1. PAY FOR PERFORMANCE DEBATE Abdul Binsahman, Christine Bills, Lindsey Janosko , Evelyne Ringia, Suzanne Mell 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. Pay for Performance Financial Incentives: Piecework rates Performance bonuses Sales commission Stock Ownership Profit Sharing 4. Non-Financial Incentives: Time off Praise & recognition Promotion More vacation days Free Vacations Pay for Performance 5. PFP Increases Productivity & Performance Fortunes 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. 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. 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-workers 8. Vrooms Expectancy Theory Employees 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. Vrooms Expectancy Theory Source: PSU.edu 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. 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. 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. 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. Motivating Top Performers Satisfying the needs of top performers and nurturing their professional growth is critical to organizational success Top performers boost company performance: Directlyby 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. 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. 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. 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. 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. 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. 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. Case Study: The Lego Experiment Participants were split into two groups The first groups sets would stay together The second groups 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. Case Study: The Lego Experiment 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. 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. Under targeting: Dozens of the largest American corporations routinely set performance targets so low theyre 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 years, effectively guaranteeing Wynn a combined $19 million in taxpayer-subsidized bonuses over two years. When does PFP fall short? 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 countrys 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 hadnt 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 companys competitors, even though the companys stock lost 6 percent of its value. 36. When does PFP fall short? Effect on Tax payers 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. 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. 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. 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. 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. Questions? Comments? 42. References Ariely, Dan, Emir Kamenica, and Drazen Prelec. 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