Module 9

Recognizing Employee
Contributions with Pay
 How Does Pay Influence
Individuals?

• Equity Theory
• Reinforcement Theory
• Expectancy Theory
• Agency Theory
– principals as owners
– agents as managers
 Types of Agency Costs

1 Perquisites
2 Attitudes toward risk
3 Decision-making horizons
 Factors in the Choice of a Compensation
Package

 Risk Aversion
 Outcome Uncertainty
 Job Programmability
 Measurable Job Outcome
 Ability to Pay
 Tradition
 Individual Pay Programs: Design Features

Payment Frequency Performance

Programs Method of Payout Measures Coverage
Merit Pay - Change - Annually - Boss’ - All
in base appraisal
Incentive Pay - Bonus - Weekly - Output, - Direct
productivity labor
Profit Sharing - Bonus - Semiannual - Profit - All
or annual
Ownership - Equity - Sale of - Stock value - All
changes stock
Gainsharing - Bonus - Monthly / - Production - Production
quarterly costs /service unit
Skill-based - Change - when skill - Skill - All
in base is acquired acquisition
 Individual Pay Programs: Consequences

Performance
Programs Motivation Attraction Culture Costs

Merit Pay - Change - High - Individual - High

in base performers competition maintenance
Incentive Pay - little - High - Intra-group - Good system
performers competition of appraisal
Profit Sharing - some in - All - Cooperation - Variable
small units
Ownership - Little - All - Knowledge - Ability to
of business pay
Gainsharing - Little - Retain - Sense of - Cost not
employees ownership variable
Skill-based - Learning - those who - Learning - can be high
want to
learn
 Individual Pay Programs: Contingencies

Organization Management
Programs Structure Style Type of Work

Merit Pay - Independent - Control - Individual, easy

jobs to measure
Incentive Pay - Measurable - Participation - Individual
jobs / units desirable appraisal
Profit Sharing - Autonomous - Participation - All types
units
Ownership - Any company - Participation - All types

Gainsharing - Most companies - Participation - All types

Skill-based - Most companies - Participation - Professional

 Merit Pay Programs:
Characteristics

• 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
 Merit Pay Programs:
Criticisms
• Individual performance differences are due largely to
SYSTEM
• Discourages teamwork
• System is not fair
• Too much reliance on supervisor for rating
– procedural issue
• Pay increase are not representative of performance
– distributive issue
• Contributes to entitlement mentality
 Individual Incentives
Used rarely for the following reasons:

1 Most jobs have no physical output

2 Many administrative problems
3 Individuals focus only on the incentive
4 Does not fit with team approach
5 Does not reward obtaining multiple skills
6 Rewards output at the expense of quality or service
 Profit Sharing

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
 Ownership

• Similar to profit sharing with employee focus on

organizational success even stronger
• Employee ownership through stock options
• Stock options typically reserved for executives,
however, the trend is toward pushing pushing eligibility
further down in the organization.
• ESOPs
 Gainsharing
• 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
 Process and Context Issues

• Employee participation in decision

making
• Communication
• Pay and process: intertwined effects
 Matching Strategy to Operating Strategy
Business Unit Strategy
Pay Strategy Dimension Defenders Prospectors

Risk Sharing (variable pay) Low High

Time Orientation Short-term Long-term

Pay level (short run) Above market Below market

Pay level (long run) Above market Above market

Benefits Level Above market Below market

Where Pay Decision Made Centralized Decentralized

Pay Unit of Analysis Job Skills