Chapter 10 – Pay for performance: Performance Appraisal and Plan
Design
Pay for performance plan – a pay plan that links individual pay to some
measure of performance on the job
HR practices such as designing a performance appraisal that
employees find acceptable goes a long way toward increasing trust in
top management
What behaviours do employees care about? Linking organization
strategy to compensation and performance management
oEmployers want employees to perform in ways that lead to
better org performance
oEmployee performance = f(S,K,M) where
S = Skill and ability to perform task
K = knowledge of facts, rules, procedures
M = motivation to perform
oThe way that compensation systems are designed is intimately
linked to the stability of performance measures
oPerformance measurement related to compensation:
Variability/ease of
measurement in
individual
performance
Variability in Organization performance
Low variability – few
swings in overall
corp performance
High variability –
regular and large
swings in overall corp
performance
Unstable, unclear and
changing objectives
CELL A – provide wide
range of rewards
beyond just money.
Include significant
incentive component
CELL B – provide wide
range of rewards beyond
just money. Emphasize
base pay with low
incentive portion
Stable and easily
measures
CELL C – emphasize
monetary rewards with
large incentive
component
CELL D – emphasize
monetary rewards. Large
base pay with low
incentive portion
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What might cause wide swings in org performance? Something usually
in the external environment that is beyond the employees’ control –
not fair to employees that their pay should suffer – perceived as unfair
treatment
oCELLS B and D – low incentive component is appropriate with
highly variable annual performance
oCELLS A and C – larger incentive components are appropriate in
companies with stable annual performance
Some employees have jobs that are fairly stable with consistent
expectation while other deal with a lot of fluctuations in things
expected from them – broader range of rewards available for
employees with unstable demands and large incentive component for
employees with stable demands
Answers questions about how good employees can JOIN the company,
how they can be RETAINED, how they can DEVELOP SKILLS, and how
can they PERFORM well on the job – all compensation decisions
What does it take to get these behaviours? What theory and research
say
oMotivation – a process involving the determination of what is
important to a person and offering it in exchange for desired
behaviour
Research that employees prefer pay systems that
recognize individual performance, cost of living, seniority,
and the market rate
Also prefer flexible total compensation – idea that only the
individual would know which package of rewards best suit
his/her personal needs
Motivation theories:
oSome theories in the table focus on content – what is important
to them like Maslow and Herzberg
oExpectancy, equity, and agency theory focus less on need states
and more on the nature of the exchange and how it affects
motivation
Expectancy theory – people cognitively evaluate potential
behaviours in relation to rewards offered in exchange –
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choose behaviours that yield the most satisfactory
exchange
Equity theory – people are concerned about the fairness
of the reward outcomes exchanged for employee inputs –
what is received versus what was expected
Agency theory – employees and management/owners
both will act opportunistically to obtain most favourable
exchange possible – employers (principals) identify
important behaviours and outcomes and pay specifically
for reaching desired levels of each
Theory Essential features Predictions
about
performance
based pay
So what?
Maslow’s
need
hierarchy
People are
motivated by
inner needs
Need from a
hierarchy
from most
basic (food,
shelter) to
higher order
(self esteem,
love, self-
actualization)
Needs are
never fully
met; operate
cyclically
Higher order
needs
become
motivating
once lower
needs are
fulfilled
Frustration
results when
needs are not
met
Base pay
must be set
high enough
to provide
individuals
with
economic
means to
meet their
basic living
needs
An at-risk
program will
not be
motivating
since it
restricts
employees’
ability to
meet lower
needs
Success
sharing
plans may
be
motivating
to some
extent
Performance
based pay
may be
demotivatin
g if it
impedes
employees’
ability to
meet daily
living needs
Incentive
pay is
motivating
to the extent
that it is
attached to
achievement
,
recognition,
and
approval
Herzberg’s
two factor
theory
Employees
are motivated
by two types
Base pay
must be set
high enough
Pay level is
important –
must meet
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