MGTO 231Human Resources ManagementPay for performance

Dr. Kin Fai Ellick WONG

Prologue

How “pay for performance” is different from base compensation and benefits?

Why such difference(s) is(are) important? Why don’t we design a compensation

system that totally follows the “pay for performance” notion? Any potential drawbacks of the idea of “pay

for performance”?

Outline

Some basic concepts

Types of pay-for-performance plans

Potential drawbacks

An incentive system

A component of a compensation system Rewards are given on the basis of

performance Those who contribute more to the firm

deserve better rewards An incentive system specifies the

regulations to execute the rewards

Assumptions Individual employees and work teams differ in

how much they contribute to the firm A large degree of the firm’s overall

performance depends on the performance of individuals and groups within the firm

To attract, retain, and motivate high performers and to be fair to all employees, the firm needs to reward employees on the basis of their relative performance

Outline

Some basic concepts

Types of pay-for-performance plans

Potential drawbacks

Four basic types

Individual-based plans Team-based plans Plantwide plans Corporatewide plans

Four basic types

Individual-based plans Team-based plans Plantwide plans Corporatewide plans

Individual-based plans

Identify and reward the contributions of individual employees

Most widely used plans in industry Three basic components

Merit payPiece-rate systemAwards

Merit payAn increase in base pay, normally given once

a year (remember what we have discussed in Performance Appraisal)

Piece-rate systemA compensation system in which employees

are paid per unit produced

AwardsA one-time reward, usually given in the form

of tangible prizePaid vacation, a television set, service medal

( 十年金牌 )

Advantages

Performance that is rewarded is likely to be repeated (reinforced)Expectancy theory: people tend to do those

things that are rewarded Can shape an individual’s goals over time Helps the firm achieve individual equity

Disadvantages

What potential disadvantages will there be?Discuss with your group members and each

group should try to give one disadvantage.Try your best to explain why the disadvantage

you suggest is a disadvantage.

Disadvantages

The quantity-quality tradeoff The power of supervisors becomes very

influentialFor survival, employees will follow the orders

of the supervisors獻媚 , 奉承 (doing what they think the top-

management want them to do in order to impress top-management)

Four basic types

Individual-based plans Team-based plans Plantwide plans Corporatewide plans

Individual-based plans are most likely to succeed when

The contributions of individual employees can be accurately isolated

The job demands autonomy Cooperation is less critical to successful

performance OR competition is to be encouraged

Team-based plans

Normally reward all team members equally based on group outcomes In forms of bonuses and/or awardsVery common in team ballgame: soccer,

basketball (Man. United, LA Lakers, South China, etc.)

Some may be allowed to decide how the bonus will be distributed within group

Advantages

Foster group cohesiveness Imagine how Man. United will be if only those

who make the goal will be awarded The performance measure on groups has

shown to be more accurate and reliable than that on individuals

Disadvantages

What potential disadvantages will there be?Discuss with your group members and each

group should try to give one disadvantage.Try your best to explain why the disadvantage

you suggest is a disadvantage.

Disadvantages

Problems of social loafingThe sum of individuals’ output is higher than

the whole group outputFree-riding effect

Inter-group competition leading to a decline in overall performanceWe have important information and you are not

allowed to access it

Team-based plans are most likely to succeed when

It is difficult to single out who did what or identify the relative contribution

In flat organizations where team works are common and highly emphasized

Employees are committed to their work and are intrinsically motivatedSocial-loafing is less likely

Four basic types

Individual-based plans Team-based plans Plantwide plans Corporatewide plans

Plantwide plans

Rewards all workers in a plant or business unit based on the performance of the entire plant or unit

Not the performance of the whole corporation, but the efficiency within a unit

Normally measured in terms of labor or material cost savings compared to an earlier period

Three common typesBonusesAwardsGainsharing

A portion of the company’s cost savings is returned to workers

Usually in the form of a lump-sum bonus

Advantages

Unlike other forms of incentives, which motivate employees to produce (開源 ) more, plantwide plan motivates employees to save (節流 ) more

Competition between individuals and teams are likely avoided

May increase the level of cooperation across workers and teams by giving everyone a common goal

Disadvantages

What potential disadvantages will there be for the idea of gainsharing?Discuss with your group members and each

group should try to give one disadvantage.Try your best to explain why the disadvantage

you suggest is a disadvantage.

Disadvantages

What potential disadvantages will there be for the idea of gainsharing?Protection of low performers because they are

hardly detectedNot fair for those units which have long been

cost effective

Four basic types

Individual-based plans Team-based plans Plantwide plans Corporatewide plans

Corporatewide plans

The most macro type of incentive programs Reward employees based on the entire

corporation’s performance In the forms of

Profit sharingEmployee stock ownership plan

Profit sharingUses a formula to allocate a portion of

declared profits to employees It is not to directly reward workers for

productivity improvementsSome may be given in terms of retirement

benefits, other may be given in terms of bonuses

Employee stock ownership plan (ESOP)Rewards employees with company stocksAn outright grant or a favorable price that may

be below market value Next media, PCCW, etc.

Advantages

Financially flexible for the firms – they can automatically adjust the labor downward during economic downturns

Increase employee commitmentThe employees become part of the owners

under the concept of profit sharing and ESOP

Disadvantages

What potential disadvantages will there be?Discuss with your group members and each

group should try to give one disadvantage.Try your best to explain why the disadvantage

you suggest is a disadvantage.

Disadvantages

Employees may have little sense of control on their compensation

Limited effect on productivityThe connection between individual goal and

firm performance is not so tight

Outline

Some basic concepts

Types of pay-for-performance plans

Potential drawbacks

Potential Drawbacks

Do only what you get paid for Decrease intrinsic motivation Decrease job satisfaction Increase stress Negative effects due to competitions

between individuals or groups

Problems of measurement Judgment bias, and not all performance can

be easily measured Credibility Gap

Some workers do not believe in the performance-reward contingency

Conclusion

“Pay for performance” is unique in the sense that there is a very clear performance-reward contingency

Why don’t we design a compensation system that totally follows the “pay for performance” notion? Any potential drawbacks of the idea of “pay for

performance”?