MGTO 231
Human 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”?
Outline
Some basic concepts
Types of pay-for-performance plans
Potential drawbacks
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
Outline
Some basic concepts
Types of pay-for-performance plans
Potential drawbacks
Four basic types
Individual-based plans
 Team-based plans
 Plantwide plans
 Corporatewide plans

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 topmanagement want them to do in order to
impress top-management)
Four basic types
Individual-based plans
 Team-based plans
 Plantwide plans
 Corporatewide plans

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

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

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
Four basic types
Individual-based plans
 Team-based plans
 Plantwide plans
 Corporatewide plans

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
Four basic types
Individual-based plans
 Team-based plans
 Plantwide plans
 Corporatewide plans

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

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
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
Outline
Some basic concepts
Types of pay-for-performance plans
Potential drawbacks
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”?