Management and Organizational Studies 3342A/B Chapter Notes - Chapter 10: Expectancy Theory, Equity Theory, Total Rewards
5 Dec 2018
School
Department
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Pay for Performance: Performance Appraisal and Plan Design
I. What Behaviours Do Employers Care About? Lining Organizational Strategy to
Compensation and Performance Management?
• There is a growing evidence that employee performance depends on three general factors
o Employee Performance = f(A, M, E)
▪ A = Ability
▪ M = Motivation to perform
▪ E = Supportive Environment (most important factor)
• Once a talented person is hired, they still need to have the motivation to succeed and
environment that allows them to succeed in order for them to be successful
II. What Does It Take to Get These Behaviours? What Does Theory and Research Say
• Motivation depends on three elements
o What’s important to a person
o Offering it in exchange
o For the desired behaviour
• Cafeteria-Style Compensation: Based on the idea that only the individual employee knows
which package of rewards is best suited for their personal needs
• Maslow’s and Herzberg’s fall into the category for identifying what is important to the
individual person
o People have certain needs, physiological, security and self-esteem
o These theories drive compensation decisions about the depth and breadth of the
compensation offerings
• Expectancy theory, equity theory and agency theory focuses less on need states and more
on the second element, the nature of the exchange
o Expectancy Theory: Argues that people behave as though they cognitively evaluate
what behaviours are possible in relation to the value of the rewards offered in
exchange
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o Equity Theory: Argues that people are highly concerned about equity, or fairness of the
exchange process, employees look at the exchange as a ratio between inputs and
outputs relative to other people’s ratios
o Agency Theory: Employees are depicted as agents who enter an exchange with
principals
▪ Both sides seek the favourable exchange for them and will act opportunistically if
given the chance
III. What Does It Take to Get These Behaviours? What Compensation Practitioners Say…
• Compensation rewarded people for meeting expectations
• This question (in the title) wasn’t asked often enough
IV. Total Reward System: Other Rewards Besides Money Influence Behaviour
• Compensation is but one of many rewards that influence employee behaviour
• Workers highly value empowerment, recognition and opportunities for advancement
• If rewards other than cash are not considered, the compensation process may produce
unintended consequences
• Job security is becoming a very important part of “compensation”
• The trend today is toward less stable ad less secure compensation packages
o Moving from a defined benefit pension to a defined contribution pensions plan
symbolizes this
• Risky compensation is defined in terms of stability of income or the ability to accurately
predict income levels from year to year
• Page 218 and 219 have dope charts for outlining every component of the total rewards
system
• Some research suggests that employees may need a risk premium to stay and perform in a
company with pay-at-risk
o And this premium may not even work, that’s how much employees are starting to value
their job and income security
V. Does Compensation Motivate Behaviour?
1. Do People Join a Firm Because of Pay?
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• Research suggests that job candidates look for organizations with reward systems
that fit their personalities
• Talented employees are attracted to companies that have strong links between pay
and performance
2. Do People Stay in a Firm (or Leave) Because of Pay?
• Turnover is much higher for poor performers when pay is based on individual
performance
• More group-incentive plans may lead to turnover of good performers
• When switching from salary to performance based pay, increases in productivity
comes from two sources
o Overall more productivity from every employee
o Poor performers being less likely to stay around because pay is not guaranteed
3. Do Employees More Readily Agree to Develop Job Skills Because of Pay
• The answer is not clear
o Evidence is starting to accumulate that says that pay for sill may not increase
productivity
4. Do Employees Perform Better on Their Jobs Because of Pay?
• Linking pay to behaviours of employees results in better individual and
organizational performance
• Evidence exists that management and workers alike believe pay should be tied to
performance
• Compensation experts estimate that every dollar spent on any performance-based
pay plan yields $2.34 in organizational earnings
o It is also documented that for every 10% increase in bonus paid means an extra
1.5% ROA
VI. The Role of Performance Appraisals in Compensation Decisions
• Performance must be objectively and accurately measured if it is to be rewarded
accordingly
• Sometimes it is hard to accurately measure a job for compensation
