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Pay for Performance: The Evidence

Chapter. 9. Pay for Performance: The Evidence. Employee performance = f (S,K,M) where: S = Skill and ability to perform task K = Knowledge of facts, rules, principles, and procedures M = Motivation to perform. What Does Employee Performance Depend On?.

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Pay for Performance: The Evidence

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  1. Chapter 9 Pay for Performance: The Evidence

  2. Employee performance = f (S,K,M) where: S = Skill and ability to perform task K = Knowledge of facts, rules, principles, and procedures M = Motivation to perform What Does EmployeePerformance Depend On?

  3. What Behaviors DoEmployers Care About? • How do we get good employment prospects to join our company? • How do we retain these good employees once they join? • How do we get employees to develop skills for current and future jobs? • How do we get employees to perform well on their current job?

  4. What Motivates Employees? In the simplest sense, motivationinvolves three elements: 1. What is important to a person, and 2. Offering it in exchange for some 3. Desired behavior

  5. Exhibit 9.2: Motivation Theories • Content Theories - Identify what is important to a person • Maslow’s Need Hierarchy • Herzberg’s 2-Factor Theory • Process Theories - Emphasis placed on nature of exchange • Expectancy Theory • Equity Theory • Agency Theory • Reinforcement Theories - Focus on desired behavior • Goal Setting • Reinforcement

  6. Exhibit 9.3: Components of aTotal Reward System 1. Compensation Wages, commissions and bonuses 2.. Benefits Vacations, health insurance 3. Social interaction Friendly workplace 4. Security Stable, consistent position and rewards 5. Status / recognition Respect, prominence due to work 6. Work variety Opportunity to experience different things 7. Workload Right amount of work (not too much, not too little) 8. Work importance Is work valued by society 9. Authority / control / autonomy Ability to influence others; control own destiny 10. Advancement Chance to get ahead 11. Feedback Receive information helping to improve performance 12. Work conditions Hazard free 13. Development opportunity Training to learn new knowledge / skills / abilities

  7. Base Pay Across theBoard Increase Cost of Living Increase Merit Pay Lump Sum Bonus Wage Components Individual Incentive Plans Success Sharing Plans Profit Sharing Risk Sharing Plans Gain Sharing Exhibit 9.4: Wage Components

  8. Does Compensation Motivate Behavior: Specific Comments • Do people join a firm because of pay? • Do people stay in a firm (or leave) because of pay? • Do employees more readily agree to develop job skills because of pay? • Do employees perform better on their jobs because of pay?

  9. Exhibit 9.5: Examples of Group Incentive Plans CompanyPay Component Corning Competitive Base Pay. Group Bonus based on meeting certain quality measures, customer satisfaction measures, and protection targets. Plant Manager base pay 25 percent below market. Five percent of excess over target goes to bonus. Bonus often equals base pay in amount. Competitive Base Pay. All employees get stock options equal to 10 percent of base pay. Employees share in corporate triumphs and failures as stock prices rise or fall. Nucor PepsiCo

  10. Exhibit 9.7: Overall Effectiveness ofAlternative Reward Plans

  11. Efficiency Strategy Structure Standards Objectives Measures Eligibility Funding Equity/Fairness Distributive justice Procedural justice Compliance Comply with existing laws Enhance and maintain firm’s reputation Designing A Pay-For-Performance Plan

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