Performance Management Concepts

1. Performance Management Concepts Prof. John Kammeyer-Mueller MGT 4301 Unit 4, Lecture 4: Performance Management

2. Plan Where we are Understand how companies establish pay policies for jobs Understand how companies provide benefits for employees Where we want to be Understand the basic concepts of human motivation and performance How we know how we�re doing What are the primary human needs identified by research? How can organizations direct employee behavior? Unit 4, Lecture 4: Performance Management

3. Metrics for Performance Management Systems Costs Administrative expense of developing programs Services Employees understand how they are evaluated Managers understand how the system should work Performance Employees know how to work Focus on corporate strategic goals Skills are appropriate for organizational goals and plans Attitudes Motivation to improve Unit 2, Lecture 4: Performance Appraisal

4. What Does it Mean to be Motivated? Three major components Direction of action�what am I going to do? Duration of action�how long am I going to do it? Intensity of action�how much effort am I going to put into this activity? Unit 4, Lecture 4: Performance Management

5. Agency and Ownership The history of British industry Early factories founded by rich landowners and merchants in Britain Ownership passed from father to son Generally the owners divided their time managing books and �gentlemanly pursuits� The history of American industry Absence of �nobility� meant factories were often managed in a different way Use of common stock to raise capital for new companies often meant factories were managed by non-owners These professional managers had more business expertise, but little incentive to manage well Result: American industry had agency problems Unit 4, Lecture 4: Performance Management

6. Basic Terms in Agency Principal An individual acting on his or her own behalf In modern corporations, these are stockholders Agent An individual acting on behalf of the stockholders In modern corporations, this includes not just lower level employees, but also higher level managers Unit 4, Lecture 4: Performance Management

7. Unit 4, Lecture 4: Performance Management Game Theory and the Principle Agent Problem This model arises if the principal cannot directly observe the productivity of the employee; this is rooted in information asymmetry Utility for A=pay � disutility due to effort Utility for B=profit � pay

8. An Example of Principal-Agent Issues Which sounds like a better option for a cab company? Pay cab drivers a flat wage regardless of how many fares they get Give cab drivers partial ownership of the cab and medallion so the revenues are split 50/50, thereby allowing the employer to capture some of the extra money the cabbie is driving Give cab drivers total ownership of the cab and medallion, so the cabbie pays a fixed rental cost and gets all the revenues Issues for this job Costly to measure performance directly Possibility of collusion between cabbie and passenger Source: Lazear, Personnel Economics Unit 4, Lecture 4: Performance Management

9. An Example of Principal-Agent Issues Ed Lazear�s conclusion: The cabbie could just turn off the meter and have some customers pay him directly at a rate below the fare The cabbie could turn off the meter and charge 75% of the fare so both the passenger and the cabbie are still better off than either would be at the full fare The cabbie would always leave the meter on and the company doesn�t care even if s/he doesn�t Unit 4, Lecture 4: Performance Management

10. Unit 4, Lecture 4: Performance Management Basic structural theories:Advantages of incentive pay �Agent� equation Satisfaction= pay-effort �Principal� equation Satisfaction=performance(effort)-pay What are the implications of this model? Examples of typical agency problems Effort levels Expense accounts Budget decisions

11. Unit 4, Lecture 4: Performance Management Basic structural theories:Advantages of incentive pay Solution: incentive alignment Make pay related to some measure of effort Agent is now: satisfaction= pay(performance)-effort Of course, this effective only when performance is under the employee�s control

12. Unit 4, Lecture 4: Performance Management A More Nuanced View of Agency The assumption is that managers can evaluate whether performance is equal to market value. The �effort beyond minimum� is (b?a) + (b?c) + (d � e) Note that the relationship between performance and effort is critical

13. Unit 4, Lecture 4: Performance Management Implications of the Agency Model Tie principal and agent incentives Compensation based on performance Methods for achieving this outcome Compensation based on revenues Methods for achieving this outcome Ensure employees are closely monitored for activities where incentives are not aligned

14. Unit 4, Lecture 4: Performance Management Methods of Solving Principal Agent Problems Simple pay based on managerial review Either bonuses or permanent raises Pay for outcomes, not time or effort Commissions, piece rates, and contract work Observe worker behaviors electronically Time spent on phone cues, number of cases closed for procedural work Make employees part owners Stock option plans, profit sharing, co-operatives, franchises

15. Expectancy: A Unifying Framework Vroom sees a three stage process where individuals judge an activity. All three stages need to have positive values to create effort This is related to models of risk and return in finance Valent outcomes can be positive and negative, including the opportunity cost of effort (e.g., the negative valence of studying for a test is partially due to your desire to do something more fun) Unit 4, Lecture 4: Performance Management

16. Expectancy Theory:Practical Examples For each of the following tasks, what are expectancy, instrumentality, and valence considerations. Taking a test Making a sale Designing a corporate webpage How do you Increase expectancy of success? Increase instrumentality of performance? Identify rewards that have high valence? Unit 4, Lecture 4: Performance Management

17. Expectancy: Core Antecedents When self-confident people see a good idea, they love it Jack Welch, CEO of GE Self-efficacy Perception of one�s own competence Linked to self-regulation by Bandura I have a goal At each step I assess my progress More success makes me devote more resources to the task Areas where self-efficacy affects outcomes Therapy for depression Therapy for phobia Smoking prevention Learning new tasks Unit 4, Lecture 4: Performance Management

18. Expectancy: Immediate Antecedents Can we change self-efficacy? Enactive mastery�experience with simple parts of tasks that are easier to accomplish Vicarious modeling�watching someone similar to you perform effectively Verbal persuasion�the coach giving you �you can do it� feedback Arousal�getting �psyched up� Are there dangers of too much self-efficacy? Unit 4, Lecture 4: Performance Management

19. Valence: Need Theories Must meet lower level needs before one can consider the next level Each level up is triggered only after the one below it is achieved Obviously implies the higher levels are �better� Unit 4, Lecture 4: Performance Management

20. Valence: Need Theories Difference feminism (e.g., Carol Gilligan) Like Kohlberg, Maslow emphasizes individualism over caring Gilligan believes that this model describes male psychology, but women have a different perspective on development Empirical problems The principle of prepotency does not match available evidence from research Examples of specific people: Viktor Frankl developed a very prominent psychological theory while in a concentration camp Van Gogh was in a constant state of �peak� but had none of the other needs met Galileo was desperate for money and very focused on improving his physical state Unit 4, Lecture 4: Performance Management

21. Alternative Models of Needs:Based on William James Existence Basic physical needs Relatedness Social interactions Growth Aesthetic pleasure and learning This preserves the concept of complex human needs without the �baggage� of prepotency Unit 4, Lecture 4: Performance Management

22. Valence: Need Theories Murray and McClelland�s manifest needs Need for achievement Need for power Need for affiliation While related to ERG, there is an important difference People don�t all want the same thing Personality traits are critical Unit 4, Lecture 4: Performance Management

23. Managerial Implications People have complex needs that must be addressed at several levels Because people are different from one another, you must design programs to match multiple needs The needs are not in competition, and meeting one need can benefit another Unit 4, Lecture 4: Performance Management

24. Basic Motivational Theories Think about a goal you�ve set for yourself What types of goals have been successful? What types of goals have been unsuccessful? What functions do goals serve? Goal setting Difficult, specific goals help focus energy Rewards improve the effectiveness of goal setting What does it add to expectancy? Personal choice The importance of attention and focus Unit 4, Lecture 4: Performance Management

25. Simple Examples of Goal Setting Think about a goal you�ve set for yourself What types of goals have been successful? What types of goals have been unsuccessful? What functions do goals serve? Set a goal for your performance on the next test and write it up based on what we�ve said so far� Unit 4, Lecture 4: Performance Management

26. Goal Setting:Historical Research On the basis of differences in performance in relation to ability, a low-motivation and a high-motivation group were selected for 2 retests on the same task. The low-motivation group was given specific goals to reach, and the high-motivation group was told to do its best. By the end of the 2nd retest, the group given specific goals had "caught" the do-best group both in terms of performance and in terms of favorable attitudes toward the task. Unit 4, Lecture 4: Performance Management

27. Goal Setting:Historical Research Data were collected on the net weight of 36 logging trucks in 6 logging operations for 12 consecutive months. Results show that performance improved immediately upon the assignment of a specific difficult goal. Similar experiments were run using typists, figure selection laboratory tasks, clerical sorting tasks, and brainstorming tasks Unit 4, Lecture 4: Performance Management

28. Goal Setting:Historical Research Performance and satisfaction of 113 40-60 yr old blue-collar unionized workers in a large telephone company was assessed. Three experimental groups received either extrinsic feedback, intrinsic feedback, or extrinsic and intrinsic feedback in addition to goal setting, while a 4th group received only goal-setting instructions. Performance measures (cost performance, absenteeism, safety, and service) show goal setting enhanced performance without knowledge of results When feedback was added to a goal-setting program, performance was further enhanced. Unit 4, Lecture 4: Performance Management

29. Goal Setting:Major Principles Specific, difficult goals lead to higher performance than do easy goals or abstract goals like urging people to �do their best� Given that there is goal commitment, the higher the goal, the higher the performance Praise, feedback, or involvement in decision making only work insofar as they lead to the setting of specific goals and commitment to goals Goal setting can influence choice of activities, persistence, effort, and problem solving Unit 4, Lecture 4: Performance Management

30. Goal Setting: The Most Proven Motivational Tool This finding is extremely robust across settings Lumber workers Scientists Salespeople Dockworkers Union bargaining reps. Typists An so on, and so on� Unit 4, Lecture 4: Performance Management

31. Goal Setting:Theories for Why Goals Work Increases instrumentality Outcomes are well defined Clear indications of success Self-reinforcing properties Achieving goals is self-reinforcing May lead to setting future goals Increases focus Coordinate mental resources Ignore non-goal activities Unit 4, Lecture 4: Performance Management

32. Goal Setting:When it Works Best Things that make goals more or less effective Specific vs. do your best Difficult vs. easy Self-set vs. participative Frequent vs. occasional feedback Rewards vs. individualized When might goals may be a problem? Unit 4, Lecture 4: Performance Management

33. Goal Setting:Theories for Why Goals Work Increases instrumentality of performance Outcomes well defined Performance is self-reinforcing Increases focus on specific parts of the task Tendency to ignore non-goal activities has been shown Unit 4, Lecture 4: Performance Management

34. The MBO Model for Incentives Across Levels Unit 4, Lecture 4: Performance Management

35. Goal Setting:Not Always Good Outcomes Having goals to perform well actually reduces adaptation in changing contexts, while goals to learn increase adaptation (LePine, JAP, 2005) Having goals to perform well are consistently related to poorer learning across a variety of study methods Goals have been linked to reduction in creativity based on the increase in focus Unit 4, Lecture 4: Performance Management

36. Goal Setting and Unethical Behavior Design a simple experiment wherein subjects completed anagram tasks (e.g., how many words can you make from the word �potato�?) Respondents were told to grade their own papers; they believed that there was no way to tell after the fact whose answer sheet was whose, but there was a secret code on each sheet Some respondents were given a �do your best� goal Some were given a goal with rewards for acheivement Some were given a goal without rewards What do you think happened? Schweitzer, Ord��ez, and Douma, AMJ, 2007 Unit 4, Lecture 4: Performance Management

37. Goal Setting and Unethical Behavior Results showed that individuals in the goal setting and reward goal conditions were more likely to overstate the number of correct answers Implications: Selection? Self-reported progress? Tasks with ambiguous outcomes? Unit 4, Lecture 4: Performance Management

38. Basic Motivation Theories:Self-Determination Theory People do a task (e.g., putting puzzles together) Some are paid, some are not Those not paid like the task more Those who are not paid report enjoying the task more and work harder without supervision People do a simple grading task for $1, others given $20 Those who are paid less again say the task is more fun Sometimes more likely to volunteer in the future Unit 4, Lecture 4: Performance Management

39. Self-Determination andthe Importance of Attributions Extrinsic motivation Causes Effects Intrinsic motivation Causes Effects The role of cognitive dissonance and self-theories in planning behavior Unit 4, Lecture 4: Performance Management

40. Basic motivation theories:Cognitive evaluation theory Implication Intrinsic motivation: high effort without supervision Extrinsic motivation: need to prod people to work harder What are some potential criticisms of this theory? Unit 4, Lecture 4: Performance Management

41. Incentives Can Improve Self-Determination? Reward contingencies can actually indicate freedom of action (i.e. I chose to work for this reward) Although being pushed to achieve a reward can increase external attributions of causality, being shown a reward and freely choosing it can increase internal attributions of causality People like to demonstrate competence and feel more capable and free when they achieve their goals Unit 4, Lecture 4: Performance Management

42. Incentives Can Improve Self-Determination? Rewards for meeting performance standards increase self-determination and perceived competence if it has informational value, as shown in multiple studies by Eisenberger, Rhoades, and Cameron Deci, Koester, and Ryan (Psych Bull, 1999) acknowledge that in adult work samples, rewards have informational value and less control value This does not disagree with the central tenet of self-determination (autonomy increases motivation and enjoyment of a task), but it does squarely disagree with the idea that rewards always diminish performance Unit 4, Lecture 4: Performance Management

43. Goal Accomplishment and Well Being We usually assume that pursuing goals is good for us, but that may not be the case Contrast individuals with goals that are due to self-motivation (because you really identify with the goal or because it interests you) vs. external motivation (because of rewards such as money, grades or status or a feeling of guilt if you fail) Individuals who pursue goals because of self-motivation are happier, whereas those who pursue them because of extrinsic rewards are less happy These results obtained in studies with contemporaneous measurement (goal content assessed at the same time as happiness) or in longitudinal tests (goal content measured at time one and happiness measured a full year later) Sheldon, Ryan, Deci, and Kasser, PSPBull, 2004 Unit 4, Lecture 4: Performance Management

44. Goal Accomplishment and Well Being We usually assume that pursuing goals is good for us, but that may not be the case Contrast individuals with goals that are based on avoidance of harm or negative outcomes goals that are based on desire to achieve positive outcomes Individuals who pursue approach goals are higher in self-esteem, optimism and depression These results are based on a specific prompt from researchers to either adopt and approach or avoidance orientation Coats, Janoff-Bulman, and Alpert, PSPBull, 1996 Interesting to note that extroversion and self-esteem are associated with approach goal orientation and neuroticism is uniquely associated with avoidance goal orientation Heimpel, Elliot, & Wood, JofPers, 2006; Steel, Schmidt, and Schultz, PsychBull, 2008 Unit 4, Lecture 4: Performance Management

45. Ways to Minimize Self-Determination Problems Improve intrinsic motivation Examples of job design interventions Examples of supervisory interventions Change the interpretation of rewards Make rewards more intrinsically meaningful Provide a balance of intrinsic and extrinsic rewards wherever possible Unit 4, Lecture 4: Performance Management

46. Principle Agent Models or Risk Aversion Models? Most of the models we�ve discussed suggest it�s obvious to pay people based on their output or some measure of performance So why are so many people paid basically the same regardless of effort levels? Concerns about the accuracy of managerial evaluations Concerns about poor business affecting compensation Concerns about co-workers What do these have in common? They�re beyond the employee�s control Therefore, they are all risky Unit 4, Lecture 4: Performance Management

47. Principle Agent Models or Risk Aversion Models? Risk aversion Which would you rather have: Equivalent in expected value $500 for sure vs. 50% chance at $1,000 Equivalent in personal value $500 for sure vs. 50% chance at $5,000 Why would risk aversion apply to salaries? Mortgages, childcare, food, and other fixed expenses! As a result, many people would never accept having their wages at risk Unit 4, Lecture 4: Performance Management

48. Risk Aversion in Greater Detail Unit 4, Lecture 4: Performance Management

49. Why Are Companies Considered Less Risk Averse? Number of investments they make are larger If one unit does poorly for a short time, other units can make it up Failure to perform for one individual is averaged across those who perform better Have more access to slack resources Companies typically have more money on hand than any individual employee would Companies operating at a profit Unit 4, Lecture 4: Performance Management

50. Why Risk Averse Companies Might Like Incentive Pay Shifts risk from the company to the employee Reduce wages without penalty Behavioral decision making experiment: How fair do you think it is for a company to cut employee wages 5% during an economic downturn How fair do you think it is for a company to suspend a 5% bonus program during an economic downturn Most people think the cut in bonuses is more fair Many companies cut bonuses, raises, or incentive programs in recessions rather than cutting wages Source: Workforce Online, October 24, 2008 Unit 4, Lecture 4: Performance Management

51. Implications of Risk Aversion Theory for Incentive Programs Provide employees some areas of �shielding� to reduce risk Provide some flexibility in terms of risk to accommodate individual differences Ensure that the variability associated with compensation is maximally under employee control Unit 4, Lecture 4: Performance Management

52. Wrap Up Where we are Understand how companies establish pay policies for jobs Understand how companies provide benefits for employees Where we want to be Understand how pay can be modified to fit the individual How we know how we�re doing What do each of the following theories say about incentive compensation plans? Expectancy Agency Goal setting Cognitive evaluation Risk aversion Unit 4, Lecture 4: Performance Management