Performance Based Pay
• Strategic implications of pay for
performance
• Assumptions of incentive plans
• Individual and group incentive
systems
• Managing merit pay systems
Strategic Implications of
Merit Pay
• Global need for positive push
• Rewarding the right behaviors
Assumptions of Incentives
• Why pay individuals differently
– Pay ranges
– Broad banding
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•
•
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Ability, expectancy, instrumentality
Performance variation
Performance measurement
The trust factor
Individual Plans
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•
•
•
Merit pay
Awards and bonuses
Piece rates
Commissions
Group Plans
• Profit sharing
– Advantage: Employee involvement
– Disadvantage: The risk factor, lack of
control, sense of inequity
• Gain sharing
– Advantage: Employee involvement
– Disadvantage: Trust essential, union
opposition, not useful in piece work
Gain Sharing & Profit
Sharing
• Gain Sharing
– Based on local
productivity
– Benefit comes
close in time to
actual performance
• Profit Sharing
– Based on total firm
financial
performance
– Benefit is deferred
to annual
administration or
even put into
pension system
Employee Stock Ownership
Plans
• Every employee a part owner
• Works better when done for reasons
of management commitment than for
financial reasons
• It does not automatically improve
employee performance, attitudes or
sense of control
Incentive System Failure
• Hardly noticeable rewards
• Inadequate performance appraisal
• Ambiguous links between
performance and reward
• Higher union wages
• Adaptation problem
Incentive System Success
• Clearly noticeable rewards
• Accurate appraisal
• Managers adept in appraising and
feedback
• Visible link between performance
and reward
• Wide range of increases
Administrative Issues
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•
•
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Concerns: Fairness, Risk, Efficiency
Communication
Pay Secrecy
Pay satisfaction
Merit Pay Systems
Employee
Motivation
Join
Stay
Perform
External Equity
External
Equity
Internal
Equity
Labor Market
&Compenstion
Surveys
Job Evaluation
& Analysis
Job Analysis
& Evaluation
Employee
Equity
Perfornance
Appraisal
Pay Grades &
Ranges
Merit Pay
Systems
Adapted From Hills, Bergmann, & Scarpello, Compensation Decision Making, 2 Ed.
Backwards & Forwards
• Summing up: Today are topics began with the
strategic implications of pay for performance, we
then examined assumptions underlying incentive
systems and several individual and group merit
pay plans. We concluded with a look at the
management issues in applying the incentive
systems. What makes some plans fail, why do
they work
• Looking Ahead: Next time we dig into the topic of
benefits — health, holidays and pension at our
next session.