Pay for perfomance (Pros&Cons) presentation

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Pay for perfomance (Pros&Cons) presentation

  1. 1. PAY FOR PERFORMANCE DEBATE Abdul Binsahman, Christine Bills, Lindsey Janosko , Evelyne Ringia, Suzanne Mell
  2. 2. Pay for Performance (PFP) or Incentive Pay • Incentive Structure to encourage & direct employees’ behaviors to meet production goals • Compensation based on completion of goals • Goals need to be realistic, measureable and clear • Rewards and incentives must be desired by employees • PFP should be seen as an investment, not an expense
  3. 3. Pay for Performance • Financial Incentives: • Piecework rates • Performance bonuses • Sales commission • Stock Ownership • Profit Sharing
  4. 4. • Non-Financial Incentives: • Time off • Praise & recognition • Promotion • More vacation days • Free Vacations Pay for Performance
  5. 5. PFP Increases Productivity & Performance • “Fortune’s Annual 100 Best Companies to Work for List” • Quicken Loans treats workers to a free vacation every two years • Hilcorp Energy Company rewarded staff with $100,000 each for doubling production rates and reserves over a 5 year span • 2011, Chesapeake Energy paid out more than $8 million to 6 thousand employees for following safe work practices • Mayo Clinic, onsite massages to cope with work anxieties • Aflac- week long employee appreciation week annually with prizes
  6. 6. Why Practice PFP? Equity Theory by Adams (1963): • People have beliefs about fairness & rewards for their job contributions • Skills, expertise & work ethic (inputs) should be rewarded with monetary & non-monetary compensation (outputs) • PFP creates a sense of fairness and motivation for employees performing well
  7. 7. Why Practice PFP? Equity Theory by Adams (1963): • When employees are not compensated for work, they will seek justice: • Decrease inputs: • slacking off • Quitting • slandering company • sabotaging co-worker’s
  8. 8. Vroom’s Expectancy Theory • Employee’s performance is based on individual factors • Individuals may have different goals but they can be motivated if: • There is a positive correlation between efforts and performance • Favorable performance will result in desirable reward • The reward will satisfy a personal need • The desire to satisfy is strong enough to make effort worthwhile
  9. 9. Vroom’s Expectancy Theory Source: PSU.edu
  10. 10. Pros: Increases Productivity & Performance Ex) Study by Kelly Global Workforce Index of 13,000 workers in the U.S. found: • 25% of U.S. workers compensation is tied to reaching performance targets. • Men are more frequently involved in PFP plans than women • Generation X (ages 30 to 47) receive PFP pay more than Baby Boomers & Generation Y. • Over 51% say they would be more productive and improve performance level in workplace if earnings were tied to performance outcomes.
  11. 11. Pros: Increases Productivity & Performance DreamMaker Bath & Kitchen implemented incentive programs for sales and labor teams: • Increased Customer Satisfaction: Store was meeting deadlines & improved employee attitudes • Better Cost Control: Deadlines met = decreased overtime • Improved estimating: fewer change orders • Checks and Balances System: Employees watched others progress to ensure progress for compensation
  12. 12. Pros: Employee Retention • Feel valued by the company and more likely to stay • Incentives help attract more desirable and motivated employees • High level of commitment to company • Increased job satisfaction • Increase in innovative ideas & solutions
  13. 13. Pay for Performance & Employee Engagement: • Employees are engaged when they are fully involved and enthusiastic about their jobs and their organizations. • Engaged Employees are 20-28% more productive • Share prices of organizations with highly engaged employees rose by an average of 16 percent • Disengagement costs between 243 to 270 billion dollars due to low productivity (Esty & Gewirtz, 2008)
  14. 14. Motivating Top Performers • Satisfying the needs of top performers and nurturing their professional growth is critical to organizational success • Top performers boost company performance: • Directly—by working diligently at their jobs • Indirectly, by their ability to inspire and motivate others. • It is critical to invest the time and energy to keep them satisfied and engaged (Harvard Business)
  15. 15. Pay for Performance & Engagement • Timely feedback increases employee engagement • Clear operational goals = Clear Expectations • Goals are communicated • Goals are measurable • Employees are accountable for reaching their goals
  16. 16. Effective Rewards Drive Performance • Individual and team monetary rewards: • Tied to strategic metrics • Tied to strategic goals • Reinforces message about what is important • Monetary (extrinsic) combined with excitement (intrinsic) factors, play a major role in ensuring focus and consistent performance. (Sullivan, 2011)
  17. 17. • Extrinsic Motivators are related to the job environment not the job content itself • Provides short term motivation only • Intrinsic Motivators appeal to people's inner drives, needs, and desires • Achieve better results • Related to job content • Draws motivation from within employees
  18. 18. Discussion Item Three – Working Conditions Discussion Item One – Salary, raises and other forms of compensation Discussion Item Two – Company policies and benefits Discussion Item Four – Status Extrinsic Motivators Extrinsic Extrinsic Extrinsic Extrinsic
  19. 19. Discussion Item Three – Opportunities to learn and grow Discussion Item One – On-the-job- achievement Discussion Item Two – Positive feedback about the quality of work Discussion Item Four – Accountability & responsibility for the work being done Intrinsic Motivators Intrinsic Intrinsic Intrinsic Intrinsic
  20. 20. • Treat your team members like business partners by sharing information about the company • Ask for input on new ways of doing things • Listen intently and work to implement one new idea from the team each quarter • Hold everyone accountable for their performance: top and bottom performers • Extrinsic and intrinsic rewards Motivating Top Performers
  21. 21. Case Study: The Lego Experiment • Participants were split into two groups • The first group’s sets would stay together • The second group’s sets would be taken apart after the participant put it together • The amount they were paid for each set declined as they built more sets ($2.00, 1.89, 1.78 … .02) • Participants would build many more sets in the first group than the second group
  22. 22. Case Study: The Lego Experiment
  23. 23. Does Pay for Performance Really Work? • The answer is that while pay for performance can work, it's not the solution for every organization. • A survey by Hewitt Associates LLC found: that • Nearly 8 in 10 companies have some kind of variable pay system • This is up from fewer than 5 in 10 in 1990
  24. 24. Does Pay for Performance Really Work? • The concept of pay for performance isn't new • Ancient Mesopotamians were paid by the basket for picking olives-form of performance-based pay. • Modern era, the term is used fairly loosely and often includes: • Commissions and bonuses • Variable pay approach anchored to evaluation & performance. • Re-earned each year • Not a permanent increase in base salary
  25. 25. When it works? 1. When it is designed for whole-company success: • Pay for performance is often criticized for tilting a company toward one measure and away from another. • Individual goals can pit workers against each other. • A plan that focuses only on output will invariably suffer in the area of quality.
  26. 26. When it works? • When it is designed for whole-company success: • Pay for performance is often criticized for tilting a company toward one measure and away from another. • Individual goals can pit workers against each other. • A plan that focuses only on output will invariably suffer in the area of quality.
  27. 27. Case Study: Federal Reserve Experiment • Series of three experiments • Participants were given tasks and based on their performance, they would receive different amounts of compensation • Highest compensation brought out highest level only in purely mechanical tasks • In any task that required creativity or thought, lower levels of compensation brought out better performance.
  28. 28. When it works? • There are clear expectations: • Must evaluate people on a regular basis • Clear communication of expectations & performance • Allows for employees to make adjustments • They feel their job is under their control • There is commitment to training and support: • Requires a commitment to training for it to work • Usually requires more administrative support
  29. 29. When does PFP fall short? • When it pits employees against each other: • Sets up competition between employees • Impedes teamwork • Research completed at Stamford University found: • Pay for performance a myth • PFP sets up competition between employees • Emphasize the individual rather than the team • Virtually all innovations are group efforts • Incentive pay is toxic, the system creates greedy rival gangs of workers, not profit
  30. 30. When does PFP fall short? • Discourages learning new skills & cooperation with others. • It may compromise quality • How incentive sometimes “work” • This figure shows how the employees quickly realize they can earn huge bonuses by writing software “bugs” and then fixing them, while writing bug-free software affords no chance to earn bonuses.
  31. 31. When does PFP fall short? • When it pits employees against each other: • Sets up competition between employees • Impedes teamwork • Research completed at Stamford University found: • Pay for performance a myth • PFP sets up competition between employees • Emphasize the individual rather than the team • Virtually all innovations are group efforts • Incentive pay is toxic, the system creates greedy rival gangs of workers, not profit
  32. 32. When does PFP fall short? • When it pits employees against each other: • Sets up competition between employees • Impedes teamwork • Research completed at Stamford University found: • Pay for performance a myth • PFP sets up competition between employees • Emphasize the individual rather than the team • Virtually all innovations are group efforts • Incentive pay is toxic, the system creates greedy rival gangs of workers, not profit
  33. 33. When does PFP fall short? • Fails to encourage intrinsic motivation: • The more you reward people for doing something, the more their intrinsic motivation tends to decline. • Case Study: 1999 Deci and colleagues of 128 studies found that in nearly all situations in which people are doing things in order to get rewards, extrinsic tangible rewards undermine intrinsic motivation
  34. 34. • Under targeting: Dozens of the largest American corporations routinely set performance targets so low they’re effectively meaningless, including Walt Disney and Valero Energy Case Study: Wynn Resorts Ltd. offers a more egregious example of the under-targeting practice. The casino company founded by major GOP donor Steve Wynn made his 2011 and 2012 bonuses contingent on earnings that were actually lower than the previous year’s, effectively guaranteeing Wynn a combined $19 million in taxpayer-subsidized bonuses over two years. When does PFP fall short?
  35. 35. When does PFP fall short? Fraud • Some of the largest alleged accounting frauds in history occurred in the last several years, leading to the well-known upheaval in the accounting industry and sweeping legislative and regulatory changes. One of the incentives that managers might be responding to is the increase in the proportion of their wealth that is tied to stock-based compensation. • Case Study: When Exelon Corp., the country’s largest operator of nuclear power plants, fell six cents per share short of the annual performance level that would trigger $20 million in cash bonuses to executives, the company simply “tacked on” $85 million in profit it hadn’t earned in order to ensure the payouts happened. One Tennessee-based energy company paid its CEO a million-dollar performance bonus for delivering “a higher percentage increase” in stock price than the company’s competitors, even though the company’s stock lost 6 percent of its value.
  36. 36. When does PFP fall short? Effect on Tax payer’s money executive compensation in the form of stock is tax- deductible for companies under a 1993 law, and much of the performance-based compensation executives draw is paid in stock, such gaming of performance targets ends up hurting taxpayers.
  37. 37. When does PFP fall short? • When it is so subjective that it opens the company to allegations of bias: • Case Study: Former and current employees at Microsoft, Ford, and Conoco have filed lawsuits, alleging that the forced-ranking systems used by those companies to award bonuses and weed out underperformers were biased against some groups of workers: • White males over blacks or women • Younger managers over older ones.
  38. 38. Can you make it work? • Success depends on the ability of managers to make objective assessments of their employees • Managers must differentiate between performances that meet, exceed or fall short of expectations • Competency-based systems should measure an employee's performance against a set of core behaviors that have a proven impact on business. • There must be follow-up evaluations.
  39. 39. Can you make it work? • Payouts should be made quarterly rather than annually • Must be communicated clearly, frequently, and simply • Success depends on training, reinforcement & company-wide commitment.
  40. 40. Conclusion • Evidence suggests that compensation committees face a trade-off between the positive incentive effects afforded by PFP and the negative side effects, such as: • Accounting Fraud • Decreased Teamwork • Decreased Quality • Organizations should design a mix of pay programs and consider extrinsic and intrinsic motivators to be successful.
  41. 41. Questions? Comments?
  42. 42. References Ariely, Dan, Emir Kamenica, and Drazen Prelec. “Man’s search for meaning: The case of Legos”. Elsevier, 2008. http://people.duke.edu/~dandan/Papers/Upside/meaning.pdf Chapman, A. (2001). Adams’ equity theory 1963. Retrieved from http://www.catagle.com/24- 1/adams_equity_theory_diagram_colour.htm Chiang, F.F. & Birtch, T.,A. (2010). Pay for performance and work attitudes: the mediating role of employee- organization service value congruence. International Journal of Hospitality Management, 29, 632-640. doi:10.1016/j.ijhm.2009.11.005 Esty, K., & Gewirtz, M. (2008, June 23). Creating a culture of employee engagement. Retrieved from http://www.boston.com/jobs/nehra/062308.shtml Fleming, N. (2011). THE BONUS MYTH. New Scientist, 210(2807), 40-43. Grant, A. M., & Shin, J. (2011). Work motivation: Directing, energizing, and maintaining effort and research. Forthcoming in R. M. Ryan (Ed.), Oxford handbook of motivation. OxfordUniversity Press Harvard Business Manager. (2011). How to motivate employees?. Retrieved from http://clevelandclinic.myhmm.org/hmm/developing_employees/how_do_you_motivate_employees.html
  43. 43. References Hollenbeck, John R., Barry Gerhart, and Patrick M. Wright. "Chapter 12." Fundamentals of Human Resource Management. By Raymond A. Noe. 4th ed. Boston, MA: Mcgraw Hill, 2011. 355-72. Irlenbusch, Bernd (2011, May 20) When performance-related pay backfires. The London school of economics and political science. http://www.lse.ac.uk/newsAndMedia/news/archives/2009/06/performancepay.aspx Miller, S. (2010). Pay-for-performance plans would increase productivity, employees say. Society for Human Resource Management. Retrieved from http://www.shrm.org/hrdisciplines/compensation/Articles/Pages/Productivity.aspx Newman, M. (2012). Business how-to: implementing an incentive plan to motivate employees. Remodeling. Retrieved fromhttp://www.remodeling.hw.net/business/operations/business-how-to-implementing-an- incentive-plan-to-motivate-employees Pink, Dan. "The Puzzle of Motivation." TED: Ideas worth Spreading. N.p., Aug. 2009. Web. 24 Feb. 2014. Pyke, A. (2013, Sep 13) How Some CEOs Cheat their Way to Higher Pay. Think Progress.Org Retrieved on February 18, 2014 from http://thinkprogress.org/economy/2013/09/13/2620121/ceo-pay-performance- based-cheating/#
  44. 44. References Robinson Resource Group (2013). Rewarding your employee: 15 examples of successful incentives in the corporate world. Retrieved from http://www.catagle.com/24- 1/adams_equity_theory_diagram_colour.htm Silversmith, J. (2011, Feb) Five Payment Models: The Pros, the cons, the Potential. Smith, E.B. (2013, Sep 13) Companies Use IRS to Raise Bonuses With Earnings Goals. Bloomsberg. Retrieved on February 24, 2014 http://www.bloomberg.com/news/2013-09-13/six-cents-help-net- bonus-millions-as-ceos-get-lower-goals.html Sullivan, J. (2011, May 16). Increasing employee productivity: The strategic role that HR essentially ignores. Retrieved from http://www.ere.net/2011/05/16/increasing-employee-productivity-the-strategic-role-that-hr-essentially- ignores/ The MMA Work Group to Advance Health Care Reform. Retrieved February 18, 2014 from http://www.minnesotamedicine.com/tabid/3679 Wiscombe, Janet. "Can Pay for Performance Really Work (live Copy)." Workforce. N.p., 29 Jan. 2001. Web. 24 Feb. 2014 Uco, C. (2005, September 1) Studies link CEO compensation to fraud, mismanagement. The International Committee of the Fourth International (ICFI) Retrieved on February 18, 2014 from https://www.wsws.org/en/articles/2005/09/ceo-s01.html
  45. 45. References Uco, C. (2005, September 1) Studies link CEO compensation to fraud, mismanagement. The International Committee of the Fourth International (ICFI) Retrieved on February 18, 2014 from https://www.wsws.org/en/articles/2005/09/ceo-s01.html University of Cambridge (n.d). Vroom’s expectancy theory. Retrieved from http://www.ifm.eng.cam.ac.uk/research/dstools/vrooms-expectancy-theory/

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