Human Resources – Chapter 9: Recognizing Employee Contributions with Pay
Even a heavily unionized government organization can use incentive compensation to motivate
Pay for performance – 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. Employees pay
does not depend solely on job.
How Does Pay Influence Individual Employees?
Pay plans are typically used to energize, direct or control employee behavior. 3 theories help
explain compensation’s effects: reinforcement, expectancy and agency theories.
Aresponse followed by a reward is more likely to recur in the future.
Expectancy theory – the theory that says motivation is a function of valence, instrumentality
and expectancy. Behaviors can be can be described as a function of ability and motivation.
Valence perceptions are perceived value of rewards being offered versus behaviors expected by
the organization. Instrumentality is the link between behaviors and pay. Valence pay outcomes
should remain the same under diff pay systems.
Agency theory – a theory focusing on the divergent interests and goals of the organization’s
stakeholders and the ways that employee compensation can be used to align these interests and
Agency costs are created – the interests of the principals (owners) and their agents (managers)
may no longer converge. Principal – a person (i.e. owner) who seeks to direct another person’s
behavior. Agent – a person (i.e. manager) who is expected to act on behalf of a principal.
Agency costs can arise from principals and agents having different goals (goal incongruence),
and principals having less than perforce information on the degree to which the agent is pursuing
and achieving the principal’s goals (information asymmetry). Behavior based contracts do not
transfer risk to the agent. Outcome oriented contracts do.
Factors affecting what contract an organization should use: risk aversion, outcome uncertainty,
job programmability, measurable job outcomes, ability to pay and tradition.
All 3 of these theories focus on how behavior reward contingencies can shape behaviors.
How Does Pay Influence Labor Force Composition?
Membership behaviors are decisions employees make about whether to join an organization or
remain with an organization. Using pay to recognize employee contributions has been thought of
a way to influence the behaviors and attitudes of employees, whereas pay level and benefits have
been seen as a way to influence membership behaviors.
Acombination of programs for compensating employees is often the best solution.
Programs for recognizing employee contributions differ according to 3 features: payment
method, frequency of payout and ways of measuring performance. 2 contingencies influencing
whether pay programs fit the situation: management style and type of work. Merit Pay
Merit pay – annual increases to base pay that are usually linked to performance appraisal
Many merit pay programs work off a merit increase grid – a grid that combines an employees
performance rating with the employee’s position in a pay range to determine the size and
frequency of his or her pay increases. Factors are the individuals performance rating and their
compa-ratio. One reason for factoring in the compa-ratio is to control compensation costs and
maintain the integrity of the pay structure.
In controlling compensation costs, another factor that requires close attention is the distribution
of performance ratings.
Criticisms of Traditional Merit-Pay Programs
Deming argued that the individual focus of merit pay discourages teamwork. If the performance
measure is not perceived as being fair and accurate, the entire merit pay program can break
down. Process issues appear to be important in administering merit pay. Employees appear to
assess fairness alon