27,000 more per employee.

13. Do People Join a Firm Because
of Pay?
• Key factors affecting a person’s decision to join a firm
• Level of pay
• Pay system characteristics
• Job candidates look for organizations that “fit” their
personalities
• Reward systems should be designed to attract people with
desired
• Personalities
• Values

14. Do People Stay in a Firm (Or
Leave) Because of Pay?
• Factors impacting turnover
• Pay based on individual performance results in higher turnover of poor
performers
• Group incentive plans may lead to higher turnover of better performers
• Level of employee satisfaction with pay

15. Do People Stay in a Firm (Or
Leave) Because of Pay? (cont.)
• Other rewards affect the decision to stay
• Work variety and challenge
• Development opportunity
• Social
• Status recognition
• Work importance
• Benefits

16. Do Employees More Readily
Agree to Develop Job Skills
Because of Pay?
• Evidence is unclear
• Relevance of skill-based pay

17. Do Employees Perform Better
on Their Jobs Because of Pay?
• Not clear if performance of individuals can be increased by
tying it to pay
• If the incentive depends on individual performance,
applicants find the company more attractive
• Team-based incentives, in contrast, are less attractive
• A number of recent studies provide strong evidence that pay
for performance has a direct and, at times, substantial impact
on firm performance
• Evidence indicates, however, that ees don’t notice incentive
payouts unless they are at least 10%, w/ 15-20 % more likely to
evoke desired response
• Some research indicates ee satisfaction w/ pay may depend
more on procedures used to determine pay than level

18. Where’s the Merit Pay Payoff?
• Jeffrey Pfeffer (Stanford) argues that idea that individual pay for
performance will enhance org performance rests on set of assumptions
that do not hold in vast majority of orgs
• “Merit pay is not based on merit”
• Perf appraisals biased
• Pay increases not enough to motivate ees, but are enough to irritate them
• In effect, for vast majority of ees, merit increases are unevenly distributed cost-
of-living and market-adjustment increases couched in language of performance
rewards
• But, high levels of differentiation destroy engagement, breed distrust, and
undermine teamwork
• Higher turnover, lower quality, serious ethical breaches
• “Effective management is a system, not a pay plan. The mistake is that
companies try to solve all their problems with pay.”
• Evidence suggests group bonuses, profit sharing, and gain sharing are more
effective forms of performance-based pay than merit pay or individual
incentives
• Source: Workforce Management, 11/3/08

19. Exhibit 9.7: Examples of Group
Incentive Plans