In this presentation we are reviewing the article, “Designing Compensations Systems to Motivate Performance Improvement” by Thiagarajan, Estes, and Kemmerer. In this article, the authors review compensations systems and their role as formal organizations incentives; what they can and cannot do and how they can be developed. To start off, the authors clarify a few things: First, that HP technologists cannot tackle this subject alone – need the help of compensation specialists, lawyers, economists, and other human resource professionals – a compensation task force. And the HP technologist can act as a consultant regarding performance with compensation matters. Second, that the term “Incentives” is sometimes used in two ways , 1) the broad sense of the word including all rewards and remuneration given to employees for the purposed eliciting, improving,m and maintaining work performance. Or 2) more commonly used today it refers to the standard business use, to variable rewards like commissions, stock options, bonuses, where compensation might be used to encompass these incentives as well as an employees' wages, salary, benefits, etc. And third, that these principles are based on psychology and economics and are useful around the world in the international job market, however the specific settings will dictate the principles to be applied for a given situation because of local customs, laws, cultures, and economies.
In previous times, management thought that compensation motivated people, but now, research tells us that motivation is an internal thing that is only influenced by the design of an organization’s performance system. This is important because once a base level of adequacy is reached in terms of compensation, the intrinsic challenges and rewards of a job are much more powerful motivators than extrinsic reward systems are. (Hertzberg as quoted in Thiagarajan et. all)Organizations use compensation systems to try and motivate their employees. By definition all compensations systems should be intentional, external, and standardized. Intentional in that they are developed with the intention of influencing employee’s performance. External in that they are external to the individual and proceed from the company such as praise from a manager or increases in salary). And compensation systems must be standardized in that they should specify a standard procedure that identifies categories of employees, activities, incentives, and relationships so that all employees are identified and classified into appropriate groups. Also that target activities and accomplishments for each group of employees is identified and define each groups’ objectives clearly to link to the activities that contribute to their efficient achievement. Lynn Blodgett, President and CEO of ACS a Xerox company stated, “I believe that a really important management principle is that if you get the incentives aligned, people will motivate themselves far better than you’ll ever motivate them. But, again, you have to get the incentives right (2011).”
Even though compensation systems all must be intentional, external, and standardized, they can vary a lot in the way they are used, who they are for, and why. Let’s review the variable characteristics. First is purpose. The three r’s of compensation systems’ purposes are recruitment, retention, and results. Recruitment is to get competent people to come work for the organization through wining and dining or outbidding competition. Retention means discouraging competent individuals from leaving through annual pay raises and providing a comfortable work environment. Results means encouraging competent people to accomplish more for the organization by linking their pay to productivity and by supplying the training and tools required for peak performance. Second is performers. The type of people we use compensation systems to motivate and the positions these individuals hold are vary different. There are CEOs as well as custodians. There are different ways to handle these differences. Organizations can group performers or reward individual performers. Third, is performance. There are several ways organizations can determine how to pay individuals. They can choose to reward the maintenance of a certain level of performance such as consistent performance for a weekly salary; Potential versus actual performance may be rewarded such as people with higher educational qualifications are paid more or actual performance could be compensated for despite educational level; Activity versus accomplishment can be compensated such as paying by the hour or number of items produced. Or short-term versus long –term accomplishment such as rewarding employees based on a short-term goal or long-term incentives for CEOs. The fourth characteristic that can be varied is Incentives. These are usually classified as monetary or non-monetary incentives. There also can be negative incentives in this category such as docking pay for absences or lateness. Examples of monetary incentives are: overtime pay, stock options, allowances like a car allowance. Non-monetary incentives would include things like supplies, cafeteria, nice office size, recognition by a manager, good working conditions such as flexible schedule, telecommuting (Tynan, 2011) choice of projects, good workload, good organizational culture, or such things as career counseling, job title, or tenure. The final variable characteristic is timing. Incentives can be given directly after an accomplishment or at certain times of year, immediately or at a delay.
Compensation systems can be extremely comprehensive between all the variables we’ve discussed. A very comprehensive system does the following things: identifies several levels and categories of performers, specifies desired behaviors in detail, expected outcomes, and measurement strategies; provides a variety of incentives in different categories; and prescribes detailed procedures for the distribution of incentives. Less comprehensive systems merely identify a few critical performers, performances, incentives, and procedures. The more comprehensive compensation systems are, they take more time, effort, and money to develop and implement but more complex or expensive systems are not always better or cost-effective. The most appropriate variation depending on the situation needs to be determined. An HP technologist reviewing a compensation system’s cost-effectiveness should ask them self, the ABC’s - is the compensation adequate for the job being done? Is it balanced or equal for each person according to their job? Is it consistent between the goal and the means and between employees and compensation?
Compensation systems are among the most potentially powerful HPT interventions and because salary and benefits are among the largest components of most organizations budgets, it’s appropriate and necessary that HP technologists pay close attention to how compensation effects individual and group performance. We know that people repeat behaviors that they find rewarding. Because of this principle compensation systems try to use this in the workplace. One source stated that, “Incentive-based compensation is becoming much more common because of the increased emphasis on performance and competition for talent.” (Obringer, 2011)
Net MBA goes so far as to say that Maslow’s hierarchy of needs comes into play with how management treats employees with incentives and compensation. Physiological needs: Provide lunch breaks, rest breaks, and wages that are sufficient to purchase the essentials of life.Safety Needs: Provide a safe working environment, retirement benefits, and job security.Social Needs: Create a sense of community via team-based projects and social events.Esteem Needs: Recognize achievements to make employees feel appreciated and valued. Offer job titles that convey the importance of the position.Self-Actualization: Provide employees a challenge and the opportunity to reach their full career potential.However, not all people are driven by the same needs - at any time different people may be motivated by entirely different factors. It is important to understand the needs being pursued by each employee. To motivate an employee, the manager must be able to recognize the needs level at which the employee is operating, and use those needs as levers of motivation.Retrieved from (http://www.netmba.com/mgmt/ob/motivation/maslow/)
The author’s outline how compensation systems can be powerful tools, but also state they are not a panacea, resolving all organizational problems. They don’t replace the intrinsic rewards of a job or replace the other types of organizational reform or HPT. The following situations require other remedies:When managers want quick resultsWhen managers are unwilling to upgrade equipment , tools, or work conditionsManagers are unwilling to disclose information to employees about salary scales and incentivesManagers are unwilling or unable to specify the results and accomplishments they wantHP technologists lack expertise or unable to consult with competent professionals
The author’s recommend using an ADDIE-like process to design and develop a compensation package. First, analysis needs to be done. A front-end analysis is suggested to gather the information regarding the budget with labor costs versus profit. Identifying external factors such as competition, look at employee’s perceptions of what would be ideal compensation versus the actual system. They also suggest interviewing people to get more information on ideal state in terms of the 3R’s – recruitment, retention, and results. HP technologists will also need to analyze the characteristics of the target population, do a systems analysis, a job-task analysis, compensation analysis including incentives and disincentives. They need to determine the goals of the compensation system and then after feedback and gathered from stakeholders and experts, review and revise the goals. Then have labor, tax, and legal experts review the goals. Second, design based on the goals determined during the analysis including salaries at each job level, variable incentives, any non-monetary incentives, as well as opportunities for professional development and procedures for distribution. During the initial design of the compensation system, provide the minimum amount of each type of compensation – whatever is missing becomes so important that is all employees will focus on. Also, remember that the status of a job is related to its title and paycheck. An impressive job title without increased responsibility or pay will not be perceived as an incentive. It is important for the HP technologist to tie rewards to increases in performance or productivity. Be careful in trying to transport compensation systems from one situation to another. An incentive that produces dramatic results in one situation does not mean it will produce similar results in another. Be careful in the use of employee competition to make sure you avoid counterproductive competition. Once designed, review and revise after consulting experts, stakeholders, and others for feedback.
This slide shows a number of questions the HP technologist can ask regarding the newly designed compensation system to determine how well it’s been designed. The next step, once all the design questions are answered is to document the compensation system. Do you need job aids, manuals or decision tables? Training materials are definitely going to need to be produced along with reference manuals. The next step is implementation. The compensation task force should be kept in the loop during the analysis and design phases and all employees need to be aware of the new system’s features. Before the actual implementation of the new system, ALL team members should attend a brief orientation workshop for change management reasons. Modifications should be made as questions and problems arise that were not addresses initially and the program should always be maintained and upgraded once it has been launched.
Addressing the compensation systems in organizations is a fairly new thing to the Human Performance Technology field. This is a welcome thing for the HPT field, as other HPT interventions lose their impact unless appropriate adjustments to compensation systems are also undertaken. There are many changes taking place in the field of compensation including more minorities, women, older people and those who are foreign-born in the workforce. These factors are affecting the compensation in the field because, for example, women will no longer accept less compensation than men and foreign trained workers do not deserve or need to accept less as well. Also, the nature of work is changing, we’re a more information-based economy now and this changes the types of performance and accomplishment which requires new compensation and diversity in the variables in the compensation. It is now becoming widely recognized that distributing gains from growth through employee stock ownership and the like is a good incentive for people who produce those gains. Also, the world is much more a global market than ever before, and finally people tend to move jobs and companies much more than ever before.
Remember that the task of designing a complex compensation system is far too complex to be attempted solely by an HP technologist. It must include experts on laws, economy, human resources, union leaders, compensation specialists, and other qualified experts. HP technologist should participate as a champion of the effort and a part of the task force. The keys with designing a compensation package are that it must align with the business strategy and performance system already in place and it must be done with the appropriate authorities and experts in order to avoid negative consequences such as upset employees and worse, lawsuits or union protests.
By Lori Maher, Justin Gast, and Justin Morris
Designing Compensation Systems to Motivate Performance Improvement Article by Sivasailam Thiagarajan, Fred Estes, and Frances N. Kemmerer
Incentive – something that influences a person to act in certain ways. Compensation system - a collection of incentives and a set of procedures for using them.
Comprehensive Compensation Systems: 1. Identifies several levels and categories of performers 2. Specifies desired behaviors in detail, expected outcomes, and measurement strategies 3. Provides a variety of incentives in different categories 4. Prescribes detailed procedures for the distribution of incentives Ask is the system adequate, balanced and consistent?
Compensation is a powerful tool HP technologists should look at how they affect performance People repeat behaviors they find rewarding
Compensation won’t fix: When managers want quick results When managers are unwilling to upgrade equipment , tools, or work conditions Managers are unwilling to disclose information to employees about salary scales and incentives Managers are unwilling or unable to specify the results and accomplishments they want HP technologists lack expertise or unable to consult with competent professionals
Can use an ADDIE-like model to create Analysis Design Implementation Evaluation
Whose performance is to be rewarded? How does on job group differ from others? What are the different conditions under which the same job is performed? How is employee performance evaluated? How frequently is employee performance evaluated? What types of accomplishments are rewarded by the compensation system? What is the relationship of different types of performance to organizational goals? If there is no direct link between individual performance an organizational productivity, how can the two be related? Who will evaluate performance? Who is responsible for suggesting appropriate incentives? What recourse does the employee have if he or she disagrees with a performance evaluation?
Current Trends Changing Workforce Changing Nature of Work Employee stake in corporations Global market Worker Movement
The compensation must be aligned with the business strategy and with other elements of the performance system. Lawsuits, union protests, and other consequences may follow amateurishly designed systems.
Bares, A. (n.d.). Compensation Cafe: Incentives/Bonuses. Compensation Cafe. Blog, . Retrieved November 8, 2011, from http://www.compensationcafe.com/incentivesbonuses/ Maslow’s Hierarchy of Needs. (n.d.). Retrieved from http://www.netmba.com/mgmt/ob/motivation/maslow/ Obringer, L. A. (n.d.). HowStuffWorks “Employee Compensation Structures.” How Stuff Works. Retrieved November 8, 2011, from http://money.howstuffworks.com/benefits1.htm Thiagarajan, S., Estes, F., and Kemmerer, F. N. (1999). Designing Compensation Systems to Motivate Performance Improvement. In Stolovitch, H. D. & Keeps, E. J. (Eds.), Handbook of Human Performance Technology: Improving Individual and Organizational Performance Worldwide (2nd ed.). San Francisco: Jossey- Bass/Pfeiffer. Tynan, D. (n.d.). 25 Ways to Reward Employees (Without Spending a Dime) - HR World. HR World.