Chapter 1Performance Management and Reward Syst.docx

Chapter 1
Performance Management
and Reward Systems
in Context
1-*
Copyright © 2013 Pearson Education, Inc. publishing as
Prentice Hall
Prentice Hall
1.pdf
P e r f o r m a n c e
m a n ag e m e n t
t h i r d e d i t i o n
h e r m a n ag u i n i s
www.pearsonhighered.com
ISBN-13:
ISBN-10:

978-0-13-255638-5
0-13-255638-3
9 7 8 0 1 3 2 5 5 6 3 8 5
9 0 0 0 0
a
g
u
in
is
P
er
fo
r
m
a
n
c
e m
a
n
a
g
em
en

t
t
h
ir
d
e
d
it
io
n
Overview
Definition of Performance Management (PM)
The PM Contribution
Disadvantages/Dangers of Poorly Implemented PM Systems
Definition of Reward Systems
Prentice Hall
1-*
Prentice Hall
Overview (continued)

Purposes of PM Systems
Characteristics of an Ideal PM System
Integration with Other Human Resources and Development
Activities
PM Around the World
Prentice Hall
1-*
Prentice Hall
Definition of PM
Prentice Hall
1-*Continuous process of …Identifying Measuring Developing
… the performance of individuals and teamsAligning
performance with the strategic goals of the organization
Prentice Hall
Definition of PM (continued)
Performance management (PM)
is NOT
performance appraisal (PA)

Prentice Hall
1-*
Prentice Hall
Definition of PM (continued)
PMStrategic business considerationsDriven by line
managerOngoing feedback
So employee can improve performance
PADriven by HRAssesses employee
Strengths
WeaknessesOnce a yearLacks ongoing feedback
Prentice Hall
1-*
Prentice Hall
Contributions of
Performance Management
For Employees
For Managers
For Organization/HR Function
Prentice Hall
1-*
Prentice Hall

Contributions of Performance Management for
EmployeesClarify definitions of
Job
Success criteria
Increase motivation to perform
Increase self-esteem
Enhance self-insight and development
Prentice Hall
1-*
Prentice Hall
Contributions of Performance Management for Managers
Communicate supervisors’ views of performance more clearly
Managers gain insight about subordinates
Better and more timely differentiation between good and poor
performers
Employees become more competent
Prentice Hall
1-*
Prentice Hall
Contributions of Performance Management for Organization/HR
Function
Clarify organizational goals
Facilitate organizational change
Fairer, more appropriate administrative actions

Better protection from lawsuits
Prentice Hall
1-*
Prentice Hall
Disadvantages/Dangers of
Poorly Implemented
PM Systems
Prentice Hall
1-*
For EmployeesFor ManagersFor Organization/HR Function
Prentice Hall
Disadvantages/Dangers of Poorly Implemented PM Systems for
EmployeesLowered self-esteemEmployee burnout and job
dissatisfactionDamaged relationshipsUse of false or misleading
information
Prentice Hall
1-*
Prentice Hall

Disadvantages/Dangers of Poorly Implemented PM Systems for
Managers
Increased turnover
Decreased motivation to perform
Unjustified demands on managers’ resources
Varying and unfair standards and ratings
Prentice Hall
1-*
Prentice Hall
Disadvantages/Dangers of Poorly Implemented PM Systems
for Organization/HR Function
Wasted time and money
Unclear ratings system
Emerging biases
Increased risk of litigation
Prentice Hall
1-*
Prentice Hall
Reward Systems
Prentice Hall
1-*DefinitionTangible ReturnsIntangible ReturnsReturns and
their Degrees of Dependency on PMFor Organization/HR
Function

Prentice Hall
Reward Systems
Definition
Set of mechanisms for distributing…
Tangible returns
Intangible or relational returns
… as part of an employment relationship
Prentice Hall
1-*
Prentice Hall
Reward Systems
Tangible Returns
Cash compensation
Base pay
Cost-of-Living and Contingent Pay
Incentives (short- and long-term)
Prentice Hall
1-*
Prentice Hall

Base pay
Hourly wages
Salary
Cost-of-Living & Contingent Pay
Usually permanent increases in pay based on either cost of
living or performance
Covered in more detail in Module 11
Incentives (short- and long-term)
Used to increase performance
E.g., bonuses (short term) or stock options/ownership
(long term)
Income Protection
Sometimes required under law, such as
Social Security (what about unemployment insurance in
the USA?) Disability pay,
medical insurance,
pension plans,
savings plans
Allowances
E.g., housing
transportation (e.g., company provides car)
Reward Systems
Tangible Returns (continued)
Benefits such as
Income Protection
Allowances
Work/life focus

Prentice Hall
1-*
Prentice Hall
Reward Systems
Intangible Returns
Relational returns such as
Recognition and status
Employment security
Challenging work
Learning opportunities
Prentice Hall
1-*
Prentice Hall
Work/life focus (to help employee balance work/home life)
Such as vacation time,
flextime and telecommuting,
services (e.g., counseling, financial planning, fitness
activities)
Relational Returns
Such as recognition,
status,
employment security,
challenging work,
opportunities to learn,
opportunities to form personal relationships

Returns and Their Degrees of Dependency on the Performance
Management SystemLow Dependency
Cost of Living Adjustment
Income ProtectionModerate DependencyHigh Dependency
Prentice Hall
1-*
Prentice Hall
Management System (Continued)Low DependencyModerate
Dependency
Work/Life Focus
Allowances
Relational Returns
Base PayHigh Dependency
Prentice Hall
1-*
Prentice Hall
Management System (Continued)Low DependencyModerate
DependencyHigh Dependency
Contingent Pay
Short-Term Incentives
Long-Term Incentives

Prentice Hall
1-*
Prentice Hall
StrategicAdministrativeInformationalDevelopmentalOrganizatio
nal maintenanceDocumentation
Prentice Hall
1-*
Prentice Hall
Strategic Purpose
Link individual goals with organization’s goals
Communicate most crucial business strategic initiatives
Prentice Hall
1-*
Prentice Hall
Note: the following is slide used before (some of this is not in
Module 1)
Links employee activities with organization’s mission and goals
Identifies results and behaviors needed to carry out strategy

Maximizes extent employees exhibit those behaviors and results
Only 13% of organizations use PM to communicate
organizational purpose and goals
Administrative Purpose
Provide information for making decisions regarding:
Salary adjustments
Promotions
Retention or termination
Recognition of individual performance
Layoffs
Prentice Hall
1-*
Prentice Hall
Informational Purpose
Communicate to employees:
Expectations
What is important
How they are doing
How to improve
Prentice Hall
1-*

Prentice Hall
Developmental Purpose
Performance feedback/coaching
Identification of individual strengths and weaknesses
Identification of causes of performance deficiencies
Tailor development of individual career path
Prentice Hall
1-*
Prentice Hall
Organizational Maintenance Purpose
Plan effective workforce
Assess future training needs
Evaluate performance at organizational level
Evaluate effectiveness of HR interventions
Prentice Hall
1-*
Prentice Hall

Documentation Purpose
Validate selection instruments
Document administrative decisions
Help meet legal requirements
Prentice Hall
1-*
Prentice Hall
An Ideal PM System:
15 Characteristics
Strategically congruent
Contextually congruent
Thorough
Practical
Meaningful
Specific
Identifies effective and ineffective performance
Prentice Hall
1-*
Prentice Hall
An Ideal PM System:

15 Characteristics (continued)
Reliable
Valid
Acceptable and fair
Inclusive
Open (No Secrets)
Correctable
Standardized
Ethical
Prentice Hall
1-*
Prentice Hall
An Ideal PM System:
15 Characteristics
Strategically CongruentConsistent with organization’s
strategyAligned with unit and organizational goals
Prentice Hall
1-*
Prentice Hall
An Ideal PM System:
15 Characteristics
Contextually CongruentCongruent with the organization’s

culture as well as the broader cultural context of the region or
country
Example: A 360-degree feedback is not effective where
communication is not fluid and hierarchies are rigid
Prentice Hall
1-*
Prentice Hall
An Ideal PM System:
15 Characteristics
ThoroughAll employees are evaluatedAll major job
responsibilities are evaluatedEvaluations cover performance for
entire review periodFeedback is given on both positive and
negative performance
Prentice Hall
1-*
Prentice Hall
An Ideal PM System:
15 Characteristics
PracticalAvailableEasy to useAcceptable to decision
makersBenefits outweigh costs
Prentice Hall

1-*
Prentice Hall
An Ideal PM System:
15 Characteristics
MeaningfulStandards are important and relevantSystem
measures ONLY what employee can controlResults have
consequences Evaluations occur regularly and at appropriate
timesSystem provides for continuing skill development of
evaluators
Prentice Hall
1-*
Prentice Hall
An Ideal PM System:
15 Characteristics
Specific
Concrete and detailed guidance to employees
What’s expected
How to meet the expectations
Prentice Hall
1-*
Prentice Hall

An Ideal PM System:
15 Characteristics
Identifies effective and ineffective performanceDistinguish
between effective and ineffective:
Behaviors
ResultsProvide ability to identify employees with various levels
of performance.
Prentice Hall
1-*
Prentice Hall
An Ideal PM System:
15 Characteristics
ReliableConsistentFree of errorInter-rater reliability
Prentice Hall
1-*
Prentice Hall
An Ideal PM System:
15 Characteristics

ValidRelevant (i.e., measures what is important)Not deficient
(i.e., doesn’t measure unimportant facets of job)Not
contaminated (i.e., only measures what the employee can
control)
Prentice Hall
1-*
Prentice Hall
An Ideal PM System:
15 Characteristics
Acceptable and FairPerception of Distributive Justice
Perception of Procedural Justice
Fairness of procedures used to:
Determine ratings
Link ratings to rewards
Prentice Hall
1-*
Prentice Hall
An Ideal PM System:
15 Characteristics

InclusiveRepresents concerns of all involved
When system is created, employees should help with deciding:
What should be measured
How it should be measured
Employee should provide input on performance prior to
evaluation meeting.
Prentice Hall
1-*
Prentice Hall
An Ideal PM System:
15 Characteristics
Open (No Secrets)Frequent, ongoing evaluations and
feedbackTwo-way communications in appraisal meetingClear
standards and ongoing communicationCommunications are
factual, open, and honest
Prentice Hall
1-*
Prentice Hall
An Ideal PM System:
15 Characteristics
CorrectableRecognizes that human judgment is fallibleAppeals
process provided

Prentice Hall
1-*
Prentice Hall
An Ideal PM System:
15 Characteristics
StandardizedOngoing training of managers to provideConsistent
evaluations across:
People
Time
Prentice Hall
1-*
Prentice Hall
An Ideal PM System:
15 Characteristics
EthicalSupervisor suppresses self-interestSupervisor rates only
where (s)he has sufficient information about the performance
dimension Supervisor respects employee privacy
Prentice Hall
1-*
Prentice Hall

Integration with other Human Resources and Development
ActivitiesPM provides information for:
Development of training to meet organizational needs
Workforce planning
Recruitment and hiring decisions
Development of compensation systems
Prentice Hall
1-*
Prentice Hall
PM Around the WorldPM used in United States, Mexico,
Turkey, India, Australia, China, and so on
Common across countries: Need to align individual and
organizational goals to enhance the performance of individuals
and groups
Prentice Hall
1-*
Prentice Hall
PM Around the World (continued)
Yet, different countries emphasize different components of PM
EX 1: PMs in Japan tend to emphasize behaviors to the
detriment of results
EX 2: The current challenge among many organizations in
South Korea is how to reconcile a merit-based approach with

more traditional cultural values
Prentice Hall
1-*
Prentice Hall
Quick ReviewDefinition of Performance Management (PM)The
Performance Management Contribution Disadvantages/Dangers
of Poorly Implemented PM SystemsDefinition of Reward
SystemsAims and Role of PM SystemsCharacteristics of an
Ideal PM SystemIntegration with Other Human Resources and
Development ActivitiesPM Around the World
Prentice Hall
1-*
Prentice Hall
Herman Aguinis, University of Colorado at Denver
Herman Aguinis, University of Colorado at Denver
All rights reserved. No part of this publication may be
reproduced, stored in a retrieval system, or transmitted, in any
form or by any means, electronic, mechanical, photocopying,
recording, or otherwise, without the prior written permission of
the publisher. Printed in the United States of America.
Prentice Hall

Prentice Hall
1-*
Prentice Hall
*
Chapter 1
An Introduction
to the Foundations
of Financial Management
© 2017 Pearson Education, Inc. All rights reserved.
1-‹#›
Learning Objectives
Identify the goal of the firm.
Understand the basic principles of finance, their importance,
and the importance of ethics and trust.
Describe the role of finance in business.
Distinguish between the different legal forms of business
organization.
Explain what has led to the era of the multinational corporation.
1-‹#›

2
2
The goal
of the firm
1-‹#›
The Goal of the Firm
The goal of the firm is to create value for the firm’s owners
(that is, its shareholders). Thus the goal of the firm is to
“maximize shareholder wealth” by maximizing the price of the
existing common stock.
Good financial decisions will increase stock price and poor
financial decisions will lead to a decline in stock price.
1-‹#›
4
4
Five PRINCIPLES
THAT FORM THE FOUNDATIONS OF FINANCE
1-‹#›
Principle 1:

Cash Flow Is What Matters
Accounting profits are not equal to cash flows. It is possible for
a firm to generate accounting profits but not have cash or to
generate cash flows but not report accounting profits in the
books.
Cash flow, and not profits, drive the value of a business.
We must determine incremental or marginal cash flows when
making financial decisions.
Incremental cash flow is the difference between the projected
cash flows if the project is selected, versus what they will be, if
the project is not selected.
1-‹#›
Principle 2:
Money Has a Time Value
A dollar received today is worth more than a dollar received in
the future.
Since we can earn interest on money received today, it is better
to receive money sooner rather than later.
1-‹#›
Principle 2:
Money Has a Time Value (cont.)
Opportunity Cost – It is the cost of making a choice in terms of
next best alternative that must be foregone.
Example: By lending money to your friend at zero percent
interest, there is an opportunity cost of 1% that could

potentially be earned by depositing the money in a savings
account in a bank.
1-‹#›
Principle 3:
Risk Requires a Reward
Investors will not take on additional risk unless they expect to
be compensated with additional reward or return.
Investors expect to be compensated for “delaying consumption”
and “taking on risk.”
Thus, investors expect a return when they deposit their savings
in a bank (ex. delayed consumption) and they expect to earn a
relatively higher rate of return on stocks compared to a bank
savings account (ex. taking on risk).
1-‹#›
1-‹#›
Principle 4: Market Prices
Are Generally Right
In an efficient market, the market prices of all traded assets
(such as stocks and bonds) fully reflect all available information
at any instant in time.
Thus stock prices are a useful indicator of the value of the firm.
Price changes reflect changes in expected future cash flows.
Good decisions will tend to increase in stock price and vice

versa.
Note there are inefficiencies in the market that may distort the
market prices from value of assets. Such inefficiencies are often
caused by behavioral biases.
1-‹#›
Principle 5: Conflicts of Interest Cause Agency Problems
The separation of management and the ownership of the firm
creates an agency problem. Managers may make decisions that
are not consistent with the goal of maximizing shareholder
wealth.
Agency conflict is reduced through monitoring
(ex. annual reports), compensation schemes
(ex. stock options), and market mechanisms
(ex. takeovers)
1-‹#›
Discussion: The Global
Financial Crisis
What factors contributed to the global financial crisis?
What do we mean by subprime loans?
How are mortgages securitized?
How have unemployment rates fared?
How can the financial crisis be explained using the five
principles of finance?

1-‹#›
Ethics & Trust in Business
Ethical behavior is doing the right thing! … but what is the
right thing?
Ethical dilemma -- Each person has his or her own set of values,
which forms the basis for personal judgments about what is the
right thing.
Sound ethical standards are important for business and personal
success. Unethical decisions can destroy shareholder wealth
(ex. Enron scandal).
1-‹#›
The role
of finance
in business
1-‹#›
The Role of Finance
in Business
Three basic issues addressed by the study of finance:
What long-term investments should the firm undertake? (Capital
budgeting decision)
How should the firm raise money to fund these investments?
(Capital structure decision)
How to manage cash flows arising from day-to-day operations?
(Working capital decision)

1-‹#›
The Role of Finance in Business (cont.)
Knowledge of financial tools is relevant for decision making in
all areas of business
(be it marketing, production etc.) and also in managing personal
finances.
Decisions involve an element of time and uncertainty …
financial tools help adjust for time and risk.
Decisions taken in business should be financially viable …
financial tools help determine the financial viability of
decisions.
1-‹#›
1-‹#›
18
18
The legal forms
of business organization
1-‹#›

The Legal Forms of
Business Organization
Business Forms
Sole
Proprietorship
Partnership
Corporation
Hybrid
S-Type
LLC
1-‹#›
20
20
Sole Proprietorship
Business owned by an individual
Owner maintains title to assets and profits
Unlimited liability
Termination occurs on owner’s death or by the owner’s choice
1-‹#›
21
21
Partnership

Two or more persons come together as co-owners
General Partnership: All partners are fully responsible for
liabilities incurred by the partnership.
Limited Partnerships: One or more partners can have limited
liability, restricted to the amount of capital invested in the
partnership. There must be at least one general partner with
unlimited liability. Limited partners cannot participate in the
management of the business and their names cannot appear in
the name of the firm.
1-‹#›
22
22
Corporation
Legally functions separate and apart from its owners
Corporation can sue, be sued, purchase, sell, and own property
Owners (shareholders) dictate direction and policies of the
corporation, oftentimes through elected board of directors.
Shareholder’s liability is restricted to amount of investment in
company.
Life of corporation does not depend on the owners …
corporation continues to be run by managers after transfer of
ownership through sale or inheritance.
1-‹#›
23
23

The Trade-offs:
Corporate Form
Benefits: Limited liability, easy to transfer ownership, easier to
raise capital, unlimited life (unless the firm goes through
corporate restructuring such as mergers and bankruptcies).
Drawbacks: No secrecy of information, maybe delays in
decision making, greater regulation, double taxation.
1-‹#›
24
24
Double Taxation Example
Assume earnings before tax = $1,000
Federal Tax @ 25% = $250
After tax income available for distribution to
shareholders = $750
Compute the taxes if the company chooses to distribute the
entire after-tax profits to shareholders as dividends.
1-‹#›
Double Taxation Example
If corporation distributes profits as dividends to shareholders,
shareholders will be taxed again.

Assuming dividends are taxed @ 15%
Dividend tax = 15% of $750 = $112.50
==>Total tax = 250 + 112.5 = $362.5 or 36.25%
1-‹#›
Hybrid Organizations:
S-Corporation and Limited Liability Companies (LLCs)
S-Type Corporations
Benefits
Limited liability
Taxed as partnership (no double taxation like corporations)
Limitations
Owners must be people so cannot be used for a joint ventures
between two corporations
1-‹#›
27
27
Limited Liability Companies (LLC)
Benefits
Limited liability
Taxed like a partnership
Limitations
Qualifications vary from state to state
Cannot appear like a corporation otherwise it will be taxed like
one

Hybrid Organizations:
S-Corporation and Limited Liability Companies (LLCs) (cont.)
1-‹#›
28
28
1-‹#›
Finance and the Multinational Firm:
The New Role
1-‹#›
Finance and The Multinational Firm: The New Role
Coca-Cola, among other companies, receive significant profits
from overseas sales.
U.S. firms are looking to international expansion to discover
profits.
In addition to U.S. firms going abroad, we have also witnessed
many foreign firms making their mark in the United States. For
example, domination of auto industry by Toyota, Honda,
Nissan, and BMW.

1-‹#›
31
31
Review: Key Terms
Agency problem
Capital budgeting
Capital structure decisions
Corporation
Efficient market
Financial markets
General partnership
Incremental cash flow
Limited partnership
Limited Liability Company (LLC)
Partnership
Opportunity cost
Sole proprietorship
S-corporation
Working capital management
1-‹#›

Chapter 1Performance Management and Reward Syst.docx

Chapter 1Performance Management and Reward Syst.docx

Recommended

Recommended

More Related Content

Similar to Chapter 1Performance Management and Reward Syst.docx

Similar to Chapter 1Performance Management and Reward Syst.docx (20)

More from walterl4

More from walterl4 (20)

Recently uploaded

Recently uploaded (20)

Chapter 1Performance Management and Reward Syst.docx