IRWIN

1. CHAPTER 16 Recognizing Individual Contributions with Pay IRWIN • a Times Mirror Higher Education Group, Inc., company, 1997

2. How Does Pay Influence Individuals? • Equity Theory - chapter 15 • Reinforcement Theory • Expectancy Theory - chapter 11 • Agency Theory • principals as owners • agents as managers IRWIN • a Times Mirror Higher Education Group, Inc., company, 1997

3. Types of Agency Costs • Perquisites • Attitudes toward risk • Decision-making horizons IRWIN • a Times Mirror Higher Education Group, Inc., company, 1997

4. Factors in the Choice of a Compensation Package • Risk Aversion • Outcome Uncertainty • Job Programmability • Measurable Job Outcome • Ability to Pay • Tradition IRWIN • a Times Mirror Higher Education Group, Inc., company, 1997

5. EXPECTANCY THEORY expectancy? instrumentality? PERFORMANCE EFFORT valence

6. Merit Pay Programs: Characteristics • Tries to identify individual performance differences • Supervisor provides most performance information • Pay is linked to performance appraisal results • Feedback is infrequent • Feedback is mostly one way - supervisor to subordinate IRWIN • a Times Mirror Higher Education Group, Inc., company, 1997

7. Merit Pay Programs: Criticisms • Individual performance differences are due largely to SYSTEM • Discourages teamwork • System is not fair • Too much reliance on supervisor for rating • procedural issue • Pay increaes are not representative of performance • distributive issue • Contributes to entitlement mentality IRWIN • a Times Mirror Higher Education Group, Inc., company, 1997

8. Individual Incentives Used rarely for the following reasons: • Most jobs have no physical output • Many administrative problems • Individuals focus only on the incentive • Does not fit with team approach • Does not reward obtaining multiple skills • Rewards output at the expense of quality or service IRWIN • a Times Mirror Higher Education Group, Inc., company, 1997

9. Profit Sharing Advantages • Encourages employees to think like OWNERS • Payments are not part of base pay Disadvantages • Many plans defer actual payments • Few plans pay out during business downturns IRWIN • a Times Mirror Higher Education Group, Inc., company, 1997

10. Gainsharing • Encourages pursuit of broader(team) goals • Measures performance that is controllable by employee • Distributes payouts frequently • Conditions for success include: • management commitment • commitment to continuous improvement and change • willingness to accept employee input • high level of cooperation and information sharing • agreement on productivity standards • employment security IRWIN • a Times Mirror Higher Education Group, Inc., company, 1997

11. Individual Pay Programs: Design Features Payment Method Frequency of Payout Performance Measures Programs Coverage Merit Pay Incentive Pay Profit Sharing Ownership Gainsharing Skill-based - Change in base - Bonus - Bonus - Equity changes - Bonus - Change in base - Annually - Weekly - Semiannual or annual - Sale of stock - Monthly / quarterly - when skill is acquired - Boss’ appraisal - Output, productivity - Profit - Stock value - Production costs - Skill acquisition - All - Direct labor - All - All - Production /service unit - All Source: Adapted from E.E. Lawler III, “Pay for Performance: A Strategic Analysis,” in Compensation and Benefits, ed. L. R. Gomez-Mejia (Washington, D. C.: Bureau of National Affairs, 1989).

12. Individual Pay Programs: Consequences Performance Motivation Programs Attraction Culture Costs Merit Pay Incentive Pay Profit Sharing Ownership Gainsharing Skill-based - Little - Clear connection - Little - Little - somein small units - Learning - High performers - High performers - All - All - Retain employees - those who want to learn - Intra-group competition - Individual competition - Knowledge of business - Sense of ownership - Cooperation - Learning - Good system of appraisal - maintenance costs high - Ability to pay - Costs not to variable - Costs are variable - can be high Source: Adapted from E.E. Lawler III, “Pay for Performance: A Strategic Analysis,” in Compensation and Benefits, ed. L. R. Gomez-Mejia (Washington, D. C.: Bureau of National Affairs, 1989).

13. Individual Pay Programs: Contingencies Organization Structure Management Style Programs Type of Work Merit Pay Incentive Pay Profit Sharing Ownership Gainsharing Skill-based - Independent jobs - Measurable jobs / units - Autonomous units - Any company - Most companies - Most companies - Control - Participation desirable - Participation - Participation - Participation - Participation - Individual, easy to measure - Individual appraisal - All types - All types - All types - Professional Source: Adapted from E.E. Lawler III, “Pay for Performance: A Strategic Analysis,” in Compensation and Benefits, ed. L. R. Gomez-Mejia (Washington, D. C.: Bureau of National Affairs, 1989).

14. Product Life Cycle andOperation Strategies Sales Prospectors Defenders IRWIN • a Times Mirror Higher Education Group, Inc., company, 1997

15. Matching Pay Strategy to Operating Strategy Business Unit Strategy Defenders Prospectors Pay Strategy Dimension Low Short-term Above market Above market Above market Centralized Job High Long-term Below market Above market Below market Decentralized Skills Risk Sharing (variable pay) Time Orientation Pay level (short run) Pay level (long run) Benefits Level Where Pay Decision Made Pay Unit of Analysis Source: Adapted from L.R. Gomez-Mejia and D. B. Balkin, Compensation, Organizational Strategy, and Firm Performance (Cincinnati:South-Western), Appendix 4b.