12
Chapter
Recognizing Employee
Contributions with
Pay
Objectives
After reading this chapter, you should be able to:
1.
2.
3.
Describe the fundamental pay
programs for recognizing
employees’ contributions to the
organization’s success.
List the advantages and
disadvantages of the pay
programs.
List the major factors to
consider in matching the pay
strategy to the organization’s
strategy.
4.
5.
Explain the importance of
process issues such as
communication in
compensation management.
Describe how U.S. pay
practices compare with those
of other countries.
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
How Does Pay Influence
Individuals?
12-2
 Reinforcement
Theory
 Expectancy Theory - Chapter 5
 Agency Theory
 principals as owners
 agents as managers
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12-3
Types of Agency Costs
Perquisites
Attitudes toward risk
Decision-making horizons
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Factors in the Choice of a
Compensation Package
12-4
Risk Aversion
Outcome Uncertainty
Job Programmability
Measurable Job Outcome
Ability to Pay
Tradition
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12-5
Individual Pay Programs:
Design Features
Payment
Method
Frequency
of Payout
- Annually
Incentive Pay
- Change
in base
- Bonus
Profit Sharing
- Bonus
Ownership
- Equity
changes
- Bonus
Programs
Merit Pay
Gainsharing
Skill-based
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- Change
in base
Performance
Measures
- Boss’
appraisal
- Weekly
- Output,
productivity
- Semiannual - Profit
or annual
- Sale of
- Stock value
stock
- Monthly /
- Production
quarterly
costs
- when skill
- Skill
is acquired
acquisition
Coverage
- All
- Direct
labor
- All
- All
- Production/
service unit
- All
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
12-6
Individual Pay Programs:
Consequences
Programs
Merit Pay
Incentive Pay
Profit Sharing
Performance
Motivation
- Change
in base
- little
Ownership
- some in
small units
- Little
Gainsharing
- Little
Skill-based
- Learning
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Attraction
Culture
- High
performers
- High
performers
- All
- Individual
competition
- Intra-group
competition
- Cooperation
- High
maintenance
- Good system
of appraisal
- Variable
- All
- Knowledge
of business
- Sense of
ownership
- Learning
- Ability to
pay
- Cost not
variable
- can be high
- Retain
employees
- those who
want to
learn
Costs
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
12-7
Individual Pay Programs:
Contingencies
Programs
Merit Pay
Organization
Structure
Management
Style
- Control
Ownership
- Independent
jobs
- Measurable
jobs / units
- Autonomous
units
- Any company
Gainsharing
Skill-based
Incentive Pay
Profit Sharing
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Type of Work
- Participation
desirable
- Participation
- Individual, easy
to measure
- Individual
appraisal
- All types
- Participation
- All types
- Most companies
- Participation
- All types
- Most companies
- Participation
- Professional
Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
Merit Pay Programs:
Characteristics
12-8
 Tries
to identify individual performance
differences
 Supervisor provides most performance
information
 Pay is linked to performance appraisal
results
 Feedback is infrequent
 Feedback is mostly one way - supervisor
to subordinate
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Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
Merit Pay Programs:
Criticisms
12-9
Individual performance differences are due largely
to SYSTEM
 Discourages teamwork
 System is not fair
 Too much reliance on supervisor for rating



Pay increase are not representative of performance


procedural issue
distributive issue
Contributes to entitlement mentality
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Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
12-10
Individual Incentives
Used rarely for the following reasons:
Most jobs have no physical output
Many administrative problems
Individuals focus only on the incentive
Does not fit with team approach
Does not reward obtaining multiple skills
Rewards output at the expense of quality or
service
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Profit Sharing
12-11
Advantages
• Encourages employees to think like OWNERS
• Payments are not part of base pay
Disadvantages
• Many plans defer actual payments
• Few plans pay out during business downturns
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Ownership
12-12
Similar to profit sharing with employee focus
on organizational success even stronger
 Employee ownership through stock options
 Stock options typically reserved for executives,
however, the trend is toward pushing eligibility
further down in the organization.
 ESOPs

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Gainsharing
12-13




Encourages pursuit of broader (team) goals
Measures performance that is controllable by
employee
Distributes payouts frequently
Conditions for success include:
– management commitment
– commitment to continuous improvement and
change
– willingness to accept employee input
– high level of cooperation and information sharing
– agreement on productivity standards
– employment security
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Process and Context Issues
12-14
 Employee
participation in decision
making
 Communication
 Pay and process: intertwined effects
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Copyright © 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
Matching Strategy to
Operating Strategy
12-15
Business Unit Strategy
Defenders
Prospectors
Low
High
Short-term
Long-term
Pay level (short run)
Above market
Below market
Pay level (long run)
Above market
Above market
Benefits Level
Above market
Below market
Centralized
Decentralized
Job
Skills
Pay Strategy Dimension
Risk Sharing (variable pay)
Time Orientation
Where Pay Decision Made
Pay Unit of Analysis
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