HRM gaining a competitive advantage noe ch012

Each employee’s pay is based upon individual performance, profits, seniority, or other factors.. Programs Recognizing Contributions Programs differ by payment method,payout frequencyan

Human Resource Management:

Gaining a Competitive Advantage

Chapter 12 Recognizing Employee Contributions

with Pay

Learning Objectives

 Discuss how pay influences individual employees

 Describe three theories that explain

compensation’s effect on individuals

 Describe pay programs for recognizing employees’

contributions to the organization’s success

 List pay programs’ advantages and disadvantages

Learning Objectives

 Describe how organizations combine incentive

plans in a balanced scorecard

 Discuss issues related to executives’

performance-based pay

 Explain the importance of process issues such as

communication in compensation management

 List major factors in matching pay strategy to the

organization’s strategy

Organizations have discretion in deciding how to

pay

Each employee’s pay is based upon individual

performance, profits, seniority, or other factors

 Regardless of cost differences, different pay

programs can have different consequences for

productivity and return on investment

Pay Influences Individual Employees

3 Theories Explain Compensation’s Effects:

Reinforcement

Theory

Agency Theory Expectancy

Theory

How Pay Influences Individual Employees

Reinforcement Theory - A response followed

by a reward is more likely to recur in the future

Expectancy Theory - Motivation is a function of

valence, instrumentality, and expectancy

Agency Theory- interests of the principals

(owners) and their agents (managers) may

nolonger converge

Agency Costs

Agency costs may be minimized by the principal

choosing a contracting scheme that alignsagent’s

interests with principal's interests

6 Factors that Influence Type ofContract:

Programs Recognizing Contributions

 Programs differ by payment method,payout frequencyand ways

of measuring performance.

 Potential consequences include employees’ performance

motivation and attraction, culture and costs

 Management style and type of work influence whether a pay

program fits the situation.

Gain

Profit Sharing Skill-based

Merit Pay

Merit pay programs link performance-appraisal

ratings to annual pay increases

A merit increase grid combines an employee’s

performance rating with the employee’s position

in a pay range to determine the size and

frequency of his or her pay increases

Some organizations provide guidelines

regarding percentage of employees who should

fall into each performance category

Merit Pay

Edward W Deming, a critic of merit pay,

arguedthat it is unfair to rate individual

performance because "apparent

differencesbetween people arise almost entirely

from the system that they work in, not the people

themselves.”

Criticisms of merit pay include:

 Focus on merit pay discourages teamwork.

 Measurement of performance is done unfairly and

inaccurately

 Merit pay may not really exist

Individual Incentives

Individual incentives reward individual performance

but payments are not rolled into base pay and

performance is usually measured as physical output

rather than by subjective ratings.

Individual incentives are rare because:

 Most jobs have no physical output measure.

 Many potential administrative problems.

 Employees may do what they get paid for and nothing

else.

 Typically do not fit in with team approach.

 May be inconsistent with organizational goals.

 Some incentive plans reward output at the expense of

Profit Sharing

Under profit sharing, payments are based on a

measure of organization performance (profits), and

payments do not become a part of base pay.

 Advantage- profit sharing may encourage employees to

think more like owners.

 Disadvantage-workers may perceive their performance

haslessto do with profitthan top management decisions

over which they have little control

Ownership encourages employees to focus

onorganization’s success, butmay be less motivational the larger the organization.

One method to achieve employee ownership is through

stock options, which give employees the opportunity to

buy company stock at a previously fixed price

Employee stock ownership plans (ESOPs) give

employers certain tax and financial advantages when stock

is granted to employees.

– ESOPs can carry significant risk for employees

Gainsharing programs offer a means of

sharing productivity gains with employees and

are based on group or plant performance that

does not becomepart of the employee’s base

salary

8 agreement on a performance standard and calculation

that is undesirable, seen as fair and closely related to

managerial objectives

Group Incentives and Team Awards

Group incentivesmeasure performace in terms of

physical output

Team award plans may use a broader range of

performance measures

Individual competition may be replaced by

competition between groups or teams

Balanced Scorecard

Some companiesdesign a mix of pay programs

4 Categories of aBalanced Scorecard:

Managerial and Executive Pay

Top managers and executives are a strategically

important group whose compensation warrants

special attention

In some companies rewards for executives are high

regardless of profitability or stock market performance

Executive pay can be linked to organizational

performance (from agency theory)

Increased pressure from regulators and shareholders

to better link pay and performance

– Securities and Exchange Commission (SEC)

Process and Context Issues

3 issues represent areas of significant company discretion

and pose opportunities to compete effectively:

Employee Participation

in Decision Making

Communication Pay&Process:

Intertwined Effects

Matching Pay& Organization Strategy

Pay Strategy Dimensions

Risk sharing (variable pay)

Time orientation

Pay level (short-run)

Pay level (long-run potential)

Benefits level

Centralization of pay decisions

Pay unit of analysis

Concentration

Low Short-term Above market Below market Above market Centralized Job

Growth

High Long-term Below market Above market Below market Decentralized Skills

Organization Strategy

 Designing a pay for performance strategy typically seeks to

balance the pros and cons of different plans and reduce the

chance of unintended consequences.

 Pay strategy will depend on the particular goals and strategy of the organization and its units.

• Many organizations are working to link pay to performance and reduce fixed labor costs, although sometimes executives

appear slow to reduce what are supposed to be

performance-based bonuses when firm performance declines.