Term
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Definition
Involves providing monetary rewards thru carefully designed compensation systems that base pay on measured performance within the control of participants.
-Include incorporating appropriate concerns for procedural and distributive justice. |
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Term
| Major contributions to performance thru two main mechanisms |
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Definition
1. Positively influence the motivation to perform.
2. They impact the attraction and retention patterns of organizations (i.e. who joins and who remains), thereby affecting the caliber of individuals available to perform. |
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Term
| Deliver rewards at 3 levels |
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Definition
1. Individual
2. Small Group
3. Organization/Division |
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Term
| At the individual level there are three different types for pay-for-performance systems. |
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Definition
1. Traditional incentive systems
2. Variable pay configurations
3. Merit Pay Plans |
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Term
| Traditional Incentive Systems (Individual) |
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Definition
1. Piece-Rate Plans: Employee is paid a specified rate for each unit produced or each service provided.
2. Sales Commission: A sales incentive that is typically expressed as a percentage of sales dollars, a percentage of gross profit margins, or some dollar amount for each unit sold |
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Term
| Variable Pay Configurations (Individual) |
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Definition
Is performance-related compensation that does not permanently increase base pay and that must be re-earned to be received again. Because base pay tends to move up more slowly with variable pay plans, the amount of bonus that can be earned needs to be substantial to make up for the fact that part of the pay is at "risk".
-The risk stems from the possibility that desired performance might not be achieved and therefore the pay is not earned. |
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Term
| A form of variable pay that is currently popular is lump-sum bonus for achieving particular goals... |
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Definition
Four methods of linking bonuses to goals:
1. assigning stretch goals and paying bonuses only if the goals are achieved
2. Having multiple goal levels and corresponding bonuses that increase as higher goals are met
3. Offering bonuses that grow incrementally as performance improves (with no upper limit)
4. Setting specific, challenging goals but making decisions about bonuses after the fact so that contextual factors can be taken into account. |
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Term
| Merit Pay Plans (Individual) |
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Definition
Rewards individuals for past work behaviors and outcomes by adding dollar amounts to their base pay.
*Merit pay is the most widely used pay system in US organizations* |
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Term
| Pay-for-performance plans focused on small groups or teams provide monetary rewards based on the measured performance of the group or team. |
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Definition
Small work groups or teams are official (designated or recognized by management) multi-person work units composed of individuals who operate interdependently in the performance of tasks that affect others associated within the organization
-Evidence suggests that performance gains can be associated with the use of monetary rewards for groups but the results are likely to be heavily influenced by situational factors. |
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Term
| At the organizational level, three pay systems that potentially link pay and performance... |
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Definition
1. Gainsharing
2. Profit Sharing
3. Stock Options |
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Term
| Gainsharing (Organizations) |
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Definition
A compensation plan in which an organization shares with employees a portion of the added earnings obtained thru their collective increases in productivity or the achievement of other goals, such as satisfaction with quality.
-Such plans usually involve a significant portion of an organization's employees and possibly all. |
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Term
| Profit Sharing (Organizations) |
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Definition
| Provides payments to employees based on the profitability of the business. Payments can be made thru current distribution plans (paid in cash), deferred plans (paid toward retirement), or a combination of both, although most companies establish deferred plans because of the associated tax advantages. |
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Term
| Weaknesses in Profit Sharing as a direct means of boosting performance... |
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Definition
1. It can be somewhat difficult to establish a clear connection (sometimes referred to as "line of sight") between individual actions and impact on profits, especially in large organizations.
2. Accounting and financial management practices and other factors outside employees' control can also impact the bottom line.
3. The deferred nature of many of these plans may not provide strong valence with respect to motivating performance. |
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Term
| Stock Options/Ownership (Organizations) |
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Definition
During the 1990s, the most rapidly growing approach was via stock options, which give employees the right to purchase a specific amount of stock at a designated price over a specified time period.
The basic rationale is that employees will be more concerned about the long-term success of the organization and increase their efforts if they can reap the benefits as reflected in the rising price of the organization's stock.
Additionally, extending ownership can both attract new talent and enhance perceptions of fairness (and thus retention) in current employees. |
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Term
| Changing conditions to Stock Options |
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Definition
In a ruling in 2005, the Financial Accounting Standards Board required companies to recognize stock options as a cost on their income statements in the year they were awarded rather than merely list them in the footnotes - a change that diluted earnings per share in the year options were granted and rendered options less attractive to many employers.
Further, the value of options plummeted early in the decade and then again beginning in 2007. |
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Term
| There is some debate regarding whether there are best practices that are applicable to most organizations or whether it is important to match pay systems to particular strategies |
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Definition
| The weight of evidence seems to be shifting toward the strategy argument. |
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Term
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Definition
There are indirect pay plan effects stemming from influences of attraction and retention patterns in organizations.
-The level of compensation influences attraction to organizations.
-Individuals appear to be more attracted to organizations in which the pay system rewards individual rather than group performance and for job outcomes rather than acquiring new skills.
-Individuals may also be more attracted to organizations that offer fixed pay, rather than variable pay, unless there is sufficient upside potential to balance the pay risk. |
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Term
| Pay for performance can also have a positive effect on retention. |
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Definition
| Research indicates positive relationships between employee perceptions of pay for performance and both pay satisfaction and job satisfaction, factors that are related to intention to leave and turnover. |
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Term
| Williams and Livingstone Meta-Analysis |
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Definition
Argue that pay-for-performance systems encourage better performers to remain with the organization while inducing poorer performers to leave.
-One caveat is that a high degree of pay dispersion in which pay is much higher for relatively few employees at the top of the pay structure than for others, can lead to higher probabilities of turnover among managers.
-These negative effects seem to be lessened when pay levels are generally high. |
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Term
| Variable pay reduces turnover |
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Definition
Due to flexibility and control over labor costs that it provides.
-By having more money allocated to bonuses or other forms of variable pay, an organization can shrink its payroll costs during downturns rather than downsize. |
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Term
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Definition
Requires looking beyond individual jobs and thinking strategically about the organization as a whole. It means developing a business model based on what drives the business (i.e. customer satisfaction), after which goals can be set at the various levels of the organization and determinations made about what will be rewarded.
Without a business model (or with the wrong one), management risks setting goals and rewarding employees for the wrong things - finding its employees doing those wrong things very efficiently, to the detriment of the organization. Focusing on what drives the business leads to the setting of appropriate performance goals for individual employees at all organizational levels.
Then, the act of tying incentives to the achievement of those goals will have not only motivational but also informational value, because people will receive a clear message about what specific behaviors and/or outcomes are expected via communications about the reward system.
-For pay for performance to be effective, strategically important job dimensions - even hard-to-measure ones - must be identified, communicated, assessed and rewarded.- |
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Term
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Definition
Because it is impossible to be motivated by incentives one does not grasp, it is critically important not only to design a pay plan that is understandable but also to communicate both clearly and frequently how the program works and what employees must do to bring about the results that will trigger a payout.
Communication also implies providing feedback along the way about progress toward targets. |
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Term
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Definition
| Employees must have appropriate knowledge, skills, and abilities (KSAs), and self-efficacy to perform at the desired level. Instituting pay for performance in a futile exercise if employees are unable to perform at the level required to receive the reward. |
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Term
| Make pay systems commensurate with employees' values |
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Definition
Pay for performance will only work if the rewards being offered are valued and the amount is viewed as sufficient, given what employees are being asked to accomplish.
Employers can generally assume that money is a value to their employees, both practically and symbolically.
Some employees, however, may not value the incremental gain being offered for high-level performance if the amount is viewed as paltry and thus not worth the additional effort.
Individuals may be uninterested in obtaining even a substantial amount of additional pay if they believe that achieving performance goals means sacrificing greater personal values. |
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Term
| Use non-financial motivators too. |
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Definition
Exclusive reliance on financial incentives would be an unwise policy because it would ignore other important sources of work motivation.
Non-monetary motivators include a diverse assortment of activities, such as providing interesting and important work assignments, engendering commitment to goals in conjunction with ongoing performance feedback, granting autonomy regarding how a job is accomplished, providing public and/or private recognition for outstanding contributions, or simply enabling one to do work that one loves. |
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Term
| Use money in conjunction with intrinsic motivation |
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Definition
Extrinsic factors may be particularly helpful during the sometimes-difficult validation and implementation stages.
-Tangible rewards can enhance, rather than undermine the effects of intrinsic motivation. |
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Term
| Target the appropriate organizational level |
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Definition
Performance-based pay must be at the appropriate level. Increasingly, firms are rewarding performance at the group and/or organizational levels rather than at the individual level alone, in hopes of boosting organizational performance thru enhanced information sharing, group decision making and teamwork.
-A key decision for management, then, concerns whether incentive pay should be based on individual or group performance.
-Further, if the organization chooses to reward group performance, decisions must be made about what constitutes a "group" for performance-measurement purposes. |
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Term
| Key factors to deciding between individual Vs. group performance |
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Definition
-Nature of the task
-Ability to measure performance
-Organizational Culture
-Management's purpose |
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Term
| Nature of the task - Individual level |
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Definition
Pay for performance at the individual level is considered most appropriate when:
-The work is designed for individuals,
-Where the need for integration with others is negligible,
-Where group performance means only the sum of members' individual performances, or
-Where the work is simple, repetitive, and stable.
*When the work is highly interdependent and a cooperative reward system is in place, it may be helpful to select individuals who are high on extraversion and agreeableness. |
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Term
| Nature of the task - Sequential teams |
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Definition
| For sequential teams that perform various tasks in a predetermined order, so that group performance cannot exceed that of the lowest individual member, it has been recommended that base pay be skill based, and team incentives be team bonuses with payouts distributed as a percentage of base pay. |
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Term
| Nature of the task - Group-based |
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Definition
Group-based incentive programs, through which all members receive equal shares of a team bonus, are generally considered appropriate when:
-Teams are composed of individuals from the same organizational level,
-When members have complementary roles and must depend upon each other and interact intensively to accomplish their work, so that group performance is enhanced by cooperation, and
-When the nature of technology and workflows allow for the identification of ditinct groups that are relatively independent of one another. |
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Term
| Ability to measure performance |
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Definition
Pfieffer (1998) argues that performance can often be more reliably assessed at aggregate than at individual levels. He concludes that individual incentive pay should be replaced by collective rewards based on organizational or subunit performance that highlight the interdepence among org. members.
-Altho most disagree, most do agree that group incentives are a suitable alternative when the identification of individual contributors is difficult due to the nature of the task. For gainsharing plans in particular, it is not only necessary that there be good performance measures for the unit of plant, but also that there be a reliable performance history in order to develop a gainsharing formula. |
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Term
| Organizational Performance |
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Definition
Group incentive plans are best suited to situations in which the organizational culture emphasizes group achievements.
-If a corporate culture is strongly individualistic and competitive, group plans such as team incentives will likely encounter considerable resistance from org. members accustomed to focusing on individual accomplishments and/or may lead to lower levels of cooperative behavior. |
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Term
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Definition
Group incentives are recommended in situations in which there is a need to align the interests of multiple interests of multiple individuals into a common goal, or when management wishes to foster entrepreneurship at the group level.
-At the organizational level, profit sharing is often used to communicate the importance of the firm's financial performance to employees, heightening their awareness of the overall financial performance of the organization by making a portion of their pay vary with it. |
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Term
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Definition
Incentive pay is based partially on individual measures of performance and partially on group measures.
-Wageman (1995) found that teams having mixed forms of rewards, mixed tasks, or both, had lower performance than those with task and pay design that were clearly either individual level or team level.
*She proposes that mixed tasks and rewards may lead to inferior performance by adding a group element to what is primarily an individual task, thereby undermining attention to the task.
-May also be more difficult to develop supporting norms for cooperation in the team.
-In addition, teams executing mixed tasks may need more time to adjust because of the greater complexity of tasks that have both individual and group performance components. |
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Term
| Competitive Vs. Cooperative Rewards |
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Definition
When a competitive reward structure was shifted to a cooperative one, team members seem to engage in "cutthroat cooperation" in which team members retained much of their competitive behavior within the new reward systems intended to foster cooperation.
-Another complicating factor is that some workers may prefer individual pay over team-based pay. |
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Term
| Make pay commensurate with the level of risk employees are required to bear |
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Definition
| Risk refers to uncertainty about outcomes and, by definition, pay-for-performance systems involve uncertain outcomes for employees. Employees tend to be risk-averse concerning pay because they have no way of minimizing their income risk thru diversification. |
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Term
| At least 4 factors can affect employees' perceptions concerning the riskiness of a pay-for-performance plan |
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Definition
1. The proportion of employee pay that is performance-based. The higher the proportion of variable pay, the more risk the employee must bear, in a tradeoff between income security and the potential for higher earnings.
2. Their self-efficacy that they can achieve the performance goals on which pay is contingent. Those who are confident of their ability to perform at a high level should perceive contingent pay as less risky than those who are less confident of their ability.
3. To the extent that the performance measure on which pay is based is influenced by factors outside individual employees' control, perceived risk for the employee is increased.
4. The amount of time between performance and the receipt of rewards. Because the future is uncertain, deferred rewards involve more risk than immediate ones. For employees to accept a pay system offering long-term rewards, they must be willing to delay gratification in the hopes of greater (but uncertain) future returns. |
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Term
| Exceptions to the principle of paying for performance |
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Definition
1. When employees are learning - performance-based pay may frustrate more than it motivates. Performance failures that are a normal part of learning may be exaggerated in the learner's mind because of failure to perform and also to obtain monetary reward.
2. When employer can monitor - Employees' awareness that they are being monitored may obviate paying for performance.
3. When other motivators are sufficient or compensatory - Some people value other aspects of their jobs more than they value pay-factors such as interesting work, autonomy, location, benefits that meet their needs or having a boss they love working for.
4. When the company is unionized - Union contracts constrain an employer's pay policies, and thus under collective bargaining agreements it may be impossible to pay for performance, especially at the individual level. What incentives are included in a union contract, they are usually group incentives, because group pay is viewed as encouraging cohesion rather than competition among members. |
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