Rewarding PerformanceRewarding Performance

1. Psychological Theories Related to 1. Psychological Theories Related to Rewards.Rewards.

2. Challenges to Pay-for-Performance.2. Challenges to Pay-for-Performance.

3. Meeting the Challenges to Pay-for-3. Meeting the Challenges to Pay-for-Performance. Performance.

4. Difference in Merit Pay and Incentive Pay.4. Difference in Merit Pay and Incentive Pay.

5. Four Types of Incentive Systems and the 5. Four Types of Incentive Systems and the Conditions Favoring Each Type.Conditions Favoring Each Type.

OverviewOverview

In the fields of organizational behavior and In the fields of organizational behavior and human resource management, human resource management, Pay-for-Pay-for-Performance Performance remains an unsettled and remains an unsettled and controversial topic. Based upon the many controversial topic. Based upon the many articles and books written on the subject, articles and books written on the subject, there appears to be an equal number of there appears to be an equal number of proponents and critics. proponents and critics.

Essentially, pay-for-performance is based on Essentially, pay-for-performance is based on the assumption that the assumption that people will work harder people will work harder and better for more moneyand better for more money. Research . Research indicates that sometimes this is true and indicates that sometimes this is true and sometimes it is not. The goal here is to sometimes it is not. The goal here is to identify factors that may identify factors that may helphelp or or harmharm the the success of performance based pay and to success of performance based pay and to identify the basic types of plans. identify the basic types of plans.

1.1. Motivate employees to give their very Motivate employees to give their very best effort.best effort.

2.2. Clearly communicate the relationship Clearly communicate the relationship between employee/team performance between employee/team performance and organizational success.and organizational success.

3.3. Attract and retain a high performing Attract and retain a high performing workforce.workforce.

Primary reasons forPrimary reasons for adopting adopting

performance based pay arrangementsperformance based pay arrangements

Challenges to Performance Challenges to Performance Based PayBased Pay

Focus only on behaviors leading to Focus only on behaviors leading to rewards.rewards.

Negative effects on cooperation.Negative effects on cooperation. Lack of control over factors necessary Lack of control over factors necessary for success.for success. Difficulty in measuring performance.Difficulty in measuring performance. Psychological contract.Psychological contract. Credibility gap.Credibility gap. Job dissatisfaction and stress.Job dissatisfaction and stress. Reduction in intrinsic motivation.Reduction in intrinsic motivation.

Challenge 1: Focus only on Challenge 1: Focus only on behaviors leading to behaviors leading to

rewards.rewards.

.. Many experiences have been documented Many experiences have been documented in the HR literature describing the in the HR literature describing the “gamesmanship” behavior of employees, “gamesmanship” behavior of employees, particularly managers, who take shortcuts, particularly managers, who take shortcuts, emphasize short-term performance, emphasize short-term performance, “juggle” the numbers, and argue over “juggle” the numbers, and argue over allocations of operating costs and allocations of operating costs and resources.resources.

Challenge 2: Negative effects on Challenge 2: Negative effects on cooperation.cooperation.

For most jobs and operations, For most jobs and operations, cooperationcooperation is needed for success. Any is needed for success. Any reward program that attempts to single-reward program that attempts to single-out and focus rewards on individuals or out and focus rewards on individuals or subgroups within the work flow often subgroups within the work flow often leads to conflict and hard feelingsleads to conflict and hard feelings..

Challenge 3: Lack of control over Challenge 3: Lack of control over factors affecting job factors affecting job

performance.performance.

This lack of control over important work This lack of control over important work related factors lowers Expectancy I related factors lowers Expectancy I perceptions.perceptions.

Challenge 4: Difficulty in Challenge 4: Difficulty in measuring performance.measuring performance.

Organizations must ensure that performance Organizations must ensure that performance measures are relevant and devoid of bias and measures are relevant and devoid of bias and favoritism.favoritism.

Challenge Challenge 5: Perceived 5: Perceived Psychological Contract.Psychological Contract.

Expectations about continuing Expectations about continuing rewardsrewards

Some experts recommend using short Some experts recommend using short term individual and group pay term individual and group pay incentives only in environments where incentives only in environments where performance trends indicate performance trends indicate predictable and consistent growthpredictable and consistent growth..

Challenge 6: The credibility Challenge 6: The credibility gap.gap.

For performance based pay to For performance based pay to motivate, employees must trust motivate, employees must trust management to set realistic targets management to set realistic targets and to provide equitable rewards and to provide equitable rewards when those targets are met.when those targets are met.

Challenge 7: Job Challenge 7: Job dissatisfaction and dissatisfaction and

stress.stress.Job dissatisfaction and stress associated with Job dissatisfaction and stress associated with

performance based pay arises from a number performance based pay arises from a number of sources, including:of sources, including:

Perceived lack of control over work related factors.Perceived lack of control over work related factors. Poor training for the job.Poor training for the job. Break-downs in communication and coordination Break-downs in communication and coordination

among individuals and departments.among individuals and departments. Pressure to attain inflexible performance goals.Pressure to attain inflexible performance goals. Dissatisfaction with the size of the rewards.Dissatisfaction with the size of the rewards.

Challenge 8: Reduction in Intrinsic Challenge 8: Reduction in Intrinsic Motivation.Motivation.

Research in psychology and management science Research in psychology and management science have documented the importance of have documented the importance of IntrinsicIntrinsic motivation. motivation.

Employees seek (a) variety, (b) challenge, (c) interest, (d) Employees seek (a) variety, (b) challenge, (c) interest, (d) autonomy, and (e) a sense of personal achievement from autonomy, and (e) a sense of personal achievement from their work.their work.

Short term pay-for-performance programs, which emphasize Short term pay-for-performance programs, which emphasize ExtrinsicExtrinsic motivation, may dilute the sense of employee motivation, may dilute the sense of employee “ownership” and empowerment, and undermine intrinsic “ownership” and empowerment, and undermine intrinsic motivational effects.motivational effects.

Meeting the ChallengesMeeting the Challenges

1. Linking pay to performance.1. Linking pay to performance.

2. Use as part of broader HR system.2. Use as part of broader HR system.

3. Build employee trust.3. Build employee trust.

4. Allow employee involvement.4. Allow employee involvement.

5. Communicate company goals.5. Communicate company goals.

6. Use multiple layers of rewards.6. Use multiple layers of rewards.

7. Build on intrinsic motivation.7. Build on intrinsic motivation.

1.1. Link between performance Link between performance

and rewardsand rewards Use performance based pay (Rewards) whereUse performance based pay (Rewards) where ::

11. There is a range of . There is a range of performance possibleperformance possible in the in the job. (Flexibility).job. (Flexibility).

2. Employees have reasonable 2. Employees have reasonable controlcontrol over factors over factors that affect their performance.that affect their performance.

3. 3. Performance goalsPerformance goals can be clearly identified. can be clearly identified.4. 4. Performance standardsPerformance standards and rewards can be and rewards can be

clearly specified. Sclearly specified. So that employees know what o that employees know what rewards will be forthcoming for meeting specified rewards will be forthcoming for meeting specified goals.goals.

2. Use as part of a broader HR 2. Use as part of a broader HR systemsystem

Performance based pay plans are more likely to Performance based pay plans are more likely to succeed when complimentary HR programs are succeed when complimentary HR programs are effective. effective. Employees are more likely to perform Employees are more likely to perform well and receive rewards when:well and receive rewards when:

Selection assures needed skills.

Employees aretrained effectively.

Career planningputs people in

right jobs.

3. 3. Build employee trustBuild employee trustthrough communication, employee involvement, and consistent through communication, employee involvement, and consistent

administration of the system.administration of the system.

4. 4. Provide employee Provide employee involvement/Participationinvolvement/Participation

Appoint an oversight committee, use worker councils, Appoint an oversight committee, use worker councils, productivity committees (quality circles), and allow appeals. productivity committees (quality circles), and allow appeals.

5. 5. Communicate company goals Communicate company goals andand how employee performance how employee performance makes amakes a difference and successdifference and successShare industry data, company performance, and relevant Share industry data, company performance, and relevant

financial information, operating plans, goalsfinancial information, operating plans, goals

6. 6. Use multiple levels of rewardsUse multiple levels of rewards

Multiple levels of rewards – i.e. Multiple levels of rewards – i.e. individual, group, and company-individual, group, and company-wide. wide.

Helps:Helps:

1.1. ensure cooperation ensure cooperation

2.2. reduces employee risk, such as reduces employee risk, such as fair wages and benefits,fair wages and benefits,

3.3. ensure team bonuses, facility or ensure team bonuses, facility or division-wide bonuses (i.e., gain division-wide bonuses (i.e., gain sharing), and profit sharing or sharing), and profit sharing or employee stock ownership (ESOPs).employee stock ownership (ESOPs).

7.7. Provide an opportunity for Provide an opportunity for intrinsic rewardsintrinsic rewards

Intrinsic motivation emanates from a sense of Intrinsic motivation emanates from a sense of personal achievement and growth. It is personal achievement and growth. It is experienced through the experienced through the variable reinforcementvariable reinforcement schedule, which gives strong and consistent schedule, which gives strong and consistent performance. performance.

Organizations can capitalize on this kind of human Organizations can capitalize on this kind of human motivation through:motivation through:

Empowerment (more authorities)Empowerment (more authorities) Job enrichment (improvement on work conditions)Job enrichment (improvement on work conditions) Participative management (participating in the Participative management (participating in the

decision making process)decision making process)

Types of Incentive PlansTypes of Incentive Plans

I. IndividualI. Individual

II. Group/TeamII. Group/Team

III. Facility/DivisionIII. Facility/Division

IV. CorporateIV. Corporate

I. Individual PlansI. Individual Plans

Rewards are based on Rewards are based on individual performance (e.g. individual performance (e.g. piece rate, commissions, or piece rate, commissions, or bonuses). Also, stock bonuses). Also, stock awards are used in many awards are used in many companies.companies.

Conditions under which Conditions under which individual-based plans are most individual-based plans are most

likely to succeed:likely to succeed: When jobs have autonomy (i.e., When jobs have autonomy (i.e.,

performed independently).performed independently). When individual contributions can be When individual contributions can be

isolated (i.e., measured).isolated (i.e., measured). When coordination and cooperation When coordination and cooperation

between employees is not critical for between employees is not critical for success.success. (i.e., jobs are independent).(i.e., jobs are independent).

II. Group/Team PlansII. Group/Team Plans

Rewards are based upon Rewards are based upon group or team group or team performance and/or performance and/or outcomes. These plans outcomes. These plans normally reward all team normally reward all team members equally based members equally based on group outcomes.on group outcomes.

Conditions under which team-Conditions under which team-based plans are most likely to based plans are most likely to

succeed:succeed: Less supervision is needed (e.g. self-directed teams).Less supervision is needed (e.g. self-directed teams). When the firm’s organization facilitates the When the firm’s organization facilitates the

implementation of team-based incentivesimplementation of team-based incentives When work tasks are so intertwined it is difficult to When work tasks are so intertwined it is difficult to

single out who did whatsingle out who did what Emphasis is on common goals.Emphasis is on common goals. Employees tend to have high job commitment.Employees tend to have high job commitment. When the objective is to foster entrepreneurship in When the objective is to foster entrepreneurship in

self-managed work groupsself-managed work groups

III. Facility/Division PlansIII. Facility/Division Plans

Generally referred to Generally referred to as gainsharing as gainsharing programs because programs because they return a portion of they return a portion of the company's cost the company's cost savings to the workers, savings to the workers, usually in the form of a usually in the form of a lump-sum bonus. lump-sum bonus.

Emphasis is on Emphasis is on inter-group inter-group cooperationcooperation. Pulling together . Pulling together toward shared goals.toward shared goals.

Conditions under which Conditions under which Facility/Division Plans are most Facility/Division Plans are most

likely to succeed:likely to succeed:

Small to medium sized firms.Small to medium sized firms. Technology allows improvements in Technology allows improvements in

performance.performance. Stable product market.Stable product market. Where company historical records related to Where company historical records related to

performance are availableperformance are available Corporate culture of trust and participation.Corporate culture of trust and participation.

IV. Corporate-Wide PlansIV. Corporate-Wide Plans Macro type of incentive program Macro type of incentive program

and is based on the entire and is based on the entire corporation's performancecorporation's performance

Corporate-wide plans are typically Corporate-wide plans are typically designed as designed as Profit SharingProfit Sharing arrangements.arrangements.

These plans attempt to reduce the These plans attempt to reduce the complexity of other incentive plans, complexity of other incentive plans, but hope to secure long term but hope to secure long term employee commitment.employee commitment.

Conditions Favoring Conditions Favoring Corporate-Corporate-WideWide Plans: Plans:

Medium to large firms.Medium to large firms. Interdependence of many divisions, and it Interdependence of many divisions, and it

would be difficult to set separate performance would be difficult to set separate performance goals for each.goals for each.

Competitive markets may be complex and/or Competitive markets may be complex and/or unstable, which would make it difficult to unstable, which would make it difficult to determine a meaningful incentive formula.determine a meaningful incentive formula.

The presence of other incentivesThe presence of other incentives