Compensation, Merit Pay and

Motivation

Compensation, Merit Pay and

Motivation

Presented by: Ken Lee (Qian Li)Presented by: Ken Lee (Qian Li)

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Organizations Motivate

Join & Remain

Perform assigned roles

Act innovatively & spontaneously

TypesOf

Behavior

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Desired Behaviors & Rewards

Desired Behaviors

Organizations encourage Rewards

Membership

Reliable Role

Innovative spontaneous

activity

Pay & Fringe

Benefits

Responsibility & Autonomy

Social Affiliations

Organization provide

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Pay

Membership Performance

Cash

Retirement planslife & health insurance indirect compensation

Instrumental System Rewards

Gearedto

Performance

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Vroom’s Expectancy Theory

• Individuals who expect to receive a valued reward for high performance are more likely to strive for that level of performance than if they received no payoff.

Theory of Pay for Performance

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Sales in Private Sector

Sales in Private Sector

PMRSPMRS

Contingency Pay Schemes

Salary

Welfare

Bonus

Theory of Pay for Performance

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Design of Pay-for-performance

Strategic Choices

StructuralStructuralIssuesIssues

ProcessProcessIssuesIssues

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Structured Issues

Measures of PerformanceComprehensiveness

ofCriteria /Objectivity

of Measures

Salary vs Bonus Permanent

Adjustment to Base Pay/One-

time Bonus

Level of Aggregation

Individual/Program/

Installation/Agency/Bureau

Size of Payouts

3% is a good rule of thumb

Administrative Convenience Frequency

of Payout

Hierarchy/SubunitsNumber of

Different Plans

Structured Structured IssuesIssues

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Process Issues

Participation in system design

Employee involvement is likely to provide better Information about which plan designs are most attractive

Obtaining legislative agreement with system objectives

instrumental value, ongoing cost, distribution of rewards, risks

Participation in system administration

• Establishment of employee oversight boards• Effective due process.

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Common Problems

Deci (1975) Contingent pay is undesirable because it reduces intrinsic

motivation and leads individuals to develop strategies to achieve rewards with minimal effort.

Meyer (1975) The feedback implicit in merit pay awards undercuts that self-

image, and the effect is to damage employee self-esteem, a factor important in individual and organizational productivity.

Pearce, Stevenson and Perry (1985) Office productivity gradually improved over the period they had

tested but that the merit pay intervention did not contribute to the trend.

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Common Problems

Invalid performance appraisals

• Performance cannot be accurately and completely

measured.• Employees complained performance appraisals have

become "objective" by quantifying trivial features of jobs,

result in meaningless appraisals.• Manager felt that the criteria were not promoting improved

individual performance or agency effectiveness• Budget limits so that pay is controlled by holding down

average employee performance ratings.

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Common Problems

Dysfunctional competition

• Pay-for-performance systems are designed

to reward individual. •Contingent pay may discourage cooperation.• Pay for performance may damage the self-

esteem and loyalty of employees.• Reduce the willingness of employees to

work outside of their performance contract

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Common Problems

• Fixed budget results in underfunding of pay-

for-performance programs.• High performers have few chances for big

rewards, and funds may be inadequate to

recognize other deserving employees.• Demoralizing effect of comparative ratings.

One must increase one's relative ranking by

displacing another.

Lack of adequate financial rewards

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What Works In The Public Sector

Federal Government Salary plans that reward individual-level performance have

generally not fared well among managers. Congress threatened to eliminate all appropriations for

contingent pay, creating doubt about the viability of such systems in the federal government.

Failure of merit pay systems to achieve expected results, new thinking about motivation and fiscal stress.

State & Local Governments Unbelievably complicated paper-intensive. Simply poorly administered. Launched without adequate funding.

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Reasons for Continuing Experimentation

Failures involve designs predicated almost exclusively on an individual level of aggregation.

Notion of "each according to his or her efforts“ is ingrained in the American political culture.

Failures were predictable because the structure or administration of the system violated one or more principles of system design.

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Guidelines Follow other "Gateway“ changes Best suited to organizations with supportive cultures Not be a leading but a lagging change

Contingent upon the situation Many government jobs and the potential of more accurate and objective

performance measurement. Situational factors including a jurisdiction’s fiscal realities.

Employees’ participation facilitates patterns of interaction that are conducive to the success.

Gradual implementation Significant time and effort must be devoted to designing and testing. Opportunity for organizational members to develop agreement.

Develop a range of meaningful rewards the types of individuals attracted to the organization, the job itself, the work

environment and changes in the external environment. Informal rewards.

Presented by: Ken Lee (Qian Li)Presented by: Ken Lee (Qian Li)