06 Oct 1. List the different types of
1. List the different types of reward systems.
2. Discuss the advantages and disadvantages of each type of assessment.
3. Identify an example environment in which each reward system would work.
4. Next identify an environment in which each reward system would present challenges.
5. Include recommendations to employers who might want to consider implementing each type of reward system.
McGraw-Hill/Irwin
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
Rewarding Performance
HUMAN RESOURCE MANAGEMENT
AN EXPERIENTIAL APPROACH
SIXTH EDITION
Chapter 11
Understand determinants of effective reward systems
Identify critical variables related to selection of most appropriate reward systems
Describe evidence on effectiveness of different types of reward systems
Know relative advantages & disadvantages of various approaches to reward effective performance
Objectives
11-*
PFP can be a key to success
Link to obtain ROI on employee compensation
Strong trend to implement PFP systems
PFP systems HPWP
PFP puts some portion of pay at risk
Need to understand difficulties of PFP
Cheating an economic act
600% rise in CEO pay largely due to PFP component
Pay For Performance
Why?
11-*
Does PFP Work?
- Certain types of PFP systems correlate with superior corporate performance
- Depends on what is being rewarded
- Short term measures must correlate with long term success
- Individual & situational contingencies need to be considered
- Successful when
Tailored to particular work situation
Linked to long term strategic objectives
11-*
Effective PFP Systems
Determinants of effective PFP Systems
Worker value outcomes (money, prizes)
Outcome is valued relative to other rewards
Desired performance is measurable
Worker must be able to control rate of output or quality
Worker must be capable of increasing output or quality
Worker must believe that capability to increase exists
Worker must believe that increased output will result in receiving a reward
Size of reward must be sufficient to stimulate increased effort
Performance measures must be compatible with strategic goals for short & long term
11-*
Expectancy/Instrumentality Theory
Expectancy
(probability that
efforts will lead
to desired
performance)
Valence
(value of outcome
to individual)
Instrumentality
(probability that
performance will
produce desired
outcomes)
Effort
Performance
Outcomes
(pay, recognition,
other rewards)
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Effective PFP Systems
Considerations
Unions becoming more receptive
Consider impact on team culture
Tie rewards to critical organizational outcomes
Compatible with strategic goals
Worker involvement in design
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PFP Systems
Difficulties
Poor perceived connection between performance & pay
Expensive to develop & maintain
Lack of objective, countable results
Perception that performance is not accurately measured
Union resistance to such systems & to change in general
Poor or negative relationship between rewarded outcomes & corporate performance measures
Supervisors do not take it seriously
11-*
PFP Systems
Legal Implications
Subject to same redress as non-PFP compensation
Title VII
Equal Pay Act
Situational constraints can foster sense of inequity
Disparate Impact theory can be used
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PFP System Selection
Considerations
Who should be included in the PFP system?
In general, all groups should be included in a PFP system
How will performance be measured?
Individual, group/unit, or organization level
Which are the rewards in the incentive system?
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PFP System Selection
Who to Include
- Systems should be developed with specific groups & conditions in mind
- Companies have different systems for different job or departments
- PFP System should involve as many employees as possible
- Americans prefer individual PFP systems
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PFP System Selection
How Will Performance be Measured?
Compatible with short & long term strategic objectives
Maximize reliability and validity of measurement
What are the Rewards?
Cash
Percentage increase to base pay
Non-cash prizes
Stock ownership
Stock options
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PFP System Selection
- Research supports not having a permanent tie to base pay
- Seeing a trend to use bonus based PFP
- Long-term costs are controlled
Behavioral Encouragement Plan
Employees earn rewards for specific accomplishments such as safety compliance or attendance
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PFP System Selection
Individual, group, or company level PFP?
Extent outcome controlled at group or individual level
Whether individual contributions can be measured
Cooperation & teamwork encouraged by group plans
Preference for individual level systems
When team-based PFP is used
It is part of a comprehensive team-based model of HRM & compensation
The pool of rewards should not be fixed
High achievers may go elsewhere
Free- riders increase as group size increases
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Individual PFP Plans
Merit pay plans
Incentive Plans
Piece Rate
Sales Incentives
Bonus
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Individual PFP Plans
Merit Pay
Distribution of pay based on appraisal of worker’s performance
Most common plan
Employees want a link between performance & pay
Fundamental problem is accuracy in performance measurement
Raters can be trained to increase accuracy
Can lead to turnover of best performers
Avoid forced distribution
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Individual PFP Plans
Piece Rate System
Based on units produced, provides the closest connection between individual performance & individual pay
Standards set for level of work done in specific amount of time
Fair rate of pay set using internal or external measures
Pay only for quality pieces
Can be combined with bonus pay
Effective when work is repetitive, controllable & no need for cooperation
Need to involve workers in design
Differential piece rate system addresses issues of production variability
Standard hourly rate sets production standard based in time units
11-*
Individual PFP Plans
Sales Incentive & Bonus
Sales Incentives
Proven to increase sales over time
Important to consider all performance dimensions
Pay based on sales data
Commission can be paid in rewards other than cash
Variable Formats
Draw – plus commission
Commission plus salary
Sales bonus
Bonus
One time payments not tied permanently to base pay
Tend to be more effective than base pay adjustments
May include individual or group performance
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Group Incentive Plans
- Profit Sharing
- Gain Sharing
- Stock Plans
11-*
Group Incentive Plans
Profit Sharing
- Distributes a portion of corporate profits among designated employees
- Payments linked to a ratio related to base pay
- Means to align management and employee goals
- Group size impacts perception of fairness
- Workers’ perception of connection between effort & profitability is key to success
11-*
Group Incentive Plans
Stock Plans
Employee stock ownership plans (ESOPs)
Retirement plan in which company contributes its stock to the plan
Employees never buy or hold the stock directly
- Employee stock option plans
Employee has the right to purchase specific number of shares at a fixed price within a period of time
Works best with employee involvement & problem solving
May be perceived as more equitable than profit sharing & gain sharing
If value drops to lower than perception then can result in feeling of inequity
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Group Incentive Plans
Gain Sharing
Sharing financial benefits of cost reductions or productivity increases with workers
Worker involvement cooperation & trust are critical
Usually paid out monthly
Four Approaches
Scanlon Plan
Rucker Plan
IMPROSHARE Plan
Winsharing
11-*
Group Incentive Plans
Gain Sharing
SCANLON
Most common plan
Reward for suggestions
Suggestions reviewed by screening committees
Measures relationship between sales value of production & labor costs
RUCKER
- Similar to the Scanlon plan but includes value of all supplies, materials, & services
- Incentive created to save on all inputs
- More difficult to explain & understand
11-*
Group Incentive Plans
Gain Sharing
IMPROSHARE (Improved Productivity Through Sharing)
Similar to Scanlon plan
Ratio uses standard hours rather than labor costs
Savings in hours result in reward allocation to workers
Rewards all employees equally
Gains can be seen over 3 years before plateau
Easy to administer and understand
WINSHARING
Combines gain-sharing with profit sharing
Takes market demand into consideration
Rewards are split evenly between workers & company
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Gain Sharing
Bottom Line
- Improved productivity & quality
- Trend is to use gain sharing with other approaches to improving productivity & quality (e.g., TQM)
- Success depends on
Significant involvement & support by management
Realistic employee & if applicable, union expectations
Company size- Smaller number of employees (200 vs. 400) results in larger productivity gains
IMPROSHARE is easier to understand & allows control over production
Scanlon & Rucker plans workers share financial risks, & integrates problem solving process
11-*
Managerial and Executive Pay
- Executive incentive reportedly linked to financial performance
- Total compensation rose 28% in 2010
- Increase mainly due to incentive vs. base pay
- Tying executive comp to earnings has coincided with dramatic increase in earnings restatements
- Plans continue to favor short vs. long term results
- “Pay for No Performance”- The Wall Street Journal article documents loss in linkage between executive pay & performance
- CEOs of seven troubled or collapsed financial institutions $464 million in performance pay from 2005 to 2008 (half in cash)
- Clawbacks – recouping compensation, is a hot political & shareholder issue
11-*
Negative Consequences to
Widening Pay Dispersion
- One study found pay dispersion in high-tech firms is predictive of subsequent team/unit performance decrements
- Pay dispersion tends to diminish communication, increase status gaps, & foster aggressive competition
11-*
Short or Long-Term
Measures of Performance
- Lower level managers typically have short term incentives
- Executives typically have short & long-term incentives
- Rewards usually in the form of lump sum bonus
- Stock options for long-term rewards
A good but abused idea
Considerable abuse in awards and re-pricing of stocks
Backdating stocks (option award to a date when the stock price was low)
Over 200 companies have been the subject of government investigations into whether they “backdated” their executives’ stock options – Managers are in jail for backdating
Not proven to effectively incent outstanding performance
11-*
Pay for Performance
The Board Room
- Rarely linked to corporate performance
- Boards provide little corporate governance & oversight
- Research indicates higher corporate performance results if Board of Directors is paid strictly with stock
- Is increased shareholder power the answer?
11-*
PFP Systems
Managerial Implications
Results of a well-designed PFP system
lower costs
higher profits
higher degree of individual or group motivation
Strategies for Effective PFP
Pay the person-Pay according to individual market value
Translate business strategy into measures that can be used for a reward system
Individualize the reward system
11-*
Key Points
The PFP system must be compatible with long term success
Plans must support the company’s values & culture
Openness & trust are critical
Money can be a motivator
Rewards should be based on individual, group & organizational performance
Sound measurement is key
All important work dimensions should be included
Close monitoring is required
11-*
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