ch 12

• Total Rewards


  The sum of all rewards employees receive in exchange for their time, efforts, and performance
• Total financial compensation


  • Fixed pay
  • Variable pay
  • Benefits
• Incentive Effect of Pay


  Pay plans are used to energize, direct, sustain, or control current employees' behavior
• Equity theory


  • Employees compare their own pay (relative to their input) with that of others
  • Perceptions of inequity may cause employees to take actions to restore equity
• Reinforcement theory


  • A response followed by a reward is more likely to recur in the future
  • High employee performance followed by a monetary reward will make future high performance more likely
• Expectancy theory


  • Behaviors are a function of ability and motivation
  • Motivation is a function of expectancy, instrumentality, and valence
  • Expectancy refers to the perceived link between one's effort and performance
  • Instrumentality refers to the perceived link between performance and a reward
  • Valence refers to the perceived value/desirability of the reward
• Extrinsic motivation


  Depends on rewards that are controlled by an external source (e.g., pay, benefits)
• Intrinsic motivation


  Depends on the rewards that flow naturally from the work itself (e.g., performing interesting work)
• Agency theory


  • Different organizational stakeholders have diverging interests and goals
  • Principal (owner/manager) seeks to direct another person's behavior
  • Agent (manager/employee) is expected to act on behalf of a principal
  • Employee compensation can be used to align the principal's and agent's interests and goals
  • Outcome-oriented contracts (transfer risks to the agent)
  • Behavior-oriented contracts (require monitoring)
• Sorting Effect of Pay

  Pay plans influence the composition of the workforce (i.e., the types of workers that are attracted to and retained by the organization)
• Performance-based pay system


  • Attracts more high performers
• Individual performance pay


  • Attracts more individualistic and risk-oriented individuals
• Team performance pay


  • Attracts more team-oriented individuals
• Pay-for-Performance Programs


  Use pay to differentiate between employees based on their performance
• Incentive intensity


  The strength of the relationship between performance and pay
• Stronger incentive intensity increases motivation, but also unintended consequences
• Weaker incentive intensity may weaken motivation and ability to retain high performers
• Types of pay-for-performance


  • Merit pay
  • Merit bonus
  • Incentive pay
  • Profit sharing
  • Stock ownership/stock options
  • Gain-sharing
  • Skill based
• Design features


  • Fixed or variable cost
  • Performance measure (subjective or objective)
  • Performance measure (individual or collective)
• Merit pay


  A traditional form of pay in which annual base pay increases permanently
• Merit bonus


  A form of variable pay that is paid in the form of a lump-sum bonus, instead of a salary increase
• Compa-ratio


  Combines an employee's performance rating with his/her position in a pay range to determine the size and frequency of his/her pay increases
• Compa-ratio targets


  • 80-90%
  • 91-110%
  • 111-120%
• Performance rating


  • Exceeds expectations
  • Meets expectations
  • Below expectations
• Typical characteristics of merit pay programs

  • Identify individual differences in performance, which are assumed to reflect differences in ability or motivation
  • Majority of performance information collected by immediate supervisor; peer and subordinate ratings receive less weight (if they exist)
  • Policy links pay increases to performance appraisal results
  • Feedback tends to occur infrequently, often once a year at a formal performance review session
  • Feedback flow tends to be largely unidirectional (from supervisor to subordinate)
• It is unfair to rate individual performance because apparent differences between employees tend to arise from system factors (out of the employee's control) rather than the employees themselves
• If the performance measure is not perceived as fair and accurate, the entire merit pay program can break down
• In most cases, high performers are not paid significantly more than mediocre or poor performers, which is not motivating to the high performers
• Small differences in pay can accumulate into large differences over time
• High-performing employees are also more likely to be promoted and have higher-paying opportunities at other employers, leading to earnings increases
• Individual incentives


  Payments are not rolled into base pay; they have to be continuously earned and re-earned
• Individual incentives


  • Piecework plans
  • Standard hour plans
  • Spot awards
  • Commission-based sales plans
• Individual incentives cover only about 7% of all U.S. workers
• Most jobs have no physical output measure
• Administrative problems (e.g., setting and maintaining acceptable standards)
• Employees only do what they are paid for (possibly at the expense of quality or customer service)
• Not a good fit with team-based work
• Inconsistent with learning new skills
• May undermine motivation or cause unintended consequences
• Profit-sharing


  Compensation plan in which payments are based on a measure of organization performance (profits) and do not become part of the employee's base salary