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Rewarding Performance
Chapter 11
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Pay for Performance Plans Challenges Meeting the Challenges
Types of Pay for Performance Plans Individual Group Plant Corporate
Pay for Performance Plans For Executives For Sales Persons
Chapter 11 OverviewChapter 11 Overview
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Pay-for-performancePay-for-performance
Pay-for-Performance (P-f-P) Incentive System Rewards individuals and groups based
on their contributions
Challenges “Do only what you get paid for”
syndrome Unethical behavior——pressure to
produce Can foster competition, not cooperation
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Factors beyond employee control
Pay-for-Performance: ChallengesPay-for-Performance: Challenges
Difficulties in measuring performance
Psychological contract Credibility gap Job dissatisfaction and stress Potential reduction of intrinsic drives
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Link pay and performance Piece-rate system
Meeting the ChallengesMeeting the Challenges
Use P-f-P as part of broader HRM system
Build employee trust Culture can support or counter mgmt
efforts Promote the belief that performance
makes a difference Infuse into organization’s climate
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Use multiple layers of rewards Different types of pay incentives
Meeting the ChallengesMeeting the Challenges
Increase employee involvement Participate in pay plan design
Stress importance of acting ethically
Use motivation and nonfinancial incentives
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Types of Pay-for-Performance Types of Pay-for-Performance PlansPlans
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Individual PlansIndividual Plans
Individual-based plans Merit pay, bonuses, and awards
Advantages: Performance rewarded likely to be
repeated Incentives can help shape person’s goals Rewarding individual performance is
equitable Fit with individualistic culture in the U.S.
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Individual PlansIndividual Plans
Disadvantages: Can promote single-
mindedness Many do not see link
between pay and performance
Quality goals may not be given priority
May promotes inflexibility
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Most likely to succeed when:
Individual PlansIndividual Plans
Individual contributions can be isolated The job demands autonomy Cooperation is less critical to successful
performance Competition is to be encouraged
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Team-based PlansTeam-based Plans
Cash or noncash Generally given to all equally
Some teams decide how bonus distributed
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Team-Based PlansTeam-Based Plans
Advantages: Foster group cohesiveness Easier to assess team performance
Disadvantages: Possible lack of fit with individual culture Free-riders Social pressures to limit performance Difficulties identifying meaningful
groups Intergroup competition
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Most likely to succeed when:
Team-Based PlansTeam-Based Plans
Work so intertwined, hard to identify individual contributions
Organization’s structure facilitates groups and teamso Are few levels in hierarchyo Technology allows for separation of work
into independent groups Objective is to foster entrepreneurship in
self-managed work groups
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Gainsharing Assumes competition to be avoided
Plantwide PlansPlantwide Plans
Advantages: Encourages active employee input Can increase cooperation levels Subject to fewer measurement errors Easier to calculate Workers more likely to accept program
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Conditions favoring plantwide plans Small to mid-size firms Technology can improve efficiency Participative management Product market is stable
Plantwide PlansPlantwide Plans
Disadvantages: Protects low performers Management-labor conflict Improvements easier when first
instituted
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Corporatewide PlansCorporatewide Plans
Profit Sharing Employee Stock Ownership Plan (ESOP)
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Advantages: Financial flexibility for the firm Increased employee commitment Tax advantages
Disadvantages: Employees may bear financial risk Limited effect on productivity May have long-term ramifications on
firm’s financial position
Corporatewide PlansCorporatewide Plans
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Conditions favoring corporatewide plans:
Corporatewide PlansCorporatewide Plans
Larger organizations Interdependence of different business
segments Cyclical market conditions
o During short term volatility, help firms save
o Are in retirement plans, so most employees not immediately affected
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Executive Plans: Can’t always tell if pay tied to performance
Designing Executive P-f-P PlansDesigning Executive P-f-P Plans
Salary and short-term incentives Long-term incentives Golden Parachutes Perks——“ stealth wealth”
Board of Directors Sets top management’s pay More involved than in past
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Key Strategic Pay QuestionsKey Strategic Pay Questions
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For Salespeople:
Designing Salespeople’s P-f-P Designing Salespeople’s P-f-P PlansPlans
Straight Salaryo Maintain good customer relationso Service existing accounts
Straight Commissiono Generate more sales through new
accts Combination or Mixed Plans
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Rewarding Excellence in Customer Rewarding Excellence in Customer ServiceService
Customer service rewards more common
May be individual, team, or plant-based
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Pay-for-performance: many challenges Meeting the challenges requires planning
Should be part of larger compensation system Should fit with overall strategic plan of org.
Pay-for-performance at four levels: Individual, group, plant, organization wide
If P-f-P plan becomes entrenched Employees will expect them regularly
P-f-P for executives and salespeople requires additional thought
Summary and ConclusionsSummary and Conclusions
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