UGBA 105
Sections 102,104,106
Week 12: Motivation II
[section # N-1!]
Agenda

Review theories of motivation
– Extrinsic
– Intrinsic


Review bases for pay
Measuring and/or rewarding performance
– Individuals
– Teams

Discuss Brainard case
2
Extrinsic motivation

Homo economicus (Taylor, Theory X,
principal/agent)

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Expectancy/path-goal (Vroom)

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M=f(R)
M = E(Ri) = S(pi)Ri
Learning theory (Skinner)
Equity theory

M = f(Rs/Es - Ro/Eo)
3
Intrinsic motivation


Theory Y (McGregor, Marx)
Motivation/hygiene (Herzberg)
Motivation factors are associated w/the actual
work itself and how challenging it is
 Hygiene factors are associated w/ the
physical & psychological context in which the
work is performed


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Hierarchy of needs (Maslow)
Cognitive dissonance (Festinger)
4
What’s so motivating
about $$$$?
“Status is of great importance in all
human relationships. The greatest
incentive that money has, usually, is that
it is a symbol of success... The resulting
status is the real incentive. Money can be
an incentive to the miser only.”
John F. Lincoln, CEO Lincoln Electric
5
Bases for pay

Human capital (education, training,
skill, experience)
– Seniority pay


Pay according to need
Pay for the job w/ pay rates set by:
– Job evaluation
– Collective bargaining
– Hay points
6
Assigning Hay points

Job rated on various dimensions:
– Type & complexity of knowledge required
– Number of employees supervised
– Amount of capital overseen
– Type & unpleasantness of working
conditions

Measures combined to form a onedimensional scale of “value” to the firm
7
Bases for pay (cont.)


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Pay the market wage (wage surveys)
Pay “efficiency” wages i.e., above
market
Pay for performance
– Individual
– Group
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Measuring Performance:
Individuals

Objective metrics
– Examples: piece rates, commissions

Subjective metrics
A) Comparative methods

Ranking and forced distribution
B) Absolute methods

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Trait rating
Behaviorally-anchored rating scales (BARS)
Management by objectives (MBO)
360 degree appraisals
9
Trait rating

Evaluation based on personal
characteristics (e.g., personality, skills,
abilities) deemed relevant to job
performance
– Ex (for a division mngr): initiative,
farsightedness, ability to identify
managerial talent
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Behaviorally Anchored Rating Scale
Selects nursing activities and
delegates responsibilities
to make the most efficient
use of time and personnel
available
Customarily makes and
carries out a satisfactory
work plan to handle daily
assignments
Approaches daily work
assignments without
foresight or systematic
planning
10 Checks orders for medication to be given
during the day and attempts to maintain a
daily schedule for distributing medication
When short of linen, rearranges work
assignments to accommodate bedridden
patients first
6 If aides had completed their normal work
assignments during night shift, would have
them help clean equipment during
remaining time on shift
Makes a routine check for paper supplies
available on unit
3 Spends most time charting and very little
time with patients and aides
0
Frequently leaves important work undone
so that he or she can leave on time
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Management by Objective


A formal goal-setting process
Typically 3 components:
1. Goal setting
2. Implementation
3. Evaluation
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360 Degree Feedback
Peers
Internal
Customers
External
Customers
Me
Self
Appraisal
Boss
Skip-level
Reports
13
Morgan Stanley 360°
Criteria
 Marketing/Professional Skills
Problem solving, initiative, communication, versatility
 Management and Leadership
People management, development, coaching, fairness
 Commercial Orientation
Client relationships, revenue contribution, deal execution
 Teamwork/One Firm Contribution
Cross-division projects, business team activity, recruitment
14
Measuring Performance:
Groups

Types of pay for group performance
– Team competitions (quality, productivity,
innovation)
– Gain-sharing (Scanlon plan)
– Profit-sharing
– Employee Stock Option Plans (ESOPs)
15
Stock Option Plans


A stock option is a contract that provides
for the owner to purchase a certain number
of company shares at a set price
Some vocabulary
– Stock grant: The number of shares optioned
– Strike price: The set purchase price
– Option exercise: Purchasing shares at your strike
price
– Vesting: How long before you can exercise your
options
16
Stock Purchase Plans


The opportunity for employees to
purchase company shares at a
discount
Used to promote the benefits of
ownership
17
Nobel Laureate Gary
Becker on ESOPs


The advantages of employee ownership have been
oversold, and its disadvantages have been
overlooked. The number of employee-owned
companies … grew from a handful in 1974 to 5,000
now because of tax advantages introduced during
this period.
It is possible that ownership does indirectly
motivate employees, but the direct incentive is
weak: almost all the additional profit created when
an employee works harder goes to fellow
employees and other owners of stock
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Gary Becker (cont.)



Employee stock ownership increases
workers’ exposure to risk from fluctuations
in the fortunes of their companies.
ESOPs often become a management tool to
fend off unfriendly takeovers and other
efforts to oust current managers.
A General Accounting Office study found no
evidence that profits and productivity
increase after companies introduce ESOP.
19
Employee stock
ownership
Disaster at Lucent
 Workers used the employee stock purchase plan
o
Applied up to 10% of pay to stock purchase at a 15%
discount.
 Workers could invest in company shares through
their 401(k)s; some invested entirely in Lucent.
 Blue-collar workers received the company's
voluntary 401(k) matching contribution in stock.
 Many Lucent workers received incentives and pay in
options
 The contracts are largely worthless.
20
Stock options for execs

Corporate governance considerations
– The Berle & Means “agency” problem


How to align the incentives of executives with
those of stockholders
A cause of the Enron, etc., scandals?
21
Michael Eisner takes no bonus in 1999
Disney Chief Executive and Chairman Michael Eisner didn't receive a
bonus in fiscal 1999… The entertainment and media giant's fiscal
fourth-quarter earnings fell to $85 million, or four cents a share, from
$296 million, or 14 cents a share a year earlier.
Eisner did receive his annual salary of $750,000 in 1999. In fiscal
1998, Mr. Eisner's bonus came to $5 million. His total compensation
in 1998 came to $575.6 million thanks to $569.8 million in stock
options he exercised. He received a bonus of $9.9 million in 1997.
In 1999, Mr. Eisner acquired 1.9 million shares of options that
realized a value of $49.9 million when exercised, the filing said. As of
Sept. 30, Mr. Eisner held 24 million in unexercised options valued at
$68.4 million.
WSJ 1/5/2000
22
CEO annual comp, 2005

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William McGuire (UnitedHealth): $1 Billion
Lee Raymond (Exxon): $405 Million
Bob Nardelli (Home Depot): $250 Million
Hank McKinnell (Pfizer): $99 Million
Franklin Raines (Fannie Mae): $90 Million
Phil Purcell (Morgan Stanley): $66 Million
Fortune, July 10, 2006
23
The cost of stock options
Many of Silicon Valley's high-tech companies … have
heavily on options to motivate their employees
relied
Santa Clara-based Yahoo is one example of how the true cost of
stock options is eroding the bottom line of many of America's
best-known companies.
…(E)arnings per share of Yahoo, Network Appliances,
Mercury Interactive, Palm, and Autodesk Inc. were cut by at
least half once the cost of options was included. For Yahoo, a
profit of 10 cents per share profit turned into a loss of 50 cents
per share, or a fall of 600 percent.
WSJ, 2000
24
Exec comp changes in face of
corporate scandals

The Sarbanes-Oxley Act (2002)
– More timely disclosure of executive-pay deals
– CEOs to return compensation based on financial results that were later
restated.
– Outlawed "backdating" of stock options.

By 2003, the average option grant fell nearly by half to $3.3
million
– Average CEO compensation declined, to $8.7 million in 2003, from $12.8
million in 2000.

In 2004, accounting rules changed to require stock grants be
treated as an expense.
– Corporate boards began substituting restricted stock for options.
– Unlike options, restricted stock retains its value even if share prices
decline.
“Behind Soaring Executive Pay, Decades of Failed Restraints,” WSJ, October 12, 2006
25
Takeaways on pay


Managers should not rely entirely on pay systems
for motivation but should design intrinsic rewards
into jobs and control systems
Every method of pay has its drawbacks. A
combination of individual and group systems is
ideal
– Don’t overdo it on individual incentives. Group incentives
have many advantages!

Alignment is critical! Make sure that the pay system
is congruent with the people, the tasks, the
technology, the structure, and the culture!
26
Brainard, Bennis &
Ferrell
Teams

Represent the view on compensation from
the perspective of the following parties:
1)
2)
3)
4)
5)
6)
7)
Richard Kincaid
Paul Piccoli
Paula O’Brien
Jason Cesario
Thornton Grey
An academic researching a case
Outside consulting agency
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