Performance Appraisals- typically performed annually by a supervisor for a subordinate, designed to help
employees understand their roles, objectives, expectations, and performance success
Performance Appraisal Methods:
1) Trait Methods
a) Graph Rating Scales- each employee is rated according to a scale of individual characteristics.
b) Mixed Standard Scales- based on comparison with (better than, equal to, or worse than) a standard
c) Forced Choice Method- rater to choose statements between successful and unsuccessful performance.
d) Essay Method- compose a statement describing employee behaviour.
2) Behavioural Methods
a) Critical Incident Method- log or diary for each employee throughout appraisal period and notes specific
critical incidents related to how well they perform.
b) Behavioural Checklist Method- checks statements on a list that the rater believes are characteristic of the
employee‟s performance or behaviour
c) Behaviourally Anchored Rating Scale (BARS)- series of vertical scales, one for each dimension of job
performance; typically developed by a committee that includes both subordinates and managers
d) Behavioural Observation Scale (BOS)- measures the frequency of observed behavior(never-always)
3) Results Methods
a) Productivity Measures- quantitative measures (e.g., sales volume) short-term results
b) Management by objectives (MBO)- employee achievement of goals set by employee and manager
c) Balanced Scoreboard- financial & customer measures, internal business processes, ability to learn & grow
Types of rater errors 5. Similar-to-Me Error
1. Error of Central Tendency • appraiser inflates the evaluation of an
• all employees are rated about average. employee because of a mutual personal
2. Leniency or Strictness Error connection.
• appraiser tends to give all employees either Designing Effective Performance Standards:
unusually high or unusually low ratings.
3. Recency Error
• based largely on an employee‟s recent
behaviour rather than behaviour throughout
4. Contrast Error
• employee‟s evaluation is biased either
upward or downward b/c of comparison
w/another employee just previously
evaluated. Chapter 9: Policy should include:
Objectives of the Compensation System 1. Rate of pay whether it‟s above, below, or at
1. To reward employees‟ past performance the prevailing community rate.
2. To remain competitive in the labour market 2. The ability gain employee acceptance while
3. To maintain salary equity among employees motivating employees to perform at best
4. To mesh employees‟ future performance with 3. Pay level when recruited and pay differential
organizational goals b/w new & more senior employees.
5. To control the compensation budget 4. Intervals for pay raises and extent to which
6. To attract new employees merit &/or seniority influences raises.
7. To reduce unnecessary turnover 5. pay levels needed to facilitate the
achievement of a sound financial position
• Evaluating the individual components of the compensation program (pay and benefits) to see if
they advance the needs of employees and the goals of the organization.
“How does this compensation practice benefit the organization?”
“Does the benefit offset the administrative cost?”
Pay for Performance Standard- managers tie compensation to employee effort and performance.
• Raise productivity & lower labour costs (merit-based pay, bonuses, salary commissions, job and
pay banding, team/ group incentives, and various gainsharing programs.)
Pay Equity- perception that compensation received is equal to value of work performed.
Equity Theory (Distributive Fairness)
• Motivation theory- how people respond to situations in which they feel they have received less
(or more) than they deserve.
• Individuals form a ratio of their inputs to outcomes in their job & then compare the value of that
ratio with the value of the ratio for other individuals in similar jobs. (= equitable or inequitable)
• Employees exert greater work effort if they expect that it will result in a reward that they value.
• Employees must believe that good performance is valued by their employer & will result in their
receiving the expected reward.
Internal/External factors determining the wage mix
Internal Factors External Factors
1. ER’s Compensation Strategy- setting org. 1. Labour Market Conditions-supply/demand for
comp. policy to lead, lag, or match qualified labour. Gov regulations/unions prevent
competitor‟s pay the lowering wages
2. Worth of a job- establishing the internal 2. Area Wage Rates- wage rate influenced by other
wage relationship among jobs and skills area employers for comparable jobs
levels 3. Cost of Living- varies. Inflation drive
3. Employee’s Relative Worth- rewarding compensation rates upward-purchasing power
individual employee performance 4. Collective Bargaining- escalator clauses, unions
4. Employer’s Ability to pay-having bargain for real wages increases that raise the
resources& profits to pay employee. stand of living for its members
Consumer Price Index (CPI)- measure of the avg change in prices over time in a fixed „market basket‟
of goods/services. Based on changes in CPI, employers adjust compensation rates accordingly to help
employees maintain their purchasing power. 1 cent per hr for each .3 or .4 point change in the CPI Job Evaluation Systems- determining the relative worth of jobs in order to establish which jobs should
be paid more than others w/in an org. Provide internal equity & basis for wage rate determination
1. Job Ranking System- arrayed on basis of their worth
2. Job Classification System- grouped according to a series of predetermined wage grades
3. Point System- calculating total points assigned to it. (point manual)
4. Work Valuation- measure a jobs worth through its value to the organization
5. Job Evaluation for Management Positions- Hay Profile method: 3 factors (knowledge, mental
activity, & accountability) to evaluate
Purpose of Wage/ Salary Surveys- survey of wages paid to employees of other employers in the
surveying organization‟s relevant labour market. Maintains external equity
Competency-Based Pay- pay based on an employee‟s skill level, variety of skills possessed, or increased
• Greater productivity • Limit the amount of compensation
• Increase employee learning & commitment employees can earn
• Improved staffing flexibility • After achieving top wage employees may
• Reduced absenteeism/ turnover be reluctant to continue training
• Encourages employees to acquire training • Difficult to develop appropriate measures
when new/updated skills are needed
Broadbanding- collapses many traditional salary grades into a few wide salary bands
Purpose of Pay for Performance: • Shared focus on organizational objectives
• Increase productivity & lower labour costs. & commitment
• Differentiate between the pay of average • Encourage employees to assume
performers & that of outstanding performers „ownership‟ of their jobs, thereby
• EEs must reach the performance „threshold‟ improving effort & job performance
established to qualify for incentive payments • Motivate employees to expend more effort
(variable pay) than under hourly &/or seniority-based
Purpose of Variable Pay Systems: compensation systems
• Tying pay to some measure of individual, • Support a compensation strategy to attract
group, or organizational performance & retain top-performing employees
Advantages of Incentive Plans:
• focus on performance targets. provide motivation
• variable costs linked to the achievement of results.
• directly related to operating performance. If performance objectives (quantity and/or quality) are
met, incentives are paid. If objectives are not achieved, incentives are withheld.
• teamwork and unit cohesiveness.
• distribute success among those responsible for producing that success.
• reward or attract top performers when salary budgets are low. (more effort better pay)
Features of Successful Incentive Plans:
• Employees have a desire for an incentive • Standards are challenging but achievable.
plan. • Should be viewed at a reward earned
• Employees are encouraged to participate. through effort & never as entitlement
• Employees see a clear connection between the • Payout formulas are simple &
incentive payments they receive and their job understandable.
performance. • Payouts are a separate, distinct part of
• Employees are committed to meeting the compensation.
standards. Individual Incentive Plans
Straight Piecework • Individual contributions can be difficult
• employees receive a certain rate for each unit measure.
produced. • Not easily applied to work that is highly
Differential Piece Rate mechanized with little employee control over
• employees whose production exceeds the output.
standard amount of output receive a higher rate • Piecework may conflict with organizational
for all of their work than the rate paid to those culture (teamwork) and/or group norms (“rate
who do not exceed the standard amount. busting”).
Problems with piecework systems: • When quality is more important than quantity.
• Is not always an effective motivator • When technology changes are frequent.
• Piecework standards can be difficult to develop.
Standard Hour Plan
• sets pay rates based on the completion of a job in a predetermined “standard time.”
• If employees finish the work in less than the expected time, their pay is still based on the standard
time for the job multiplied by their hourly rate. (ex.Service departments in automobile dealerships)
• supplemental to the base wage for cost reduction, quality improvement/ other performance criteria
• Unplanned bonus given for employee effort unrelated to an established performance measure.
Merit Pay Program (merit raise) • there may be vagueness regarding merit award
• Links an increase in base pay to how criteria.
successfully an employee achieved some • don‟t believe their compensation is tied to effort
objective performance standard. and performance; unable to differentiate btw merit
Merit Guidelines pay & other types of pay increases.
• Guidelines for awarding merit raises that are • The performance appraisal objectives of
tied to performance objectives. employees & managers are often at odds.
Problems with Merit Raises: • Create feelings of pay inequity
• Money available increases may be inadequate to • Merit pay plans do not necessarily motivate higher
satisfactorily raise all employees‟ base pay. levels of employee performance
• Managers may have no guidance in how to define
and measure performance;
Lump-sum Merit Program- receive a year-end merit Advantages
payment, which is not added to their base pay Provides financial control
Contains employee benefit costs
clear link between pay and performance
Incentive Rewards- used to recognize productivity gains, special contributions or achievements, and service
to the organization.
- feel appreciated when ERs tie awards to performance & deliver awards in timely, sincere & specific way.
- Noncash Incentive Awards- most effective as motivators when combined w/meaningful employee
a. Straight Salary- permits salespeople to be b. Straight Commission- based upon a percentage of
paid for performing various duties that are sales.
not reflected immediately in their sales - Salary Draw is a cash advance that must be
volume. paid back as commissions are earned.
- Encourages building customer Disadvantages
relationships. - Emphasis on sales volume rather than profits.
- Provides compensation during periods of - Customer service after the sale is neglected.
poor sales. - Earnings tend to fluctuate widely between
- May not provide sufficient motivation for good and poor periods of business.
maximizing sales volume. - Temptation to grant price concessions
- c. Salary & Commission- includes a straight salary and a commission component (“leverage”)
- advantages of straight salary and straight commission forms of compensation.
- greater design flexibility
- develop the most favourable ratio of selling expense to sales.
- Motivates sales force to achieve specific company marketing objectives in addition to sales volume.
d. Salary plus bonus- pays a salary plus a bonus achieved by reaching targeted sales goals
Incentives for Professional Employees
- encourage greater level of individual performance *Executive Package
- Bonuses & merit increases 1. Base Salary
- Double-track wage systems 2. Short-term Incentives/bonuses
- Performance incentive bonuses 3. Long-term incentives or stock
- Profit sharing & stock ownership