MGTO 231 Human Resources Management

MGTO 231Human Resources Management Pay for performance Dr. Kin Fai Ellick WONG

Prologue • How “pay for performance” is different from base compensation and benefits? • Why such difference(s) is(are) important? • Why don’t we design a compensation system that totally follows the “pay for performance” notion? • Any potential drawbacks of the idea of “pay for performance”?

An incentive system • A component of a compensation system • Rewards are given on the basis of performance • Those who contribute more to the firm deserve better rewards • An incentive system specifies the regulations to execute the rewards

Assumptions • Individual employees and work teams differ in how much they contribute to the firm • A large degree of the firm’s overall performance depends on the performance of individuals and groups within the firm • To attract, retain, and motivate high performers and to be fair to all employees, the firm needs to reward employees on the basis of their relative performance

Four basic types • Individual-based plans • Team-based plans • Plantwide plans • Corporatewide plans

Individual-based plans • Identify and reward the contributions of individual employees • Most widely used plans in industry • Three basic components • Merit pay • Piece-rate system • Awards

Merit pay • An increase in base pay, normally given once a year (remember what we have discussed in Performance Appraisal) • Piece-rate system • A compensation system in which employees are paid per unit produced

Awards • A one-time reward, usually given in the form of tangible prize • Paid vacation, a television set, service medal (十年金牌)

Advantages • Performance that is rewarded is likely to be repeated (reinforced) • Expectancy theory: people tend to do those things that are rewarded • Can shape an individual’s goals over time • Helps the firm achieve individual equity

Disadvantages • What potential disadvantages will there be? • Discuss with your group members and each group should try to give one disadvantage. • Try your best to explain why the disadvantage you suggest is a disadvantage.

Disadvantages • The quantity-quality tradeoff • The power of supervisors becomes very influential • For survival, employees will follow the orders of the supervisors • 獻媚, 奉承 (doing what they think the top-management want them to do in order to impress top-management)

Individual-based plans are most likely to succeed when • The contributions of individual employees can be accurately isolated • The job demands autonomy • Cooperation is less critical to successful performance OR competition is to be encouraged

Team-based plans • Normally reward all team members equally based on group outcomes • In forms of bonuses and/or awards • Very common in team ballgame: soccer, basketball (Man. United, LA Lakers, South China, etc.) • Some may be allowed to decide how the bonus will be distributed within group

Advantages • Foster group cohesiveness • Imagine how Man. United will be if only those who make the goal will be awarded • The performance measure on groups has shown to be more accurate and reliable than that on individuals

Disadvantages • Problems of social loafing • The sum of individuals’ output is higher than the whole group output • Free-riding effect • Inter-group competition leading to a decline in overall performance • We have important information and you are not allowed to access it

Team-based plans are most likely to succeed when • It is difficult to single out who did what or identify the relative contribution • In flat organizations where team works are common and highly emphasized • Employees are committed to their work and are intrinsically motivated • Social-loafing is less likely

Plantwide plans • Rewards all workers in a plant or business unit based on the performance of the entire plant or unit • Not the performance of the whole corporation, but the efficiency within a unit • Normally measured in terms of labor or material cost savings compared to an earlier period

Three common types • Bonuses • Awards • Gainsharing • A portion of the company’s cost savings is returned to workers • Usually in the form of a lump-sum bonus

Advantages • Unlike other forms of incentives, which motivate employees to produce (開源)more, plantwide plan motivates employees to save (節流) more • Competition between individuals and teams are likely avoided • May increase the level of cooperation across workers and teams by giving everyone a common goal

Disadvantages • What potential disadvantages will there be for the idea of gainsharing? • Discuss with your group members and each group should try to give one disadvantage. • Try your best to explain why the disadvantage you suggest is a disadvantage.

Disadvantages • What potential disadvantages will there be for the idea of gainsharing? • Protection of low performers because they are hardly detected • Not fair for those units which have long been cost effective

Corporatewide plans • The most macro type of incentive programs • Reward employees based on the entire corporation’s performance • In the forms of • Profit sharing • Employee stock ownership plan

Profit sharing • Uses a formula to allocate a portion of declared profits to employees • It is not to directly reward workers for productivity improvements • Some may be given in terms of retirement benefits, other may be given in terms of bonuses

Employee stock ownership plan (ESOP) • Rewards employees with company stocks • An outright grant or a favorable price that may be below market value • Next media, PCCW, etc.

Advantages • Financially flexible for the firms – they can automatically adjust the labor downward during economic downturns • Increase employee commitment • The employees become part of the owners under the concept of profit sharing and ESOP

Disadvantages • Employees may have little sense of control on their compensation • Limited effect on productivity • The connection between individual goal and firm performance is not so tight

Potential Drawbacks • Do only what you get paid for • Decrease intrinsic motivation • Decrease job satisfaction • Increase stress • Negative effects due to competitions between individuals or groups

Problems of measurement • Judgment bias, and not all performance can be easily measured • Credibility Gap • Some workers do not believe in the performance-reward contingency

Conclusion • “Pay for performance” is unique in the sense that there is a very clear performance-reward contingency • Why don’t we design a compensation system that totally follows the “pay for performance” notion? • Any potential drawbacks of the idea of “pay for performance”?

MGTO 231 Human Resources Management