Incentives and Compensation

1. Incentives and Compensation MANA 4328 Dennis C. Veit dveit@uta.edu

2. Problems at RightNow!

3. Problems at RightNow! • Marketing: New hires making more than “old timers”. • Programmers: Arkady $38k Josh $75k • Controller Edith makes 1/3rd of CFO Harriett • Allan in Store Relations with “Big Company” salary • Max Dir of International Marketing makes less than others at his level – and is a golfing buddy

4. Fox Threatens Charges After Salaries Leaked • It was unclear who sent the original e-mail, but it caused a serious uproar at Fox when it landed in inboxes. • Tony Vinciquerra, president and CEO of the Fox Networks Group, sent an e-mail to the staff apologizing for the distraction the e-mail caused and asking that everyone delete it and not discuss it with anyone outside of the company. • A former Fox executive noted that the revelation of staff salaries was likely to cause dissension in the ranks and predicted it would lead to a parade of executives looking to renegotiate their contracts. • TelevisionWeek 11.7.03

5. Merits of Secrecy? Should pay be secret? Should performance evaluations be secret?

6. Equity Theory • Comparison of my input / reward ratio with that of similar others. • Employees may seek to address imbalance by changing their inputs. • Fairness of pay differentials between different performance levels depends large part on the content and process of performance appraisal.

7. “Monkeys Demand Equal Pay” A recent study shows brown capuchin monkeys refused to play along when they saw another monkey get a better payoff for performing the same work. The monkeys were trained to trade a granite token for a piece of cumber. When the reward was the same for both monkeys, they took the cucumber 95 percent of the time. But it was a different story when one monkey was given something better -- namely, a grape. Then, the other monkey often pitched a fit -- either throwing the token, refusing to eat the cucumber or giving it to the other monkey. Associated Press 2003

8. Linking Evals and Merit Raises • How to get employees to view merit raises as linked to performance? • Types of raises: • Across the board or COLA (cost of living adjustments) • Seniority pay • Pay for performance • Merit pay systems share two attributes: • Absorbs vast amount of management time and resources. • Makes everyone unhappy.

9. Pay for Performance Requires • Definition of performance • How are we going to measure and compare people? • Distribution of performance • Can we distinguish high and low performers? • Decide the increase for each level of performance. • How large a difference between high and low performers?

10. Questions • Should low performers be paid an increase? • Should average performers be paid an increase? • What about cost of living? • What about existing difference in pay distribution? • Promote the top performers?

11. Alternatives • Market driven pay • Variable pay plan linked to organizational performance. • Year end bonuses rather than raises. • Use promotion to reward top performers. • Specific incentives for each job.

12. “Manhattan restaurant opts for 20% automatic” Per Se, one of the most highly rated Manhattan restaurants, is instituting a 20 percent service charge to all checks in lieu of a tip. The service charge will then be used by the restaurant to help pay all hourly employees -- kitchen staff, waiters, and busboys -- a flat hourly wage. Servers and other floor people make upward of $100,000 a year, while those in the kitchen take home $30,000. The new policy means the waiters are going to have to take a pay cut. With a cut in pay, or even the tip incentive removed from the equation, service could suffer. A spokesman for Per Se said the stable salary -- which also comes with benefits like vacation and health insurance -- would create a more professional environment and increase motivation. CNN 8.17.2005