Human resource management gaining a competitive advantage 2014 chapter 12

• Each employee’s pay is based upon individual performance, profits, seniority, or other factors.. How Does Pay Influence Individual Employees?. How Does Pay Influence Individual Emplo

• Organizations have a relatively

large degree of 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

very different consequences for

productivity and return on

investment.

How Does Pay Influence Individual Employees?

Three different theories help explain compensation’s effects:

Reinforcement Theory

Agency Theory Expectancy Theory

How Does Pay Influence

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 -The interests of the principals (owners) and their agents (managers) may no

longer converge

– Types of agency costs include:

• perquisites

• attitudes towards risk

• decision-making horizons

Agency Costs

• Agency costs may be minimized by the

principal choosing a contracting scheme that helps align the interests of the agent with the principal's own interests

• The type of contract depends partly on the

following factors:

– risk aversion

– outcome uncertainty

– job programmability

– measurable job outcomes

– ability to pay

– tradition

Programs for Recognizing

Employee Contributions

• Programs differ by payment method, frequency of

payout, and ways of measuring performance

• Potential consequences of such programs are

performance motivation of employees, attraction of

employees, organization culture, and costs

• Contingencies that may influence whether a pay program fits the situation are management style, and type of work

Merit Pay Incentive Pay

Gain Sharing Ownership

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 the percentage of

employees who should fall into each performance category.

Merit Pay

• Edward W Deming, who is a critic of merit pay, argues that it is unfair to rate individual

performance because "apparent differences

between people arise almost entirely from the

system that they work in, not the people

themselves.”

• Criticisms of merit pay include:

– The focus on merit pay discourages teamwork.

– The 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

• They are relatively rare because:

– Most jobs have no physical output measure

– There are many potential administrative problems

– Employees may do what they get paid for and nothing else

– They typically do not fit in with the team approach

– They may be inconsistent with organizational goals

– Some incentive plans reward output at the expense of quality or customer service

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.

– The advantage is that profit sharing

may encourage employees to think more like owners

– The drawback is that workers may

perceive their performance has little

to do with profit but is more related to top management decisions over

which they have little control

• Ownership encourages employees to focus on the

success of the organization as a whole, but, like profit sharing, ownership may 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) are

employee ownership plans that 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 become part of the employee’s base salary.

• Conditions that should be in place for

gainsharing to be effective include:

– management commitment

– a need to change or a strong commitment to

continuous improvement

– management's acceptance and encouragement

of employee input

• Conditions that should be in place for

gainsharing to be effective include:

– high levels of cooperation and interaction

– employment security

– information sharing on productivity and costs – goal setting

– commitment of all involved parties to the

process of change and improvement – 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 incentives tend to

measure performace in terms of physical output

• Team award plans may use

a broader range of performance measures.

• Drawbacks are that individual competition may

be replaced by competition between groups or teams

Balanced Scorecard

• Some companies find it useful to design a mix of pay programs

• The four categories of a balanced

scorecard include:

– financial

– customer

– internal

– learning and growth

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)

• There has been increased pressure from regulators and shareholders to better link pay and

performance

– The Securities and Exchange Commission (SEC)

CEO Pay

• Great Britain 3-1

• Japan 7-1

• USA 450 -1

Process and Context Issues

Three issues represent areas of significant company

discretion and pose opportunities to compete effectively:

Employee Participation

in Decision Making

Communication Pay and Process:

Intertwined Effects

Matching Pay Strategy and 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