Rewarding Performance 11

2004 by Prentice Hall Terrie Nolinske, Ph.D.

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HR Challenges
How can individuals and groups be recognized? What is a pay-for-performance plan and how is it used in the organization? How is an executive compensation package designed? What are the pros and cons of different compensation methods?
2004 by Prentice Hall Terrie Nolinske, Ph.D. 11 - 2

Pay-for-Performance (Incentive) Systems Assume That

Individuals and teams differ in level and quality of contribution
Firms overall performance depends on performance of individuals and groups in the firm

Firm should reward employees based on their relative performance to attract, retain and motivate high performers
2004 by Prentice Hall Terrie Nolinske, Ph.D. 11 - 3

Challenges to Incentive System

Do Only What You Get Paid For Syndrome
Adversely affects cooperation

Lack of Control
Difficulties in Measuring Performance

Psychological Contract is created that is often resistant to change

2004 by Prentice Hall Terrie Nolinske, Ph.D. 11 - 4

Challenges to Incentives (contd)

Employees question fairness and credibility Potential reduction of intrinsic drives Leads to job dissatisfaction and stress
2004 by Prentice Hall Terrie Nolinske, Ph.D. 11 - 5

Developing Incentive Systems

Link pay and performance appropriately Use incentives as part of a larger plan Use financial and non-financial incentives

Build Employee Trust

Promote belief that performance matters Use multiple layers of rewards Increase employee involvement
2004 by Prentice Hall Terrie Nolinske, Ph.D. 11 - 6

Pay-for-Performance Programs
Micro Level Macro Level

Individual Team Merit Pay Bonuses

Bonuses
Awards Piece rate
2004 by Prentice Hall Terrie Nolinske, Ph.D.

Awards

Business Unit Gainsharing Bonuses Awards

Firm Profit Sharing Stock plans

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Individual-Based Incentive Plan: Advantages

Individuals are goal-oriented
Financial incentives can shape goals

Individual-based plans fit an individualistic culture

Performance rewarded may be repeated
2004 by Prentice Hall Terrie Nolinske, Ph.D. 11 - 8

Individual-Based Incentive Plan: Disadvantages

Tying pay to goals promotes narrow focus
Individual pay plans may work against achieving quality goals Individual-based programs may promote inflexibility
2004 by Prentice Hall Terrie Nolinske, Ph.D. 11 - 9

Individual-Based Plans Best When

contributions of individuals can be accurately isolated
job demands autonomy cooperation is less critical to successful performance or when competition is to be encouraged
2004 by Prentice Hall Terrie Nolinske, Ph.D. 11 - 10

Team-Based Incentive Plan: Advantages Foster group cohesiveness

Facilitates workforce flexibility

Reliably measure team performance

2004 by Prentice Hall Terrie Nolinske, Ph.D.

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Team-Based Incentive Plan: Disadvantages

Free-ride effect Intergroup competition leads to decline in overall performance Social pressures limit performance

Identifying meaningful groups difficult

2004 by Prentice Hall Terrie Nolinske, Ph.D.

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Team-Based Plans Best When

it is difficult to single out who did what

firms culture / structure support teams

task objective fosters entrepreneurship in self-managed work groups

2004 by Prentice Hall Terrie Nolinske, Ph.D.

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Gainsharing (Plantwide) Incentive Plan: Advantages

Elicit active employee input
Increase cooperation across workers and teams by creating common goal Subject to fewer measurement difficulties than individual- or team-based incentives

Easy to formulate bonus calculations and achieve acceptance of plans

2004 by Prentice Hall Terrie Nolinske, Ph.D. 11 - 14

Gainsharing (Plantwide) Incentive Plan: Disadvantages

Protects low performers Criteria used to trigger rewards Management-labor conflict

2004 by Prentice Hall Terrie Nolinske, Ph.D.

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Gainsharing (Plantwide) Plans Best When

firms are small to midsize
technology is not widely used

firm does not have multiple plants with varying levels of efficiency
nontraditional hierarchy of authority exists demand for products/services is stable
2004 by Prentice Hall Terrie Nolinske, Ph.D. 11 - 16

Profit-sharing (Corporatewide) Incentive Plans: Advantages

Financial flexibility for the firm

Increased employee commitment

Tax advantages

2004 by Prentice Hall Terrie Nolinske, Ph.D.

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Profit-sharing (Corporatewide) Incentive Plans: Disadvantages

Risk tied to firm performance Limited effect on productivity Long-run financial shortages

2004 by Prentice Hall Terrie Nolinske, Ph.D.

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Profit-sharing (Corporatewide) Plans Best When

firm is large firms have multiple interdependent plants or business units firms face highly cyclical ups and downs in product demand used with other incentives firm wants to foster partnership
2004 by Prentice Hall Terrie Nolinske, Ph.D. 11 - 19

Designing Executive Long-Term Income Programs

Award determinants?
Shared costs, shared risk? Cap on earnings? Frequency of award? Ease of which converted to cash?
2004 by Prentice Hall Terrie Nolinske, Ph.D. 11 - 20

Most Common Perks Received by U.S. Senior Executives

Perk
Physical Exams Financial Counseling Company Car Club Memberships First-Class Air Travel Company Plane Personal Liability Ins. Cellular Phone Chauffeur Service Airline VIP Clubs Reserved Parking Home Security System

Percentage of Surveyed Companies Offering to Senior Executives

Executive Dining Room Home Computer

Loans
2004 by Prentice Hall Terrie Nolinske, Ph.D.

10

20

30

40

50

60

70

80

90

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Case
Some firms use business games to explain its operations, finances and status in the environment to employees.
Do pay-for-performance plans improve or decline as a result of these programs?
In addition to programs like these, what else can help make the connection between individual or team performance and firm profitability?
2004 by Prentice Hall Terrie Nolinske, Ph.D.

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