Chapter 11

Using Performance-Based Pay to Achieve Strategic Objectives 

Performance Management
1. Set performance goals, 2. Measure against the performance goals, 3. Provide feedback on those performance goal measures. Link all of this to pay

Measurement must have a high degree of reliability (repeatedly measuring the same results) and validity (measuring the truth).

Performance Appraisal Formats 
 * Non referenced - ranking or forced distribution
 * Absolute standards – behaviorally-anchored rating scales
 * Output-based formats – direct index, management by objectives

Performance-based pay

 * Helps organizations achieve their strategic objectives


 * Helps organizations manage labor costs as PBP is a variable cost that can be paid when times are good and foregone when times are bad
 * Merit based pay, contrarily, is costly as it is an increase to the fixed cost of labor


 * Helps organizations attract, retain, and motivate talent
 * Signals that a company is interested in EEs wanting to be paid for good performance
 * Creates instrumentality perceptions among EEs – the belief that your performance actually determines how much you earn


 * To be effective, PBP must motivate EEs. Organizations must use valid performance measures to help establish expectancy perceptions – EE efforts will translate to performance


 * PBP practices are only as good as the performance measures used


 * HR Triad: Line managers and HR professionals must ensure the PBP practices support the overall strategic objectives of the organization. EEs must understand and accept the PBP system.

Types of Performance-based Pay
 * 1) Recognition Awards
 * 2) Spot awards – granted on the spot to recognizae EEs for performing beyond the call of duty
 * 3) Challenge is to award EES fairly and avoid resentment among other EEs
 * 4) Merit Pay
 * 5) Typically ties EEs performance measured by the SUPV appraisal to the EEs yearly raise
 * 6) Disadvantage is that performance measures are subjective (halo effect, leniency/strictness, central tendencies, primacy/recency, biases, rater errors, or other measurement problems make excellent performance appraisals key) and that merit pay is a permanent pay raise
 * 7) Employers can use the lump sum merit – ties performance appraisals to lump sum bonuses rather than to raises
 * 8) Merit matrix is a tool used to determine the merit increase using info about EEs performance ratings
 * 9) Incentive Pay
 * 10) One-time award based on objective measures (i.e. sales, customer satisfaction)
 * 11) Individual incentives tend to increase competition among coworkers and focuses attention on whatever is being measured to the exclusion of other parts of the job
 * 12) Straight Piecework Plan
 * 13) Differential Piece
 * 14) Standard hour plan 
 * 15) Team incentives *Advantages *Disadvantages
 * 16) Gainsharing - measures a work unit's costs and productivity and then shares future gains with EEs
 * 17) Profit sharing - employer pays EEs amounts based on the profits of the business in addition to regular pay


 * o Advantages: creates social pressure and evokes more persistent behavior than when individuals work alone, competition among coworkers is replaced by cooperation, and strength of rewards are now paired with social rewards s.a. praise and camaraderie, the high performer of the team can encourage other team members to imitate successful behavior
 * o Disadvantages: competition among groups, equity problems arise if team members contributed unequally
 * 7. Gainsharing – measures a work unit’s costs and productivity and then shares future gains with EEs
 * o Effective as it rewards EEs to work harder and suggest new ways to work more efficiently
 * 8. Profit sharing – employer pays EEs amounts based on the profits of the business in addition to regular pay
 * o Current distribution plans - % of profits distributed quarterly or annually
 * o Deferred distribution plans – earnings in an escrow fund for distribution at retirement, termination, death, or disability
 * o Combined distribution plans – combination of the above

4. Earnings-at-Risk Pay - base pay set below the market average and a large portion of the total earnings based on performance
 * Commissions - pay based on a % of the sales price
 * Stock Ownership
 * EE stock ownership plans (ESOPs) grant stock to EEs for long-term savings and retirement
 * Stock appreciation rights (SARs) grant EEs cash or stock awards based on the increase in stock price over a specified time
 * Stock options give an EE the right to buy stock under specified conditions

Rewards

 * Nonmonetary rewards may be as effective as monetary awards in certain situations but may not affect outcomes as quickly as monetary rewards.
 * Usually not all EEs are eligible for all the rewards an employer offers
 * Rewards are usually related to an EE’s line of sight – the amount of influence an EE has on a performance measure
 * Must be timely in order to evoke subsequent desirable behavior

The Trend
Seniority-based pay shifted to merit pay during the past several decades. Now, shifting from merit pay toward incentives and pay-at-risk which makes it easier to tie pay to strategic goals and motivate EEs.

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