Performance Based Pay

• Strategic implications of pay for performance

• Assumptions of incentive plans

• Individual and group incentive systems

• Managing merit pay systems

Strategic Implications of Merit Pay

• Global need for positive push

• Rewarding the right behaviors

Assumptions of Incentives

• Why pay individuals differently– Pay ranges– Broad banding

• Ability, expectancy, instrumentality

• Performance variation

• Performance measurement

• The trust factor

Individual Plans

• Merit pay

• Awards and bonuses

• Piece rates

• Commissions

Group Plans

• Profit sharing– Advantage: Employee involvement– Disadvantage: The risk factor, lack of

control, sense of inequity

• Gain sharing– Advantage: Employee involvement– Disadvantage: Trust essential, union

opposition, not useful in piece work

Gain Sharing & Profit Sharing

• Gain Sharing– Based on local

productivity– Benefit comes

close in time to actual performance

• Profit Sharing– Based on total firm

financial performance

– Benefit is deferred to annual administration or even put into pension system

Employee Stock Ownership Plans

• Every employee a part owner

• Works better when done for reasons of management commitment than for financial reasons

• It does not automatically improve employee performance, attitudes or sense of control

Incentive System Failure

• Hardly noticeable rewards

• Inadequate performance appraisal

• Ambiguous links between performance and reward

• Higher union wages

• Adaptation problem

Incentive System Success

• Clearly noticeable rewards

• Accurate appraisal

• Managers adept in appraising and feedback

• Visible link between performance and reward

• Wide range of increases

Administrative Issues

• Concerns: Fairness, Risk, Efficiency

• Communication

• Pay Secrecy

• Pay satisfaction

Merit Pay Systems

Labor M arket&Com penstion

Surveys

External Equity

Join

Job Evaluation& Analysis

ExternalEquity

Job Analysis& Evaluation

InternalEquity

Stay

PerfornanceAppraisal

Pay Grades &Ranges

M erit PaySystem s

Em ployeeEquity

Perform

Em ployeeM otivation

Adapted From Hills, Bergmann, & Scarpello, Compensation Decision Making, 2 Ed.

Backwards & Forwards

• Summing up: Today are topics began with the strategic implications of pay for performance, we then examined assumptions underlying incentive systems and several individual and group merit pay plans. We concluded with a look at the management issues in applying the incentive systems. What makes some plans fail, why do they work

• Looking Ahead: Next time we dig into the topic of benefits — health, holidays and pension at our next session.