Post on 21-Dec-2015
MGTO 231Human Resources ManagementPay for performance
Dr. Kin Fai Ellick WONG
Prologue
How “pay for performance” is different from base compensation and benefits?
Why such difference(s) is(are) important? Why don’t we design a compensation
system that totally follows the “pay for performance” notion? Any potential drawbacks of the idea of “pay
for performance”?
Outline
Some basic concepts
Types of pay-for-performance plans
Potential drawbacks
An incentive system
A component of a compensation system Rewards are given on the basis of
performance Those who contribute more to the firm
deserve better rewards An incentive system specifies the
regulations to execute the rewards
Assumptions Individual employees and work teams differ in
how much they contribute to the firm A large degree of the firm’s overall
performance depends on the performance of individuals and groups within the firm
To attract, retain, and motivate high performers and to be fair to all employees, the firm needs to reward employees on the basis of their relative performance
Outline
Some basic concepts
Types of pay-for-performance plans
Potential drawbacks
Four basic types
Individual-based plans Team-based plans Plantwide plans Corporatewide plans
Four basic types
Individual-based plans Team-based plans Plantwide plans Corporatewide plans
Individual-based plans
Identify and reward the contributions of individual employees
Most widely used plans in industry Three basic components
Merit payPiece-rate systemAwards
Merit payAn increase in base pay, normally given once
a year (remember what we have discussed in Performance Appraisal)
Piece-rate systemA compensation system in which employees
are paid per unit produced
AwardsA one-time reward, usually given in the form
of tangible prizePaid vacation, a television set, service medal
( 十年金牌 )
Advantages
Performance that is rewarded is likely to be repeated (reinforced)Expectancy theory: people tend to do those
things that are rewarded Can shape an individual’s goals over time Helps the firm achieve individual equity
Disadvantages
What potential disadvantages will there be?Discuss with your group members and each
group should try to give one disadvantage.Try your best to explain why the disadvantage
you suggest is a disadvantage.
Disadvantages
The quantity-quality tradeoff The power of supervisors becomes very
influentialFor survival, employees will follow the orders
of the supervisors獻媚 , 奉承 (doing what they think the top-
management want them to do in order to impress top-management)
Four basic types
Individual-based plans Team-based plans Plantwide plans Corporatewide plans
Individual-based plans are most likely to succeed when
The contributions of individual employees can be accurately isolated
The job demands autonomy Cooperation is less critical to successful
performance OR competition is to be encouraged
Team-based plans
Normally reward all team members equally based on group outcomes In forms of bonuses and/or awardsVery common in team ballgame: soccer,
basketball (Man. United, LA Lakers, South China, etc.)
Some may be allowed to decide how the bonus will be distributed within group
Advantages
Foster group cohesiveness Imagine how Man. United will be if only those
who make the goal will be awarded The performance measure on groups has
shown to be more accurate and reliable than that on individuals
Disadvantages
What potential disadvantages will there be?Discuss with your group members and each
group should try to give one disadvantage.Try your best to explain why the disadvantage
you suggest is a disadvantage.
Disadvantages
Problems of social loafingThe sum of individuals’ output is higher than
the whole group outputFree-riding effect
Inter-group competition leading to a decline in overall performanceWe have important information and you are not
allowed to access it
Team-based plans are most likely to succeed when
It is difficult to single out who did what or identify the relative contribution
In flat organizations where team works are common and highly emphasized
Employees are committed to their work and are intrinsically motivatedSocial-loafing is less likely
Four basic types
Individual-based plans Team-based plans Plantwide plans Corporatewide plans
Plantwide plans
Rewards all workers in a plant or business unit based on the performance of the entire plant or unit
Not the performance of the whole corporation, but the efficiency within a unit
Normally measured in terms of labor or material cost savings compared to an earlier period
Three common typesBonusesAwardsGainsharing
A portion of the company’s cost savings is returned to workers
Usually in the form of a lump-sum bonus
Advantages
Unlike other forms of incentives, which motivate employees to produce (開源 ) more, plantwide plan motivates employees to save (節流 ) more
Competition between individuals and teams are likely avoided
May increase the level of cooperation across workers and teams by giving everyone a common goal
Disadvantages
What potential disadvantages will there be for the idea of gainsharing?Discuss with your group members and each
group should try to give one disadvantage.Try your best to explain why the disadvantage
you suggest is a disadvantage.
Disadvantages
What potential disadvantages will there be for the idea of gainsharing?Protection of low performers because they are
hardly detectedNot fair for those units which have long been
cost effective
Four basic types
Individual-based plans Team-based plans Plantwide plans Corporatewide plans
Corporatewide plans
The most macro type of incentive programs Reward employees based on the entire
corporation’s performance In the forms of
Profit sharingEmployee stock ownership plan
Profit sharingUses a formula to allocate a portion of
declared profits to employees It is not to directly reward workers for
productivity improvementsSome may be given in terms of retirement
benefits, other may be given in terms of bonuses
Employee stock ownership plan (ESOP)Rewards employees with company stocksAn outright grant or a favorable price that may
be below market value Next media, PCCW, etc.
Advantages
Financially flexible for the firms – they can automatically adjust the labor downward during economic downturns
Increase employee commitmentThe employees become part of the owners
under the concept of profit sharing and ESOP
Disadvantages
What potential disadvantages will there be?Discuss with your group members and each
group should try to give one disadvantage.Try your best to explain why the disadvantage
you suggest is a disadvantage.
Disadvantages
Employees may have little sense of control on their compensation
Limited effect on productivityThe connection between individual goal and
firm performance is not so tight
Outline
Some basic concepts
Types of pay-for-performance plans
Potential drawbacks
Potential Drawbacks
Do only what you get paid for Decrease intrinsic motivation Decrease job satisfaction Increase stress Negative effects due to competitions
between individuals or groups
Problems of measurement Judgment bias, and not all performance can
be easily measured Credibility Gap
Some workers do not believe in the performance-reward contingency
Conclusion
“Pay for performance” is unique in the sense that there is a very clear performance-reward contingency
Why don’t we design a compensation system that totally follows the “pay for performance” notion? Any potential drawbacks of the idea of “pay for
performance”?