IRWIN

CHAPTER 16

Recognizing IndividualContributions with Pay

©a Times Mirror Higher Education Group, Inc., company, 1997a Times Mirror Higher Education Group, Inc., company, 1997

• Equity Theory - chapter 15• Reinforcement Theory• Expectancy Theory - chapter 11• Agency Theory

– principals as owners– agents as managers

• Equity Theory - chapter 15• Reinforcement Theory• Expectancy Theory - chapter 11• Agency Theory

– principals as owners– agents as managers

©a Times Mirror Higher Education Group, Inc., company, 1997a Times Mirror Higher Education Group, Inc., company, 1997

IRWIN

How Does Pay Influence Individuals?How Does Pay Influence Individuals?

1 Perquisites2 Attitudes toward risk3 Decision-making horizons

1 Perquisites2 Attitudes toward risk3 Decision-making horizons

©a Times Mirror Higher Education Group, Inc., company, 1997a Times Mirror Higher Education Group, Inc., company, 1997

IRWIN

Types of Agency CostsTypes of Agency Costs

• Risk Aversion• Outcome Uncertainty• Job Programmability• Measurable Job Outcome• Ability to Pay• Tradition

• Risk Aversion• Outcome Uncertainty• Job Programmability• Measurable Job Outcome• Ability to Pay• Tradition

©a Times Mirror Higher Education Group, Inc., company, 1997a Times Mirror Higher Education Group, Inc., company, 1997

IRWIN

Factors in the Choice of a Compensation Package

Factors in the Choice of a Compensation Package

EXPECTANCY THEORYEXPECTANCY THEORY

EFFORT PERFORMANCE

expectancy? instrumentality?

valence

• Tries to identify individual performance differences• Supervisor provides most performance information • Pay is linked to performance appraisal results• Feedback is infrequent• Feedback is mostly one way - supervisor to subordinate

• Tries to identify individual performance differences• Supervisor provides most performance information • Pay is linked to performance appraisal results• Feedback is infrequent• Feedback is mostly one way - supervisor to subordinate

©a Times Mirror Higher Education Group, Inc., company, 1997a Times Mirror Higher Education Group, Inc., company, 1997

IRWIN

Merit Pay Programs:Characteristics

Merit Pay Programs:Characteristics

• Individual performance differences are due largely to SYSTEM• Discourages teamwork • System is not fair• Too much reliance on supervisor for rating

– procedural issue• Pay increaes are not representative of performance

– distributive issue• Contributes to entitlement mentality

• Individual performance differences are due largely to SYSTEM• Discourages teamwork • System is not fair• Too much reliance on supervisor for rating

– procedural issue• Pay increaes are not representative of performance

– distributive issue• Contributes to entitlement mentality

©a Times Mirror Higher Education Group, Inc., company, 1997a Times Mirror Higher Education Group, Inc., company, 1997

IRWIN

Merit Pay Programs:Criticisms

Merit Pay Programs:Criticisms

1 Most jobs have no physical output2 Many administrative problems3 Individuals focus only on the incentive4 Does not fit with team approach5 Does not reward obtaining multiple skills6 Rewards output at the expense of quality or service

1 Most jobs have no physical output2 Many administrative problems3 Individuals focus only on the incentive4 Does not fit with team approach5 Does not reward obtaining multiple skills6 Rewards output at the expense of quality or service

©a Times Mirror Higher Education Group, Inc., company, 1997a Times Mirror Higher Education Group, Inc., company, 1997

IRWIN

Individual IncentivesIndividual Incentives

Used rarely for the following reasons:

Advantages� Encourages employees to think like OWNERS� Payments are not part of base pay

Disadvantages� Many plans defer actual payments� Few plans pay out during business downturns

Advantages� Encourages employees to think like OWNERS� Payments are not part of base pay

Disadvantages� Many plans defer actual payments� Few plans pay out during business downturns

©a Times Mirror Higher Education Group, Inc., company, 1997a Times Mirror Higher Education Group, Inc., company, 1997

IRWIN

Profit SharingProfit Sharing

©a Times Mirror Higher Education Group, Inc., company, 1997a Times Mirror Higher Education Group, Inc., company, 1997

IRWIN

GainsharingGainsharing

• Encourages pursuit of broader(team) goals• Measures performance that is controllable by employee• Distributes payouts frequently• Conditions for success include:

– management commitment– commitment to continuous improvement and change– willingness to accept employee input– high level of cooperation and information sharing– agreement on productivity standards– employment security

• Encourages pursuit of broader(team) goals• Measures performance that is controllable by employee• Distributes payouts frequently• Conditions for success include:

– management commitment– commitment to continuous improvement and change– willingness to accept employee input– high level of cooperation and information sharing– agreement on productivity standards– employment security

Individual Pay Programs: Design FeaturesIndividual Pay Programs: Design Features

Source: Adapted from E.E. Lawler III, “Pay for Performance: A Strategic Analysis,” in Compensation and Benefits,ed. L. R. Gomez-Mejia (Washington, D. C.: Bureau of National Affairs, 1989).

Programs

Merit Pay

Incentive Pay

Profit Sharing

Ownership

Gainsharing

Skill-based

Payment Method

Performance Measures

Frequencyof Payout Coverage

- Change in base- Bonus

- Bonus

- Equity changes- Bonus

- Change in base

- Annually

- Weekly

- Semiannual or annual- Sale of stock - Monthly / quarterly- when skill is acquired

- Boss’ appraisal- Output, productivity- Profit

- Stock value

- Production costs- Skill acquisition

- All

- Direct labor- All

- All

- Production /service unit- All

Individual Pay Programs: ConsequencesIndividual Pay Programs: Consequences

Source: Adapted from E.E. Lawler III, “Pay for Performance: A Strategic Analysis,” in Compensation and Benefits,ed. L. R. Gomez-Mejia (Washington, D. C.: Bureau of National Affairs, 1989).

Programs

Merit Pay

Incentive Pay

Profit Sharing

Ownership

Gainsharing

Skill-based

Performance Motivation CultureAttraction Costs

- Little - Clear connection- Little - Little - somein small units- Learning

- High performers- High performers- All - All - Retain employees- those who want to learn

- Intra-group competition- Individual competition- Knowledge of business- Sense of ownership- Cooperation - Learning

- Good system of appraisal- maintenance costs high- Ability to pay- Costs not to variable- Costs are variable- can be high

Individual Pay Programs: ContingenciesIndividual Pay Programs: Contingencies

Source: Adapted from E.E. Lawler III, “Pay for Performance: A Strategic Analysis,” in Compensation and Benefits,ed. L. R. Gomez-Mejia (Washington, D. C.: Bureau of National Affairs, 1989).

Programs

Merit Pay

Incentive Pay

Profit Sharing

Ownership

Gainsharing

Skill-based

Organization Structure

ManagementStyle Type of Work

- Independent jobs- Measurable jobs / units- Autonomous units- Any company - Most companies

- Most companies

- Control

- Participation desirable- Participation - Participation - Participation - Participation

- Individual, easy to measure- Individual appraisal- All types

- All types - All types - Professional

Sales

Product Life Cycle andOperation Strategies

Product Life Cycle andOperation Strategies

Prospectors Defenders

©a Times Mirror Higher Education Group, Inc., company, 1997a Times Mirror Higher Education Group, Inc., company, 1997

IRWIN

Matching Pay Strategy to Operating StrategyMatching Pay Strategy to Operating Strategy

Pay Strategy Dimension

Business Unit Strategy

Defenders Prospectors

Risk Sharing (variable pay)

Time Orientation

Pay level (short run)

Pay level (long run)

Benefits Level

Where Pay Decision Made

Pay Unit of Analysis

Low

Short-term

Above market

Above market

Above market

Centralized

Job

High

Long-term

Below market

Above market

Below market

Decentralized

Skills

Source: Adapted from L.R. Gomez-Mejia and D. B. Balkin, Compensation, Organizational Strategy,and Firm Performance (Cincinnati:South-Western), Appendix 4b.