11 Rewarding Performance 2004 by Prentice Hall Terrie

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. 2

Pay for Performance (Incentive) Systems Assume That… • Individuals and teams differ in level and quality of contribution • Firm’s 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. 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. 4

Challenges to Incentives (cont’d) • Employees question fairness and credibility • Potential reduction of intrinsic drives • Leads to job dissatisfaction and stress © 2004 by Prentice Hall Terrie Nolinske, Ph. D. 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. 6

Pay-for-Performance Programs Micro Level Individual Team Merit Pay Bonuses Awards Piece rate © 2004 by Prentice Hall Terrie Nolinske, Ph. D. Awards Macro Level Business Unit Gainsharing Bonuses Firm Profit Sharing Stock plans Awards 7

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. 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. 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. 10

Team-Based Incentive Plan: Advantages • Foster group cohesiveness • Facilitates workforce flexibility • Reliably

Team-Based Incentive Plan: Disadvantages • Free-ride effect • Inter-group competition leads to decline in overall performance • Social pressures limit performance • Identifying meaningful groups difficult © 2004 by Prentice Hall Terrie Nolinske, Ph. D. 12

Team-Based Plans Best When… • it is difficult to single out who did what • firm’s culture / structure support teams • task objective fosters entrepreneurship in self-managed work groups © 2004 by Prentice Hall Terrie Nolinske, Ph. D. 13

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. 14

Gainsharing (Plantwide) Incentive Plan: Disadvantages • Protects low performers • Criteria used to trigger

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. 16

Profit-sharing (Corporatewide) Incentive Plans: Advantages • Financial flexibility for the firm • Increased employee

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. 18

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. 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. 20

Most Common Perks Received by U. S. Senior Executives Perk Percentage of Surveyed Companies Offering to Senior Executives 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 Executive Dining Room Home Computer Loans © 2004 by Prentice Hall Terrie Nolinske, Ph. D. 21

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. 22