MEASURING AND MEASURING AND EVALUATING PERFORMANCE EVALUATING PERFORMANCE

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AnnoucementsAnnoucementsMidterm exam

◦ February 25th: 100 MC questions, Chapters 1 through 7

◦ All chapters will be equally represented in the exam

◦ Questions will be from BOTH text as well as the material covered in class

◦ From the text you can exclude the topic “forecasting human resource needs” (pp. 109-112). Just read lecture notes for this topic

◦ You can also exclude the topic HRIS from the text (pp.137-144).

◦ Everything else is fair game.◦ If you have any questions feel free to contact me

GOOD LUCK!2

AgendaAgendaWhat is performance

◦What to measure◦Limitations of various measures

Performance Appraisal

Ratings and rater errors

General recommendations

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What is performance?What is performance?Performance

◦Observable behavior that contributes to the accomplishment of an organization’s goals Task Citizenship Counterproductive

Performance Criteria◦Measures of job performance that

capture individual differences in the proficiency of job-related behaviours

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Performance ManagementPerformance ManagementHR system that includes processes

used to identify, encourage, measure, evaluate, improve, and reward employee performance

Related to terms such as performance appraisal, performance evaluation, etc.◦Performance appraisal: “the process by

which organizations evaluate employee performance”

◦Although Performance Management is often considered to be a broader term

Common Uses of Performance Common Uses of Performance AppraisalAppraisal

1. Administrative – to make employment decisions◦ Promotion, termination◦ Training—who to train; what to train◦ Compensation—merit increases

2. Developmental◦ Provide feedback / coaching◦ Seek to improve performance;

address weaknesses◦ Motivation

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What is performance? What is performance? The Criterion The Criterion ProblemProblem

Difficulties involved in determining what performance is and how to measure it

Criterion Deficiency◦ When performance standards fail to capture

the full range of employees’ responsibilities◦ Behaviours that are important for job

performance are not assessed E.g., Salesperson - focused on sale revenue but

ignore customer service

Criterion Contamination◦ When criterion measure is influenced by other

factors that are not part of job performance E.g., factors outside of employee’s control

influence his/her performance - machine breakdowns; differences in sales regions

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What is performance?What is performance?“Objective” Measures

◦Output Units produced, items sold, $ sales,

commission earnings, etc.◦Quality measures

# of errors, # of errors detected, # complaints/grievances, # commendations, rates of scrap/breakage

◦Employment data Absences (unexcused), Lateness/tardiness,

Accidents

◦These suffer from unreliability, deficiency, and contamination Also, many jobs don’t have “objective”

outcomes8

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Potential Performance Potential Performance CriteriaCriteriaRatings

◦Performance appraisals by trainers, supervisors, peers, self

◦Performance in work samples, simulations, etc.

Others◦Counterproductive behaviours◦Safety records, accidents◦Citizenship (voluntary) behaviours

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The Appraisal ProcessThe Appraisal Process

What is performance?What is performance?Behaviours??

◦Behaviours that contribute to fulfilling job requirements

◦Focuses on what employees do – and what they have control over

◦PA - what ee’s should start, stop, and continue doing

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What is performance?What is performance?Measuring behaviours requires use of ratings

◦Relative Judgments Rankings / comparisons with other

employees

◦Absolute Judgments Comparisons with job-related

standards – checklists, rating scales, etc.

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Potential Performance Potential Performance CriteriaCriteriaRatings - referred to as “Subjective Measures” ◦by supervisors, peers, trainers, self

Limitation◦Ratings depend on human judgment◦Prone to biases and rating errors

◦Structured rating scales have been used to reduce biases 2 common instrument types: BARS, BOS

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BARS: Behaviourally Anchored BARS: Behaviourally Anchored Rating ScalesRating ScalesFormat was developed by Smith and

Kendall due lack of standardization (and reliability) across raters◦ Goal was to help the rater rate

Performance standards are concrete◦ Each standard consists of a number of

specific, behavioural anchors on the rating form itself

◦ behavioral anchors cover the range of performance – from excellent to poor behaviour

◦Anchors are worded in the form of expectations 14

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BOS: Behavioural Observation BOS: Behavioural Observation ScalesScales Focus on behaviour

◦ Based on job analysis – often critical incident technique

Performance ratings are based on the “frequency” criterion

◦ How often employee engages in behaviour

◦ Using a 5-point frequency scale

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Developing Behavioural Developing Behavioural Observation Scales (BOS)Observation Scales (BOS)1. Collect critical incidents2. Group similar incidents into a

behavioural item◦ E.g., 2 critical incidents

(1)Describes details of organizational change to subordinates

(2)Explains why the change is necessary Could be grouped into a behavioural item

Provides employees with information about organizational change

◦ 2 more critical incidents(1) Listens to employee concerns(2) Asks employee for help in making the change

work Could be grouped into a behavioural item

Addresses employee concerns and input regarding change

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Developing Behavioural Developing Behavioural Observation Scales (BOS)Observation Scales (BOS)3. Similar behavioural items are

grouped into a meaningful behavioural criterion◦ 2 behavioural items

1. Provides employees with information about organizational change

2. Addresses/responds to employee concerns and input regarding change

Combine to form the behavioural (BOS) criterion OVERCOMING RESISTANCE TO CHANGE

The PA instrument is created by attaching a 5-point rating scale to each behavioural item

Example of a BOS Example of a BOS CriterionCriterion

I. Criterion: Overcoming Resistance to Change

1. Provides employees with information about organizational change

Almost never 1 2 3 4 5 Almost always

2. Addresses/responds to employee concerns and input regarding change

Almost never 1 2 3 4 5 Almost always

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Who’s perspective Who’s perspective matters?matters?Multisource (or 360) PA

Possible rating combinations include…◦Supervisors rating employees◦Employees rating supervisors◦Team members rating each other◦Employees rating themselves◦3rd parties (customers) rating

employees20

Who’s perspective Who’s perspective matters?matters?Should ratings from multiple

sources be consistent?

Does it matter if the appraisal is for administrative or developmental purposes?

What if different sources are not consistent?

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Factors Distorting PA Ratings aka: Factors Distorting PA Ratings aka: Rating ErrorsRating Errors

Halo effect / errorLeniency / Strictness errorCentral tendencyRecency effectContrast effectMatthew effectSimilarity error

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Factors Distorting PA Factors Distorting PA RatingsRatingsHalo effect

◦ Tendency to provide similar ratings across different PA dimensions

Leniency / Strictness error◦ Leniency –when ratings are restricted to high

part of scale◦ Strictness – when ratings are restricted to low

part of scale

Central tendency◦ When raters avoid extreme ratings and restrict

ratings to middle of scale

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Factors Distorting PA Factors Distorting PA RatingsRatingsRecency effect

◦ Ratings are based largely on employee’s most recent behaviour

Contrast effect◦ When an employee’s evaluation is biased

upward or downward because of a comparison with another employee who was recently evaluated

Rating ErrorsRating ErrorsMatthew effect

◦Tendency of raters to use previous evaluations as an anchor for subsequent evaluations

◦"the rich get richer and the poor get poorer“ i.e., Employees receive the same

appraisal results, year in and year out Like a self-fulfilling prophecy -- if they

have done well, they will continue to do well; if they have done poorly, they will continue to do poorly 25

Rating ErrorsRating ErrorsSimilarity (“similar-to-me”) error

◦Tendency of rater to inflate ratings when they have something in common with the target

◦Study: middle class managers divided into 2 groups

◦Both groups given a detailed job description and then viewed videotape of someone performing the job well Group 1: heard applicant say he had 2

brothers, a father with a Ph.D. in physics and mother with MSW

Group 2: heard applicant say he had 12 brothers and sisters, father was a bus driver, mother was a maid

2nd group gave significantly lower ratings26

Pop Quiz – What type of error is Pop Quiz – What type of error is thisthis

If I don’t know how to evaluate someone, I assume they are average.

What type of rating error results in highly correlated performance dimensions?

Using a forced distribution is primarily a response to what rating error?

What is a type of rater error training that focuses on teaching raters the meaning of different levels of performance?

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Reducing Rating ErrorsReducing Rating ErrorsFrame of Reference (FOR) Training

Encourage supervisors to keep notes about worker performance – performance “diary”◦Improves accuracy of recall

Build accountability into ratings◦Require raters to justify / provide

evidence for ratings◦E.g., describe specific behaviour;

include someone who can verify; etc. 28

Performance Management / Performance Management / Appraisal System should…Appraisal System should…

1. Be based on job analysis2. Be focused on behaviour (use BOS)3. Be prioritized by senior

management 4. Use multiple raters 5. Provide raters with extensive

training6. Ensure performance management is

on-going29

Important Elements of PAImportant Elements of PAIn general, Performance

Appraisal systems – like selection systems – should be:

◦Valid◦Reliable◦Practical◦Free from bias / Fair

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3 Dimensions of Fairness / 3 Dimensions of Fairness / JusticeJustice1. Distributive justice

• Perceived fairness of the distribution of the rewards

2. Procedural justice• Perceived fairness of the

procedure/system used• “Voice”

3. Interactional justice• Perceived fairness of the

relationship with the rater(s); sincerity, etc.

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Final RecommendationsFinal Recommendations

1. No surprises

2. It’s about process

3. Providing feedback◦ Improves performance if it focuses

on task-relevant behaviour◦ Makes performance worse if it’s

personal – implies traits

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COMPENSATIONCOMPENSATION

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AgendaAgendaStrategic issues in Compensation

Establishing Base Pay

Performance-based Pay

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CompensationCompensationGoals of Compensation:

◦Attract◦Retain◦Motivate

Compensation costs are single largest cost category in most firms◦60% in some manufacturing

organizations◦Up to 80% in colleges/universities

http://www.fin.gov.on.ca/english/publications/salarydisclosure/2009/univer09.html

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Strategic ConsiderationsStrategic Considerations1. What criteria should determine pay?

◦ The job, individual KSAOs, performance, organizational profitability, what other orgs are paying…?

2. What “pay mix” should be used?◦ Base, benefits, stock, performance

rewards

3. Should performance rewards be used?◦ If so, based on individual, team, org

performance?

Optimal strategy is one that adds the most value to the firm

◦ May not be the lowest cost36

DirectDirectDirectDirect IndirectIndirectIndirectIndirect

BonusesBonuses

Pay for PerformancePay for PerformanceSecurity Plans• Pensions

Security Plans• Pensions

Employee Services• Educational assistance• Recreational programs

Employee Services• Educational assistance• Recreational programs

CommissionsCommissions

Wages / SalariesWages / Salaries

Insurance PlansInsurance Plans• MedicalMedical• DentalDental• LifeLife

Insurance PlansInsurance Plans• MedicalMedical• DentalDental• LifeLife

Time Not WorkedTime Not Worked• VacationsVacations• HolidaysHolidays• LeavesLeaves

Time Not WorkedTime Not Worked• VacationsVacations• HolidaysHolidays• LeavesLeaves

Base Pay

Incentives /

Performance Pay

• can account for up to 50% of pay costs

Total Compensation

Changing Compensation Changing Compensation SystemsSystemsTraditionalTraditional ModernModern

Seniority-basedSeniority-basedincreases increases

Performance-drivenPerformance-drivengains gains

Pay = 100% basePay = 100% basesalarysalary

Variable componentVariable componentaddedadded

Few incentive/bonusFew incentive/bonusplans, restricted toplans, restricted toexecutives executives

Many kinds of plans, Many kinds of plans, extended throughout extended throughout

the organizationthe organization

399. Centralization vs Decentralization of Pay Decisions

8. Open vs Secret Pay

7. Monetary vs Non-monetary Rewards

6. Performance vs Membership

5. Egalitarianism vs Elitism

4. Job vs Individual Pay

3. Fixed vs Variable Pay

2. Below-Market vs Above-Market Pay

1. Internal vs External Equity

Considerations in Developing a Compensation Plan Considerations in Developing a Compensation Plan Considerations in Developing a Compensation Plan Considerations in Developing a Compensation Plan

Designing a Compensation System

Pay Preferences?Pay Preferences? Which of the following pay

systems would you prefer?

1. Straight salary

2. Variable pay system with incentives based on individual performance

3. Variable pay system with incentives based on organizational performance

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Pay Preferences?Pay Preferences? U.S. survey showed following

preferences?

1. Straight salary (63%)

2. Variable pay system with incentives based on individual performance (22%)

3. Variable pay system with incentives based on organizational performance (12%)

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Pay ParadoxPay ParadoxPsychologists (e.g., Kasser & Ryan,

2001) and economists (e.g., Stutzer, 2004) have noted:

◦ People who earn a higher income report being more happy and satisfied with their lives

However,

◦ People who strongly value and seek money and financial success are less happy and satisfied

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Monetary vs Non-Monetary Monetary vs Non-Monetary RewardsRewardsNon-monetary rewards are intangible

◦ Interesting work, challenging assignments, public recognition

Rank the following in order of importance?◦ A) a nice boss◦ B) pay level◦ C) interesting work◦ D) opportunity to learn new skills◦ E) flexibility of work hours

How would other people rank these?

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Monetary vs Non-Monetary Monetary vs Non-Monetary RewardsRewardsWhat’s the truth??

◦People often underreport importance of pay to themselves

◦Organizations should not underestimate importance of pay

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Pay SecrecyPay Secrecy

AdvantagesAdvantages

DisadvantagesDisadvantages

• Most employees prefer to have their pay kept secret

• Gives managers greater freedom

• Covers up inequities in the internal pay structure

• May generate distrust in the pay system

• May erode perceived link between pay and performance

• Tendency to overestimate others’ pay – causes dissatisfaction

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Study re: the Cost of Pay Study re: the Cost of Pay CutsCutsGreenberg, J. (1990). Employee theft as

a reaction to underpayment inequity: The hidden cost of pay cuts. Journal of Applied Psychology, 75, 561-568.

Study background◦Company had lost 2 large contracts

◦In lieu of layoffs, company made temporary pay cuts of 15% in 2 manufacturing plants

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Research QuestionsResearch QuestionsBased on equity theory

◦Would employees perceive the pay cut as unfair and seek to redress this via theft?

◦Would the nature of the reason provided for the pay cut influence the degree of theft that would occur?

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Rationales for Pay CutRationales for Pay CutIn the 2 plants getting pay cut, the

explanation for pay cut was varied◦Plant A: Adequate explanation

rationale for cut, management showed remorse

◦Plant B: Inadequate explanation rationale was minimal, no remorse

◦Plant C: Control plant A plant owned by same company where

cuts were not necessary

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MethodMethodData collected every 2 weeks for

30 week period◦10 weeks before, during, and after pay

cut◦Plant A - n = 55; Plant B - n = 30; Plant

C - n = 58◦Measured theft using shrinkage

measure (% of inventory not accounted for by known usage, sales, etc)

◦Any guesses?

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Mean percentage of employee theft Mean percentage of employee theft as function of time relative to pay cutas function of time relative to pay cut

0

1

2

3

4

5

6

7

8

9

Before During AfterTime period relative to pay cut

Mea

n %

the

ft

Inadequateexplanation

Adequateexplanation

Control

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SummarySummaryIncrease in theft during underpayment

period◦ Moderated by adequacy of explanation ◦ Less theft when decision was not biased,

authorities were sensitive to employee point of view, decision based on adequate information

Preexisting differences between plants may have influenced results

Conclusion◦ Fairness re: pay cuts has significant influence

on employee negative reactions to pay cuts

Methods for Establishing Methods for Establishing Base PayBase Pay

Base Pay

JobEvaluation

MarketPricing

Skill-basedPay

Market PricingMarket Pricing

Establishing base pay by determining the minimum amount of pay necessary to attract qualified individuals from the labour market

Salary surveys

Relates to external equity

Job EvaluationJob EvaluationJob Evaluation

◦The systematic process of determining the relative worth of jobs in order to establish which jobs should be paid more than others within an organization.

◦Point system is most popular method

Point Method of Job Point Method of Job EvaluationEvaluationEstablishes job values by assigning

points to each job based on “compensable factors”◦ key job characteristics that differentiate the

value of various jobs, ◦ Factors are weighted◦ Jobs are rated - points assigned

The point totals are used to create the job worth hierarchy.

Point Values for Job Factors of The American Point Values for Job Factors of The American Association of Industrial ManagementAssociation of Industrial Management

1ST 2ND 3RD 4TH 5THFACTORS DEGREE DEGREE DEGREE DEGREE DEGREE

Skill1. Education 14 28 42 56 702. Experience 22 44 66 88 1103. Initiative and ingenuity 14 28 42 56 70

Effort4. Physical demand 10 20 30 40 505. Mental or visual demand 5 10 15 20 25

Responsibility6. Equipment or process 5 10 15 20 257. Material or product 5 10 15 20 258. Safety of others 5 10 15 20 259. Work of others 5 10 15 20 25

Job Conditions10. Working conditions 10 20 30 40 5011. Hazards 5 10 15 20 25

Source: Reproduced with permission of the American Association of Industrial Management, Springfield, Mass.

Pay GradePay Grade

A grouping of jobs of similar value to the organization.

How many pay grades to use?

◦ Could range from 4 to 15. ◦ It depends on the variance of wages

and jobs across the organization, and the width of the pay ranges.

Job Evaluation Points

PAY GRADE STRUCTUREPAY GRADE STRUCTURE

100 150 200 250 300 350

WeeklySalary

575

550

525

500

475

450

425

400Pay Policy LinePay Policy Line

I

II

III

IV

V

Min

Mid

Max

Pay RangePay Range

The minimum and maximum pay rates for jobs in a particular pay grade.

Typically we see ranges around 80% of mid-point for minimum to 125% for maximum.

MAX

MID

MIN

Pay-for-PerformancePay-for-Performance

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Performance Pay

Individual Performance

TeamPerformance

OrganizationalPerformance

Individual Incentive PlansIndividual Incentive PlansStraight Piecework

◦ Employees receive a certain rate for each unit produced.

Differential Piece Rate◦ Employees whose production exceeds the

standard amount of output receive a higher rate for all of their work.

Standard hour plan◦ Pay rates set based on predetermined

“standard time” for completing a job Employees get paid for that amount of

time, even if they finish earlier

BonusesBonusesBonus

◦Incentive payment that is supplemental to the base pay For cost reduction, quality improvement, or

other performance criteria.

Spot bonus◦Unplanned bonus given for employee

effort unrelated to an established performance measure.

Merit PayMerit PayMerit Pay (merit raise)

◦Links an increase in base pay to how successfully an employee achieved some objective performance standard.

Problems◦ Inadequate funding for merit increases.

◦ Small raises not very meaningful / noticeable

May undermine motivational value of merit increase

◦ Problems with defining and measuring performance.

◦ Merit pay decisions influenced by organizational politics

◦ Mistrust between management and employees.

◦ Strategic utility is questionable

Merit raises are added to base

Creates fixed cost, even if perf is not maintained

Lump-Sum Merit PayLump-Sum Merit PayLike a bonus

◦ Year-end merit payment which is not added to their base pay.

Advantages

◦ Provides financial control – does not escalate base salary levels

◦ Contains employee benefit costs – often calculated as percentage of salary

◦ Provides a clear link between pay and performance

Individual Incentive Individual Incentive SystemsSystems AdvantagesAdvantages

DisadvantagesDisadvantages

• Performance is reinforced regularly

• Reinforcement is quick and frequent

• Effective behaviours are likely to continue

• Wages paid in proportion with performance

• Administration can be complex

• May result in inequities • Employees may not

achieve standards due to uncontrollable forces

• Union resistance• Focus efforts on only

one aspect e.g. sales

Pay-for-PerformancePay-for-Performance

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AdvantagesAdvantages

DisadvantageDisadvantagess

1. Signal key behaviours and motivate employees

2. Set performance standards

3. Support specific managerial strategies

4. Make pay more variable

1. Employees prefer predictable and certain rewards

2. “line of sight” shortcomings

Criticisms of Executive Criticisms of Executive Incentive PlansIncentive PlansIncentive payments are excessive

compared with return to stockholders.

Time periods for judging and rewarding performance are too short.

Quarterly earnings growth is emphasized at the expense of research and development.

Emphasis is placed upon equaling or exceeding executive salary survey averages.

Benefits do not relate closely to individual performance.

CompensationCompensationPay is a statement of an employee’s

worth by an employer.

Pay is a perception of worth by an employee.

Pay carries a great deal of information about what the organization values: ◦E.g., Southwest Airlines

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Advantages of Base PayAdvantages of Base PayFlexibility to direct employees to a

number of different activities or needs.

Allows employers to recognize and encourage non-output based behaviours such as skill development.

Signals a commitment to the employee.

Simplicity.

Disadvantages of Base Disadvantages of Base PayPayRepresents more of a fixed

employer commitment than performance-contingent pay

Does not directly motivate task behaviour

Does not directly contribute to citizenship behaviour

Not self-correcting (for performance)

Group/Team Performance Pay◦Examples include profit sharing,

gainsharing, team merit increases.

Organization Performance pay◦Examples include profit sharing,

employee stock ownership plans (ESOP), stock options, or pay based on organization level outcomes such as profit or return on equity (ROE).

The Pros of Team The Pros of Team Incentive PlansIncentive Plans

Team incentives are effective when:◦They support group planning and

problem solving,

◦The contributions of individual employees depend on group cooperation.

◦They broaden the scope of the contribution that employees are motivated to make.

◦They encourage cross-training and the acquiring of new interpersonal competencies.

The Cons of Team Incentive The Cons of Team Incentive PlansPlansTeam incentives are ineffective

when:

◦Individual team members perceive that “their” efforts contribute little to team success or to the attainment of the incentive bonus. Or that others’ shortcomings undermine their

performance

◦Intergroup social problems—”free-riders”

◦Complex payout formulas are difficult for team members to understand.