Fluent Essays

1. List the different types of reward systems. 2. Discuss the advantages and disadvantages of each type of assessment. 3. Identify an example environment in which each reward system would work. 4. Next identify an environment in which each reward system would present challenges. 5. Include recommendations to employers who might want to consider implementing each type of reward system. McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Rewarding Performance HUMAN RESOURCE MANAGEMENT AN EXPERIENTIAL APPROACH SIXTH EDITION Chapter 11 Understand determinants of effective reward systems Identify critical variables related to selection of most appropriate reward systems Describe evidence on effectiveness of different types of reward systems Know relative advantages & disadvantages of various approaches to reward effective performance Objectives 11-* PFP can be a key to success Link to obtain ROI on employee compensation Strong trend to implement PFP systems PFP systems HPWP PFP puts some portion of pay at risk Need to understand difficulties of PFP Cheating an economic act 600% rise in CEO pay largely due to PFP component Pay For Performance Why? 11-* Does PFP Work? Certain types of PFP systems correlate with superior corporate performance Depends on what is being rewarded Short term measures must correlate with long term success Individual & situational contingencies need to be considered Successful when Tailored to particular work situation Linked to long term strategic objectives 11-* Effective PFP Systems Determinants of effective PFP Systems Worker value outcomes (money, prizes) Outcome is valued relative to other rewards Desired performance is measurable Worker must be able to control rate of output or quality Worker must be capable of increasing output or quality Worker must believe that capability to increase exists Worker must believe that increased output will result in receiving a reward Size of reward must be sufficient to stimulate increased effort Performance measures must be compatible with strategic goals for short & long term 11-* Expectancy/Instrumentality Theory Expectancy (probability that efforts will lead to desired performance) Valence (value of outcome to individual) Instrumentality (probability that performance will produce desired outcomes) Effort Performance Outcomes (pay, recognition, other rewards) 11-* Effective PFP Systems Considerations Unions becoming more receptive Consider impact on team culture Tie rewards to critical organizational outcomes Compatible with strategic goals Worker involvement in design 11-* PFP Systems Difficulties Poor perceived connection between performance & pay Expensive to develop & maintain Lack of objective, countable results Perception that performance is not accurately measured Union resistance to such systems & to change in general Poor or negative relationship between rewarded outcomes & corporate performance measures Supervisors do not take it seriously 11-* PFP Systems Legal Implications Subject to same redress as non-PFP compensation Title VII Equal Pay Act Situational constraints can foster sense of inequity Disparate Impact theory can be used 11-* PFP System Selection Considerations Who should be included in the PFP system? In general, all groups should be included in a PFP system How will performance be measured? Individual, group/unit, or organization level Which are the rewards in the incentive system? 11-* PFP System Selection Who to Include Systems should be developed with specific groups & conditions in mind Companies have different systems for different job or departments PFP System should involve as many employees as possible Americans prefer individual PFP systems 11-* PFP System Selection How Will Performance be Measured? Compatible with short & long term strategic objectives Maximize reliability and validity of measurement What are the Rewards? Cash Percentage increase to base pay Non-cash prizes Stock ownership Stock options 11-* PFP System Selection Research supports not having a permanent tie to base pay Seeing a trend to use bonus based PFP Long-term costs are controlled Behavioral Encouragement Plan Employees earn rewards for specific accomplishments such as safety compliance or attendance 11-* PFP System Selection Individual, group, or company level PFP? Extent outcome controlled at group or individual level Whether individual contributions can be measured Cooperation & teamwork encouraged by group plans Preference for individual level systems When team-based PFP is used It is part of a comprehensive team-based model of HRM & compensation The pool of rewards should not be fixed High achievers may go elsewhere Free- riders increase as group size increases 11-* Individual PFP Plans Merit pay plans Incentive Plans Piece Rate Sales Incentives Bonus 11-* Individual PFP Plans Merit Pay Distribution of pay based on appraisal of worker’s performance Most common plan Employees want a link between performance & pay Fundamental problem is accuracy in performance measurement Raters can be trained to increase accuracy Can lead to turnover of best performers Avoid forced distribution 11-* Individual PFP Plans Piece Rate System Based on units produced, provides the closest connection between individual performance & individual pay Standards set for level of work done in specific amount of time Fair rate of pay set using internal or external measures Pay only for quality pieces Can be combined with bonus pay Effective when work is repetitive, controllable & no need for cooperation Need to involve workers in design Differential piece rate system addresses issues of production variability Standard hourly rate sets production standard based in time units 11-* Individual PFP Plans Sales Incentive & Bonus Sales Incentives Proven to increase sales over time Important to consider all performance dimensions Pay based on sales data Commission can be paid in rewards other than cash Variable Formats Draw - plus commission Commission plus salary Sales bonus Bonus One time payments not tied permanently to base pay Tend to be more effective than base pay adjustments May include individual or group performance 11-* Group Incentive Plans Profit Sharing Gain Sharing Stock Plans 11-* Group Incentive Plans Profit Sharing Distributes a portion of corporate profits among designated employees Payments linked to a ratio related to base pay Means to align management and employee goals Group size impacts perception of fairness Workers’ perception of connection between effort & profitability is key to success 11-* Group Incentive Plans Stock Plans Employee stock ownership plans (ESOPs) Retirement plan in which company contributes its stock to the plan Employees never buy or hold the stock directly Employee stock option plans Employee has the right to purchase specific number of shares at a fixed price within a period of time Works best with employee involvement & problem solving May be perceived as more equitable than profit sharing & gain sharing If value drops to lower than perception then can result in feeling of inequity 11-* Group Incentive Plans Gain Sharing Sharing financial benefits of cost reductions or productivity increases with workers Worker involvement cooperation & trust are critical Usually paid out monthly Four Approaches Scanlon Plan Rucker Plan IMPROSHARE Plan Winsharing 11-* Group Incentive Plans Gain Sharing SCANLON Most common plan Reward for suggestions Suggestions reviewed by screening committees Measures relationship between sales value of production & labor costs RUCKER Similar to the Scanlon plan but includes value of all supplies, materials, & services Incentive created to save on all inputs More difficult to explain & understand 11-* Group Incentive Plans Gain Sharing IMPROSHARE (Improved Productivity Through Sharing) Similar to Scanlon plan Ratio uses standard hours rather than labor costs Savings in hours result in reward allocation to workers Rewards all employees equally Gains can be seen over 3 years before plateau Easy to administer and understand WINSHARING Combines gain-sharing with profit sharing Takes market demand into consideration Rewards are split evenly between workers & company 11-* Gain Sharing Bottom Line Improved productivity & quality Trend is to use gain sharing with other approaches to improving productivity & quality (e.g., TQM) Success depends on Significant involvement & support by management Realistic employee & if applicable, union expectations Company size- Smaller number of employees (200 vs. 400) results in larger productivity gains IMPROSHARE is easier to understand & allows control over production Scanlon & Rucker plans workers share financial risks, & integrates problem solving process 11-* Managerial and Executive Pay Executive incentive reportedly linked to financial performance Total compensation rose 28% in 2010 Increase mainly due to incentive vs. base pay Tying executive comp to earnings has coincided with dramatic increase in earnings restatements Plans continue to favor short vs. long term results “Pay for No Performance”- The Wall Street Journal article documents loss in linkage between executive pay & performance CEOs of seven troubled or collapsed financial institutions $464 million in performance pay from 2005 to 2008 (half in cash) Clawbacks – recouping compensation, is a hot political & shareholder issue 11-* Negative Consequences to Widening Pay Dispersion One study found pay dispersion in high-tech firms is predictive of subsequent team/unit performance decrements Pay dispersion tends to diminish communication, increase status gaps, & foster aggressive competition 11-* Short or Long-Term Measures of Performance Lower level managers typically have short term incentives Executives typically have short & long-term incentives Rewards usually in the form of lump sum bonus Stock options for long-term rewards A good but abused idea Considerable abuse in awards and re-pricing of stocks Backdating stocks (option award to a date when the stock price was low) Over 200 companies have been the subject of government investigations into whether they “backdated” their executives’ stock options - Managers are in jail for backdating Not proven to effectively incent outstanding performance 11-* Pay for Performance The Board Room Rarely linked to corporate performance Boards provide little corporate governance & oversight Research indicates higher corporate performance results if Board of Directors is paid strictly with stock Is increased shareholder power the answer? 11-* PFP Systems Managerial Implications Results of a well-designed PFP system lower costs higher profits higher degree of individual or group motivation Strategies for Effective PFP Pay the person-Pay according to individual market value Translate business strategy into measures that can be used for a reward system Individualize the reward system 11-* Key Points The PFP system must be compatible with long term success Plans must support the company’s values & culture Openness & trust are critical Money can be a motivator Rewards should be based on individual, group & organizational performance Sound measurement is key All important work dimensions should be included Close monitoring is required 11-*