Chapter 9.docx

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Western University
Management and Organizational Studies
Management and Organizational Studies 4485F/G
Linda Eligh

Chapter 9 – Recognizing Employee Contributions with Pay Canada Post  Online calculator to simplify the bonus incentive program  Communication illustrating transparency in the firm, and showcasing the costs of benefits vs. the company’s profits Introduction  Pay for Performance o Variable forms of pay designed to recognize and reward employees’ performance that are based on measures of individual or group contributions to the organization’s success; sometimes called incentive pay, variable pay or performance-based pay o Costs of the program? o Expected return? o Fit? o What might go wrong? How does pay influence Individual Employees?  Most employees compare their own pay with that of others o Inequity may cause employees to try and find a solution (quit, lack of cooperation) Reinforcement Theory  High performance followed by reward makes it more likely in the future o High performance followed by reward, diminishes that effect o Only reward when performance is achieved, or results are missed Expectancy Theory  The theory that says motivation is a function of valence, instrumentality and expectancy  Focuses on effects when they are offered by the organization  Behaviours are a function of motivation  Valence Perceptions are value of rewards offered versus behaviours expected by organization  Motivation is function of expectancy (link between effort and performance) o And Instrumentality (perceived link between behaviours and pay)  Expectancy perceptions often have more to do with job design and training than pay systems  Increased pay increases extrinsic motivation, but reduces intrinsic motivation Agency Theory  Focuses on the divergent interests and goals of all of the organization’s stakeholders and the ways that employee compensation can be used to align these interests and goals. o Interests of principals (owners) and agents (managers) may no longer converge o Principle: a person who seeks to direct another person’s behaviour o Agent: a person who is expected to act on behalf of a principal. o What may be best for the agent, may not best for the owner  Agency costs arise from o Different goals between agents and principals o Principal may have less than perfect information on what the degree of the agent is pursuing and achieving the principal’s goals o Managers may do prestige building  Jets  Empire building o Mangers and shareholders may have different views towards risk  Little risk in their pay o Decision-making horizons differ  Change of ownership may make managers focus on short-run performance at expense of long-term success o Type of contracts used  Outcome-oriented contracts – compensation goes up as profits go up  Averse to risk, may require higher pay  Behaviour-based contracts  Must link somewhat partly to outcomes How does pay influence labour force composition?  Pay to recognize employee contributions influence behaviours and attitudes of current employees  Pay level and benefits influence membership behaviours o Decisions to remain with organization  Different pay systems appear to attract people with different personality traits and values Pay for Performance Programs  Combination of programs is the best solution Merit Pay  Annual increases to base pay that are usually linked to performance appraisal ratings  Evidence of merit-pay effectiveness is surprisingly scarce even though every organization uses  Basic Features o Merit Increase grid  A grid that combines an employee’s performance rating with the employee’s position in a pay range to determine the size and frequency of his or her pay increases  Position in pay range = compa ratio  Using the compa-ratio is to control compensation costs and maintain integrity of the pay structure  If someone is farther away from where they should be compensated, the system accommodates this and pays more frequently and more  Controlling costs involves paying close attention to distribution of performance ratings  Limiting the percentage that can be in the top two is important  Risks if everyone is actually doing well o Characteristics:  Merit pay identifies individual differences in performance  Majority of information on individual performance is collected from immediate supervisor  Policy of linking increases to performance appraisal results  Feedback under such system tends to occur infrequently  Flow of feedback tends to be largely unidirectional from supervisor to subordinate.  Criticisms of Traditional Merit-Pay Programs o Deming suggested that its not in the power of the person themselves for individual performance, but the situation such as coworkers, the job, materials, equipment which is largely out of their control  Also discourages teamwork  Eliminate the link between individual performance and pay o The measurement of performance must be fair and accurate o Procedural fairness must occur o Merit Pay does not exist  The difference between top and middle performers is only 2-3%, then the actual wage increase is as little as 300 per year.  Not significant enough to influence attitudes and behaviour o Accumulation effect creates entitlement  Big merit increase given early remains part of base salary “forever”  Does not have to be re-earned
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