Pay-for-performance aims to motivate employee behaviors through compensation. Research shows compensation influences joining, retention, skill development, and performance, though other non-pay factors also impact behaviors. Effective pay-for-performance requires: supporting business strategy through aligned structure and standards; distributing rewards fairly through amounts and procedures; and complying with laws to maintain reputation. Research overwhelmingly finds compensation motivates behaviors when designed and implemented properly.
2. Exhibit 9.1: The Cascading Link Between Organization
Strategy and Employee Behavior
Nordstrom’s Organization Strategy
• extremely good quality merchandise
• high levels of customer satisfaction
Exhibit 9.1
3. Exhibit 9.2: The Big Picture, or Compensation Can’t
Do It Alone!
His performance
depends on three
things:
1. Physical
abilities and
skills
2. Motivation
3. Absence of
environmental
obstacles
Exhibit 9.2
4. In the 1980s, Nabisco was slow to recognize customer demand for cookies.
Why?
They had a centralized organization structure that took a long time to get sales information up
to the top decision makers.
What did Nabisco do?
They decentralized (organization design) the company, creating divisions responsible for
different product lines. Now when sales people say consumer preferences are changing,
response is much more rapid.
5. COMPENSATION CAN’T DO IT ALONE
• Compensation should be sufficient for recruiting and hiring.
• Compensation needs to retain good employees.
• After hiring and retaining, focus on building knowledge and skills.
• Employers must motivate employees to perform well on their jobs.
7. WHAT BEHAVIORS DO EMPLOYERS
CARE ABOUT?
1. Attract of good employment prospects to join the company.
2. Retain good employees once they join.
3. Get employees to develop competencies for current/future jobs.
4. Get employees to perform well while at the company.
8. WHAT BEHAVIORS DO EMPLOYERS
CARE ABOUT? (cont.)
1. How do we attract good employment prospects to join our company?
• The long-run success of any company depends on getting good people to accept
employment.
9. WHAT BEHAVIORS DO EMPLOYERS
CARE ABOUT? (cont.)
2. How do we retain these good employees
once they join?
• It doesn’t do much good to attract
exceptional employees to the company only
to lose them a short time later.
• Once the compensation practices get a
good employee in the door, company needs
to figure out ways to ensure it’s not a
revolving door.
10. WHAT BEHAVIORS DO EMPLOYERS
CARE ABOUT? (cont.)
3. How do we get employees to develop skills for current and future jobs?
• The compensation challenge is to get employees, traditionally resistant to
change, to willingly develop skills that may not be vital on the current job
but are forecast to be critical as the company’s strategic plan adjusts to
change.
11. WHAT BEHAVIORS DO EMPLOYERS
CARE ABOUT? (cont.)
4. How do we get employees to perform well on their current job?
• The compensation challenge is to design rewards that enhance job
performance.
12. WHAT DOES IT TAKE TO GET THESE BEHAVIORS? WHAT
THEORY SAYS
In the simplest sense, motivation involves three elements:
1. what is important to a person, and
2. offering it in exchange for some
3. desired behavior
As to the first element, what’s important to employees, data suggest employees prefer pay systems that
are influenced by:
• Individual performance
• Changes in cost of living
• Seniority
• Market rate
13. WHAT DOES IT TAKE TO GET THESE BEHAVIORS? WHAT
THEORY SAYS (cont.)
Content Theories (what is important to a person)
Hertzberg’s Two Factor Theory
Maslow’s Hierarchy of Needs
14. WHAT DOES IT TAKE TO GET THESE BEHAVIORS? WHAT
THEORY SAYS (cont.)
Process Theories (the nature of the exchange)
Expectancy Theory
Equity Theory
Agency Theory
15. • In the past, compensation people didn’t ask this question very often.
• Now, progressive companies ask, “What do we want our compensation package
to do?”
WHAT DOES IT TAKE TO GET THESE BEHAVIORS?
WHAT PRACTITIONERS SAY
16. WHAT DOES IT TAKE TO GET THESE BEHAVIORS?
WHAT PRACTITIONERS SAY (cont.)
Exhibit 9.4: Components of a Total Reward System
17. WHAT DOES IT TAKE TO GET THESE BEHAVIORS?
WHAT PRACTITIONERS SAY (cont.)
Recently completed a worldwide “employment
branding” exercise.
Three things emerged as strengths at McDonald’s:
1. An emphasis on family and friends in a social work
environment
2. Flexibility in work assignments and work schedules
3. Development of skills that helped launch future careers
Promotes a business culture of fun and encourages
employees to find ways to make their jobs more
interesting and relevant to them personally.
• Southwest “pays by the trip,” meaning employees earn more the
more flights they work.
• Employees also have significant ownership in the company
through a discount stock purchase program and receive profit-
sharing checks when the airline is profitable, which is has been for
45 years in a row.
• In one year, Southwest paid out $543 million in profit-sharing to its
56,110 employees, working out to an average of almost $10,000
per employee.
18. WHAT DOES IT TAKE TO GET THESE BEHAVIORS?
WHAT PRACTITIONERS SAY (cont.)
Wage Components
A variety of wage components, listed from least risky to most risky (stability of
income):
19. DOES COMPENSATION MOTIVATE BEHAVIOR?
• 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?
20. DO PEOPLE JOIN A FIRM BECAUSE OF PAY?
DOES COMPENSATION MOTIVATE BEHAVIOR? (cont.)
21. DO PEOPLE STAY IN A FIRM (OR LEAVE) BECAUSE OF
PAY?
• Poor performers leave when pay is based on individual performance.
• Group incentives may lead to more turnover of better performers.
• Dissatisfaction with pay may cause turnover.
• Even the way an organization pays may impact turnover.
DOES COMPENSATION MOTIVATE BEHAVIOR? (cont.)
22. Other
rewards also
influence
the decision
to stay
Job
Satisfaction
Socializatio
Organizationa
commitment
Organizationa
Prestige
DOES COMPENSATION MOTIVATE BEHAVIOR? (cont.)
DO PEOPLE JOIN A FIRM BECAUSE OF PAY? (CONT.)
Besides money, other rewards
also influence the decision to
stay (retention) in a firm.
23. DO EMPLOYEES MORE READILY AGREE TO DEVELOP JOB
SKILLS BECAUSE OF PAY?
• The answer is not known.
• New skills will help employees on current and future job demands.
• Evidence points to paying for skill may not increase productivity but may improve
quality.
DOES COMPENSATION MOTIVATE BEHAVIOR? (cont.)
24. DO EMPLOYEES PERFORM BETTER ON THEIR JOBS BECAUSE
OF PAY?
DOES COMPENSATION MOTIVATE BEHAVIOR? (cont.)
Research Studies Result of the Study
Study at the HR practices of over 3,000 companies
Organizations significantly above the mean (by one
standard deviation) on these and other “high-
performance work practices” had annual sales that
averaged $27,000 more per employee
Heneman Comprehensive Review
Heneman reports that 40 of 42 studies looking at
merit pay show performance increases when pay is
tied to performance.
One study of 841 union and nonunion companies
They found that gain-sharing and profit- sharing
plans (both designed to link pay to performance)
increased individual and team performance 18 to
20%.
Review of 26 studies
The study gives high marks to profit-sharing plans:
Organizations with such plans had 3.5 to 5% higher
annual performance.
Practitioner/s Practitioners' Perception
Gerhart and Milkovich
Across 200 companies they found a 1.5%
increase in return on assets for every 10%
increase in the size of a bonus.
Numerous critics, led by Alfie Kohn
His conclusion, based heavily on the work of
Deci and colleagues, is that rewarding a person
for performing a task reduces interest in that
task—extrinsic rewards (money) reduce intrinsic
rewards (enjoyment of the task for its own sake).
Employees/Managers Perception
Dyer and colleagues
Substantial evidence indicates that management and
workers alike believe pay should be tied to
performance. Dyer and colleagues asked 180
managers from 72 different companies to rate nine
possible factors in terms of the importance they
should receive in determining the size of salary
increases. This group believed the most important
factor for salary increases should be job
performance.
Other research supports these findings
Both college students and a second group of
managers ranked job performance as the most
important variable in allocating pay raises. Another
way to make the pay-for-performance argument is to
look at the ways HR professionals try to cut costs. At
the top of the list: Create greater distinction between
high and low performers! In other words, really pay
Employee responses overwhelmingly say
yes.
Research overwhelmingly says yes.
Practitioner perceptions overwhelmingly say
yes.
25. DESIGNING A PAY-FOR-PERFORMANCE PLAN
The pay model suggests effectiveness depends on three things:
1. Efficiency.
2. Equity.
3. Compliance.
26. DESIGNING A PAY-FOR-PERFORMANCE PLAN (CONT.)
EFFICIENCY
Efficiency involves three areas of concern:
1. Strategy: The plan must support corporate objectives. E.g., organizational
strategies fit the compensation strategy and HR plan.
2. Structure: The organizational structure and the compensation plan should be
aligned. E.g., decentralized structure and flexible plans.
3. Standards: E.g., objectives, measures, eligibility, and funding.
27. DESIGNING A PAY-FOR-PERFORMANCE PLAN (CONT.)
EQUITY/FAIRNESS
There are two types of equity, or fairness:
1. Distributive justice: Amount that is distributed to employees.
2. Procedural justice: Procedures used to determine the amount of rewards.
A key element in fairness is communication.
28. DESIGNING A PAY-FOR-PERFORMANCE PLAN (CONT.)
COMPLIANCE
• A pay-for-performance system should comply with existing laws.
• Firms want a reward system that maintains and enhances their reputation.
