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Rewarding Rewarding PerformancePerformance

Chapter 11Chapter 11

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• Recognize individual and group Recognize individual and group contributions to the firm by rewarding high contributions to the firm by rewarding high performersperformers

• Develop pay-for-performance plans that are Develop pay-for-performance plans that are appropriate for different levels in an appropriate for different levels in an organizationorganization

• Identify the potential benefits and Identify the potential benefits and drawbacks of different pay-for-performance drawbacks of different pay-for-performance systems and choose the plan that is most systems and choose the plan that is most appropriate for a particular firmappropriate for a particular firm

Chapter 11 OverviewChapter 11 Overview

(c) 2007 by Prentice Hall 11-3

• Design an executive compensation package Design an executive compensation package that motivates executives to make decisions that motivates executives to make decisions that are in the firm’s best intereststhat are in the firm’s best interests

• Weigh the pros and cons of different Weigh the pros and cons of different compensation methods for sales personnel compensation methods for sales personnel and create an incentive plan that is and create an incentive plan that is consistent with the firm’s marketing strategyconsistent with the firm’s marketing strategy

• Design an incentive system to reward Design an incentive system to reward excellence in customer serviceexcellence in customer service

Chapter 11 Overview Chapter 11 Overview (cont’d)(cont’d)

(c) 2007 by Prentice Hall 11-4

Pay-for-performance: The Pay-for-performance: The ChallengesChallenges

• Pay-for-performance Pay-for-performance or Incentive Systemsor Incentive Systems

• The “The “do only what you do only what you get paid forget paid for” ” syndrome syndrome

(c) 2007 by Prentice Hall 11-5

• Negative effects on the spirit of Negative effects on the spirit of cooperationcooperation

• Lack of controlLack of control• Difficulties in measuring performanceDifficulties in measuring performance• Psychological contractsPsychological contracts• The credibility gapThe credibility gap• Job dissatisfaction and stressJob dissatisfaction and stress• Potential reduction of intrinsic drivesPotential reduction of intrinsic drives

Pay-for-performance: The Pay-for-performance: The ChallengesChallenges

(c) 2007 by Prentice Hall 11-6

• Link pay and performance appropriatelyLink pay and performance appropriately– Piece-rate systemPiece-rate system – – A compensation system A compensation system

in which employees are paid per unit in which employees are paid per unit produced.produced.

• Use pay-for-performance as part of a Use pay-for-performance as part of a broader HRM systembroader HRM system

• Build employee trustBuild employee trust

Meeting the Challenges of Pay-Meeting the Challenges of Pay-for-performance Systemsfor-performance Systems

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• Promote the belief that performance Promote the belief that performance makes a differencemakes a difference

• Use multiple layers of rewardsUse multiple layers of rewards

• Increase employee involvementIncrease employee involvement

• Use motivation and nonfinancial incentivesUse motivation and nonfinancial incentives

Meeting the Challenges of Pay-Meeting the Challenges of Pay-for-performance Systemsfor-performance Systems

(c) 2007 by Prentice Hall 11-8

Types of Pay-for-performance Types of Pay-for-performance PlansPlans

(c) 2007 by Prentice Hall 11-9

Types of Pay-for-performance Types of Pay-for-performance PlansPlans

• Individual-based plansIndividual-based plans– Merit payMerit pay

– Bonus programsBonus programs

– Lump-sum paymentsLump-sum payments

• Advantages and Advantages and disadvantages of disadvantages of individual-based pay-individual-based pay-for-performance plans for-performance plans

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Conditions under which individual-based Conditions under which individual-based plans are most likely to succeed-plans are most likely to succeed-

• When the contributions of individual employees When the contributions of individual employees can be accurately isolatedcan be accurately isolated

• When the job demands autonomyWhen the job demands autonomy• When cooperation is less critical to successful When cooperation is less critical to successful

performance or when competition is to be performance or when competition is to be encouraged encouraged

Types of Pay-for-performance Types of Pay-for-performance PlansPlans

(c) 2007 by Prentice Hall 11-11

Team-based PlansTeam-based Plans

• Advantages and Advantages and disadvantages disadvantages to team-based to team-based pay-for-pay-for-performance performance plansplans

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Conditions under which team-based Conditions under which team-based plans are most likely to succeed-plans are most likely to succeed-

• When work tasks are so intertwined it is When work tasks are so intertwined it is difficult to single out who did whatdifficult to single out who did what

• When the firm’s organization facilitates the When the firm’s organization facilitates the implementation of team-based incentivesimplementation of team-based incentives

• When the objective is to foster When the objective is to foster entrepreneurship in self-managed work entrepreneurship in self-managed work groupsgroups

Team-based PlansTeam-based Plans

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Advantages and DisadvantagesAdvantages and Disadvantages

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• GainsharingGainsharing• Conditions favoring plantwide Conditions favoring plantwide

plansplans– Firm sizeFirm size– TechnologyTechnology– Historical performanceHistorical performance– Corporate cultureCorporate culture– Stability of the product marketStability of the product market

Plantwide PlansPlantwide Plans

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Corporatewide PlansCorporatewide Plans

• Profit sharingProfit sharing• Employee Stock Employee Stock

Ownership Plan Ownership Plan (ESOP)(ESOP)

• Advantages and Advantages and disadvantages of disadvantages of corporatewide pay-corporatewide pay-for-performance for-performance plansplans

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Conditions favoring corporatewide Conditions favoring corporatewide plansplans

• Firm sizeFirm size

• Interdependence of different parts of Interdependence of different parts of the businessthe business

• Market conditionsMarket conditions

• The presence of other incentivesThe presence of other incentives

Corporatewide PlansCorporatewide Plans

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For Executives and SalespeopleFor Executives and Salespeople

• Salary and short-term incentivesSalary and short-term incentives

• Long-term incentivesLong-term incentives

• PerksPerks

• Directors and shareholders as equity Directors and shareholders as equity partnerspartners

• SalespeopleSalespeople

Designing Pay-for-performance Designing Pay-for-performance PlansPlans

(c) 2007 by Prentice Hall 11-18

• Do you think it is ethical for a company to Do you think it is ethical for a company to give its CEO and its other top executives give its CEO and its other top executives multimillion-dollar pay packages that are multimillion-dollar pay packages that are not closely tied to the company’s not closely tied to the company’s performance?performance?

A Question of Ethics - A Question of Ethics -

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Key Strategic Pay QuestionsKey Strategic Pay Questions

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Rewarding Excellence in Rewarding Excellence in Customer ServiceCustomer Service

• Customer service Customer service rewards may be rewards may be individual-, team-, individual-, team-, or plant-basedor plant-based

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• Pay-for-performance: The ChallengesPay-for-performance: The Challenges

• Meeting the challenges of pay-for-Meeting the challenges of pay-for-performance systemsperformance systems

• Types of pay-for-performanceTypes of pay-for-performance

• Designing pay-for-performance plans Designing pay-for-performance plans for executives and salespeoplefor executives and salespeople

Summary and ConclusionsSummary and Conclusions