Compensation and Incentives.pptx anjum.pptx

8/14/2019 Compensation and Incentives.pptx anjum.pptx

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Compensation and Incentives:

Practice vs. TheoryGEORGE P. BAKER, MICHAEL C. JENSEN, and KEVIN

J. MURPHY


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Introduction

In this paper, the authors have discussed aspects of

compensation where current economic theory and actual

practice seem particularly disassociated, and summarize

empirical evidence that is inconsistent with our traditionaleconomic theories. The practices which are satisfying the

employees are many than tangible rewards.


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The Absence of Pay-for-Performance

Compensation Systems

Nonmonetary rewards for performance can be important,

tend to focus on monetary rewards because individuals

are willing to substitute nonmonetary for monetaryrewards & because money represents a generalized claim

on resources.

Non- monetary rewards can take many different forms such

as including praise from superiors and co-workers,implicit promises of future promotion opportunities,

feelings of self-esteem that come from superior

achievement and recognition.


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Is Pay an Effective Motivator?

Monetary rewards are counterproductive(ineffective).

Money actually lowers employee motivation, by

reducing the intrinsic rewards that an employee receives

from the job.

Similarly, Slater concludes thatGetting people to chase

money produces nothing but people chasing money.

Using money as a motivator leads to a progressivedegradation in the quality of everything produced.


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Contd..

Kohn says:

Incentives Can Be Bad for Business, offers three reasons

why merit-pay systems are counterproductive.

First, rewards encourage people to focus narrowly

on a task, to do it as quickly as possible, and to take few

risks.

Second, extrinsic rewards can erode intrinsic interest.

Finally, people come to see themselves as being controlled

by a reward.


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Contd..

Hamner says Ruin Motivation with Pay argues that merit

systems decrease motivation because managers

systematically mismanage pay-for-performance

programs. Aggressive pay-for-performance systemsultimately involve distinguishing workers on the basis of

their performance, and there is a large behavioural

literature arguing that treating employees differently from

each other is detrimental to employee morale.


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Criticism

Monetary pay-for-performance systems indicates not that

they are ineffective but rather that they

are too effective: strong pay-for-performance motivates

people to do exactly what they are told to do.Here the arguments about whether people are motivated by

money

or

whether they should be motivated by money


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Promotion-Based Incentive Systems

Promotions in organizations serve two important anddistinct purposes.

1)Individuals differ in their skills and abilities, jobs differ in

the demands they place on individuals, and promotions

are a way to match individuals to the jobs for which

theyre best suited.

2)Role of promotions is to provide incentives for lower

level employees who value the pay and prestige

associated with a higher rank in the organization.


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Promotion-Based Incentives vs. Bonus-Based

IncentivesPromotions are used as the primary incentive device in

most organizations. The important problem with

promotion-based reward systems is that they require

organizational growth to feed the reward system.This means such systems can work well in rapidly

growing firms, but are likely to generate problems in

slowly growing or shrinking firms. Promotion-based

schemes will be used more and prevalent in large

organizations and growing industries with many

hierarchical levels than in smaller organizations with

fewer levels.


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Contd..

Bonus-based incentives, this depends on years bonus of

the years performance, Bonus schemes can, in principal,

provide incentives for all individuals in the organization,

regardless of their ability, position, and promotionopportunities. Bonus-based incentives will be more

important at higher levels in the organization since the

probability of future promotion is lower; the CEO is not

promotable and therefore his or her financial incentivesmust come from bonuses. Bonus-based systems will be

more prevalent in declining industries and smaller

organisation.


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Profit-sharing Plans

Profit-sharing, in which an individuals compensation is

tied to the overall performance of the firm, has become

increasingly popular in U.S. Corporations.

A recent New York Stock Exchange survey indicates thatseventy percent of firms with profit-sharing plans report

that they lead to improved productivity. gain sharing can

play an important role in motivating people to be more

productive.


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Biased and Inaccurate Performance

EvaluationsThe general reluctance of managers to give poor performance

evaluations to employees is puzzling but consistent with well-

documented evidence that most people believe their

performance is better than average.In a study, one indicates that 58% of a sample of white-collar

clerical and technical workers rated their own performance as

falling within the top 10% of their peers in similar jobs, 81%

rated themselves in the top 20%.

Another study of 1,088 managerial and professional employees

found an even stronger bias: 47% rated their own performance

in the top 5%, 83 % rated their performance in the top 10%, no

one rated their performance below 75%.


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Contd..

The biased perceptions of individuals regarding their own

performance may explain why supervisors appear to have

a strong aversion to giving subordinates poor evaluations.

Forced-ranking systems will generate considerableconflict in organizations.

Visible rewards will not be granted for superior

performance unless there is significant incentive for

superiors to undertake the unpleasant task of tellingsubordinates that they are poor or even average

performers.


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Compensation Surveys and the Relation

Between CEO Pay and Firm Size

Compensation increases with firm size,

larger firms the larger pay,

for example, may employ better qualified and better paidCEOs.

It also suggests that CEOs can increase their pay

by increasing firm size.


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Conclusion

Monetary rewards are not only the rewards but non monetarybenefits are also important.

As employes are interested with non monetary rewards which

have significant role but monetary also plays a important role

as the reward for some employees.


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