Pay for Performance

1. Pay for Performance SESSION 5 - Pay for Performance Performance Appraisals

2. Employees Performance • Three general factors driving employees performance : • Skills & ability to perform task • Knowledge of facts, rules, principles and procedures • Motivation to perform SESSION 5 - Pay for Performance Performance Appraisals

3. Principal determinants of job performance Knowledge & Skills Environment Work Organization Effort (Motivation) Behavior Job Performance SESSION 5 - Pay for Performance Performance Appraisals Role Personality Available resources • Financial • Technical • Material • Human • Temporal

4. Motivation Theories • Based on needs • Maslow’s need hierarchy • Herzberg’s two-factor theory • Based on employer/employee’s relationship • Expectancy • Equity • Reinforcement • Goal setting • Agency SESSION 5 - Pay for Performance Performance Appraisals

5. Motivation Theories • Maslow’s need hierarchy • Performance-based pay • Must be set high enough to meet basic living needs • At-risk program will not be motivating is it restricts employees’ ability to meet basic needs • Incentive pay is motivating if attached to achievement, recognition, or approval SESSION 5 - Pay for Performance Performance Appraisals

6. Motivation Theories • Herzberg’s two-factor theory • Performance based pay • Pay level is important - must meet minimum requirements to be considered as a motivator • Performance is obtained through reward : • Security plans will induce minimum performance • Success sharing plans will be motivating • At-risk plans will be demotivating • Other conditions in the working relationship influence performance-based pay SESSION 5 - Pay for Performance Performance Appraisals

7. Motivation Theories • Expectancy • Performance-based pay • Larger incentive payments are better than smaller ones • Employees must believe they can influence performance targets • People choose the behavior that leads to the greatest reward • Identification of training and resource needs required to meet target levels are essential SESSION 5 - Pay for Performance Performance Appraisals

8. Motivation Theories • Equity • Performance-based pay • Performance measures must be clearly defined • Employees must be able to affect them through work behaviors • Fairness and consistency employees across the organization is important • Relative pay amongst employees matters SESSION 5 - Pay for Performance Performance Appraisals

9. Motivation Theories • Reinforcement • Performance-based pay • Timing on payouts is very important • Rewards must be tightly coupled to desired performance objectives SESSION 5 - Pay for Performance Performance Appraisals

10. Motivation Theories • Goal setting • Performance-based pay • Employees must believe they can influence performance targets • Performance targets should be challenging and specific • Feedback about performance is important • The amount of the incentive reward should match the goal difficulty SESSION 5 - Pay for Performance Performance Appraisals

11. Motivation Theories • Agency • Performance-based pay • Is the optimal compensation choice for more complex jobs where monitoring employees’ work is difficult • Performance target should be tied to organizational goals • Employees dislike risky pay and will require a higher total cash pay opportunity in exchange for accepting performance-based pay SESSION 5 - Pay for Performance Performance Appraisals

12. Components of a Total Reward System • Compensation Wages, commissions, & short/long-term incentives • Benefits Vacations, health insurance • Social interaction Friendly workspace • Security Stable, consistent position & rewards • Status/recognition Respect, prominence due to work • Work variety Opportunities to experience different things • Workload Right amount of work (not too much nor too little) • Work importance Is work valued by society • Authority/control/autonomy Ability to influence others; control own destiny • Advancement Chance to get ahead • Feedback Receive information helping to improve performance • Work conditions Hazard free • Development opportunities Formal/informal training to learn new KSAs SESSION 5 - Pay for Performance Performance Appraisals

13. Wage Components • Compensation components from least risky to most risky for employees : • Base pay • Salary Increase Plans • Across the board • Cost-of-living increase • Merit pay • Lump-sum bonus • Individual incentive • Sharing Plans • Success-sharing plans • Gain sharing • Profit sharing • Risk sharing SESSION 5 - Pay for Performance Performance Appraisals

14. Wage Components • Base Pay • The guaranteed portion of an employee’s wage package • This is the secure portion of wages • Viewed as a fixed cost to the employer • Can be lowered by employers in some countries (i.e. US UK, Switzerland) based on company performance. • Not possible in most EU countries without harsh union negotiations • Could be lowered on a voluntary basis (e.g. HP) SESSION 5 - Pay for Performance Performance Appraisals

15. Wage Components • Salary Increase Plans • Across the board • Wage increase granted to all employees, regardless of performances • Low risk even though at discretion of employer • Cost-of-living (COL) • Same as above but based on local COL indexes • Merit pay • Salary increase based on individual performance • Size of merit pool at discretion of employer • Lump-sum bonus • Same as merit pay increase but paid as a one-time payment • Not added to the base salary (i.e base salary level stays untouched) SESSION 5 - Pay for Performance Performance Appraisals

16. Wage Components • Sign-in bonus • Lump-sum or installment bonuses designed to attract new high performers to join a company or take a new challenging position within the organization • Stay-on bonus • Lump-sum or installment bonuses designed specifically to retain key employees during and after a major restructuration (e.g. Chapter 11 or after a merger & acquisition) SESSION 5 - Pay for Performance Performance Appraisals

17. Wage Components • Individual Incentives • Are either : • An add-on to a fixed base pay - lower risk => Base Salary plus Bonus = Total Cash (TC) • A variable portion of the overall pay - higher risk but higher earning potential => Base Salary plus Incentive = Total Target Cash (TTC) • Measures of performance are objective (e.g. sales volume) SESSION 5 - Pay for Performance Performance Appraisals Incentive Overachievement (50%) Total Cash (TC) Bonus (25%) Total Target Cash (TTC) Market value Base Pay (100%) Incentive (25%) Base Pay (75%)

18. Wage Components • Sharing Plans • Success-sharing • Tied to group performance • Not penalized for performance below standard • Gain sharing • Same as above but usually not based on financial performance of organization but on some cost index • Profit sharing • Add-on linked to group performance relative to exceeding some financial goals • Risk sharing • Same as above but employees can be penalized during poor performance years. However rewards is typically higher than the other sharing plans • Employees absorb a “temporary” cut in base pay SESSION 5 - Pay for Performance Performance Appraisals

19. Does Compensation Motivate Behavior? Person Characteristics Preferred reward Characteristics Materialistic Relatively more concerned about pay level Low self-esteem Want large decentralized organization with little pay for performance Risk takers Want more pay-based on performance Risk averse Want less performance-based pay Individualists Want pay plans based on individual performance, not group performance SESSION 5 - Pay for Performance Performance Appraisals

20. Other Motivators • Type of rewards Important • Work variety and challenge 50% • Development opportunities 38% • Social 40% • Status recognition 23% • Work importance 20% • Benefits 22% SESSION 5 - Pay for Performance Performance Appraisals

21. Effectiveness of Alternative Reward Plans Type of Plan Considered Effective Log-term executive incentives High Annual bonus High Individual incentives High Employee stock ownership High Spot awards Medium - High Gain sharingMedium - High Lump-sum merit payMedium Profit sharingMedium Suggestion boxMedium - Low SESSION 5 - Pay for Performance Performance Appraisals

22. What is expected from a Reward System • Rewards must : • Help organizations attract and retain employees • Must make high performance an attractive option for employees • Must encourage employees to built new skills and gradually foster commitment to the organization SESSION 5 - Pay for Performance Performance Appraisals

23. PerformanceManagement SESSION 5 - Pay for Performance Performance Appraisals

24. Performance Appraisal Issues • Frustration from employees • Performance goals are not clearly defined • They don’t know how their performance is evaluated • They don’t believe their last performance review guided them on how to improve • They don’t think the reviews can differentiate among good, average, and poor performer • They don’t think doing a good job is recognized SESSION 5 - Pay for Performance Performance Appraisals

25. Performance Appraisal Defined • Performance Appraisal is the systematic assessment of an individual’s job related strengths and weaknesses. • Employee development : Many personnel professionals consider this to be the most productive aspect of P.A SESSION 5 - Pay for Performance Performance Appraisals

26. Feedback Objectives • Employees find out where they stand with the supervisor and the organization. 2. Supervisor-Subordinate relationships are strengthened because they encourage mutual agreement on performance expectations. SESSION 5 - Pay for Performance Performance Appraisals

27. Feedback Objectives • Training and Development needs are identified. • Provides an opportunity for the supervisor and subordinate to express themselves on a variety of performance related issues. SESSION 5 - Pay for Performance Performance Appraisals

28. Discipline • Dealing with problem employees is probably one of the most troublesome aspects of a supervisor’s job • P.A. can be used to identify job related problems and through frequent observation and feedback, the employee can be made aware of the problems and what corrections are necessary. • Also P.A. (if reliable and valid) can be used as legal justification for termination. SESSION 5 - Pay for Performance Performance Appraisals

29. Performance Appraisal Issues • Perhaps the biggest complaint of all employees (and managers too) is that appraisals are too subjective. • Performance is not easily quantified • Some believe that work situation (not the individual) is the major determinant of performance. • Not having the necessary information, technology, or control to adequately perform his/her job • Its is critical to understand the influence of the work environment and system in order to assess individual performance • Equally important is to identify the strategies for understanding and measuring job performance better SESSION 5 - Pay for Performance Performance Appraisals

30. Common Errors in Appraising Performance • Most supervisors dread doing appraisals • Several factors that lead raters to give inaccurate appraisals : • Guilt • Embarrassment about giving praise • Taking things for granted • Not noticing • The halo effect • Dislike of confrontation • Spending too little time on the preparation of the appraisal SESSION 5 - Pay for Performance Performance Appraisals

31. Avoid the following errors in evaluations • Ensure that your supervisors not to make the following eight common errors that can distort and even invalidate the evaluation process. Specifically, supervisors should not: • Base the evaluation on the employee's most recent behavior, instead of reviewing the whole performance period; • Allow irrelevant or non job-related factors to influence the evaluation, such as physical appearance, social standing, participation in employee assistance programs, or use of leaves of absence; • Include only favorable remarks on the evaluation, even when negative comments are justified and appropriate; • Rate all subordinates at about the same point on a ranking scale, usually in the middle; SESSION 5 - Pay for Performance Performance Appraisals

32. Avoid the following errors in evaluations • Specifically, supervisors should not (continued): • Allow one characteristic of the employee or one aspect of the job performance to distort the rest of the rating process; • Judge all employees at the extremes, either too leniently or too strictly; • Allow one very good or very bad rating to affect all the other ratings of the employee (the "halo effect"); or • Permit personal bias to unduly influence the evaluation process. SESSION 5 - Pay for Performance Performance Appraisals

33. Four factors to make an effective program • Regular, informal feedback from supervisors. • Annual evaluations aren't enough. Employees need regular input that focuses on day-to-day performance objectives rather than concentrating on past mistakes or failures • Performance goals set jointly by employees and supervisors • Goals should be precise and quantifiable where possible, such as the completion of a specific project within a set period of time. • To help employees meet their goals, supervisors should provide additional training or other necessary support. SESSION 5 - Pay for Performance Performance Appraisals

34. Four factors to make an effective program • Action plans to address performance or disciplinary problems • The supervisor should identify and discuss problems with the employee as they occur and develop a plan of action for improvement. • The employee also should have input and be able to suggest changes to the plan. • Once agreed upon, the plan should be reviewed regularly to make sure the employee is progressing satisfactorily.. • Formal reviews that accurately document the "big picture." • Ideally, these formal reviews should be done several times a year. • But, if you regularly conduct informal meetings to discuss performance, a semi-annual or even annual review may be sufficient. • the purpose of formal meetings is to assess whether goals and action plans have been met and to determine if the employee is on track for career development. SESSION 5 - Pay for Performance Performance Appraisals

35. Better Understanding Job Performance • Looking strictly at task performance • How the employees perform the responsibilities of their jobs • Evaluation based on the negative behaviors of employees (i.e. counterproductive performance) • Jobs becoming more dynamic require employees to adapt and grow on an ongoing basis • Focuses on individual characteristics or personal competencies • Consistent with the whole trend toward measuring job competency • Identifying the best appraisal format • Recent attention has focused less on the rating format and more on the raters themselves SESSION 5 - Pay for Performance Performance Appraisals

36. Better Understanding Job Performance • Identification of possible groups of raters (supervisor, peers, subordinates, customers, self) • Examines whether a given group leads to more or less accurate ratings • How raters process information about job performance and translate it into performance ratings • Impact of irrelevant information on the evaluation of employees. • May yield strategies for reducing the flaws in the total process • Raters may be trained to increase the accuracy of their trainings SESSION 5 - Pay for Performance Performance Appraisals

37. Individual Performance Evaluation Methods SESSION 5 - Pay for Performance Performance Appraisals

38. Performance Evaluation methods • Comparison-based methods • Standard-based Methods • The standard rating scale method • The BARS method • Methods based on performance objectives • Methods based on objective indicators SESSION 5 - Pay for Performance Performance Appraisals

39. Comparison-Based Methods • The ranking method • Straight ranking • Based on individual performances • Alternative ranking • Identifying best against worst performers until all ranked • Paired comparison method • Allow performance of employees reporting to same manager to be compared between each others • Performance of employees can be judged equivalent =>risk of over concentration, i.e. too many employees with same rating…few managers have courage of their convictions. • The forced distribution • Predetermined distribution (bell curve approach) • Not encouraged is less than 20 employees SESSION 5 - Pay for Performance Performance Appraisals

40. Three Ranking Formats SESSION 5 - Pay for Performance Performance Appraisals

41. Standard-Based Methods • The standard rating scale method • List of criteria and an evaluation scale • Either numeric (e.g. 1 to 5) • Or qualitative (e.g. weak to strong) • The most widely used method SESSION 5 - Pay for Performance Performance Appraisals

42. Methods based on performance objectives • The BARS (Behavioral Anchored Rating Scales) method • Evaluates performance against a set of behavioral aspects or dimensions • Quite complex process involving a number of steps to develop this method, i.e • Identify set of critical incidents • Grouping incidents classified and selected • Set incidents prevalence • Various working group to design such approach SESSION 5 - Pay for Performance Performance Appraisals

43. Methods based on performance objectives SESSION 5 - Pay for Performance Performance Appraisals

44. Methods based on performance objectives • Designed as a participative management and development tool • Management by objectives (MBO) driven by the job description SESSION 5 - Pay for Performance Performance Appraisals

45. Methods based on objective indicators • Based on concrete, objective indicators, such as: • Productivity • Profit levels • Absenteeism • Employee turnover rates • Sales volume • Reject rates, etc… • Not applicable to managerial levels SESSION 5 - Pay for Performance Performance Appraisals

46. Select the Right Assessors • More than 80% of the inputs for performance ratings comes from supervisors • Supervisors assign (or jointly determine) what work employees are to perform • Supervisor most knowledgeable of the job • Supervisor ratings also tend to be more reliable than those from other sources • Supervisors are particularly prone to halo and leniency errors SESSION 5 - Pay for Performance Performance Appraisals

47. Select the Right Assessors • Peer as Raters • They work more closely with the ratee and probably have an undistorted persperctive of typical performance • Peers have little or no experience in conducting appraisals • Can create group tensions • Self as a Rater • Has the most complete knowledge of the job • More lenient and possibly more unreliable than ratings form other sources • Customer as Rater • Boundaries between organizations and the outside world is fading • Subordinate as Rater • Is appealing since most employees want to be popular with people who report to them • Can see both their strengths and weaknesses as a leader • Subordinates prefer to give artificially inflated ratings of their supervisors SESSION 5 - Pay for Performance Performance Appraisals

48. Training Raters to Rate more Accurately • Straightforward lecturing to ratees about ways to improve the quality of their ratings generally is ineffective • Individualized or small-group discussion sections are more effective • When these session are combined with extensive practice and feedback sessions, rating accuracy significantly improves • The greatest success has come from efforts to reduce the halo errors and improve accuracy SESSION 5 - Pay for Performance Performance Appraisals

49. Merit Pay SESSION 5 - Pay for Performance Performance Appraisals