Unit 4, Lecture 4: Performance Management PERFORMANCE

1
Performance Management Concepts

• Prof. John Kammeyer-Mueller
• MGT 4301

2
Plan

• Where we are
• Understand how companies establish pay policies
  for jobs
• Understand how companies provide benefits for
  employees
• Where we want to be
• Understand the basic concepts of human motivation
  and performance
• How we know how were doing
• What are the primary human needs identified by
  research?
• How can organizations direct employee behavior?

3
Metrics for Performance Management Systems

• Costs
• Administrative expense of developing programs
• Services
• Employees understand how they are evaluated
• Managers understand how the system should work
• Performance
• Employees know how to work
• Focus on corporate strategic goals
• Skills are appropriate for organizational goals
  and plans
• Attitudes
• Motivation to improve

4
What Does it Mean to be Motivated?

• Three major components
• Direction of actionwhat am I going to do?
• Duration of actionhow long am I going to do it?
• Intensity of actionhow much effort am I going to
  put into this activity?

5
Agency and Ownership

• The history of British industry
• Early factories founded by rich landowners and
  merchants in Britain
• Ownership passed from father to son
• Generally the owners divided their time managing
  books and gentlemanly pursuits
• The history of American industry
• Absence of nobility meant factories were often
  managed in a different way
• Use of common stock to raise capital for new
  companies often meant factories were managed by
  non-owners
• These professional managers had more business
  expertise, but little incentive to manage well
• Result American industry had agency problems

6
Basic Terms in Agency

• Principal
• An individual acting on his or her own behalf
• In modern corporations, these are stockholders
• Agent
• An individual acting on behalf of the
  stockholders
• In modern corporations, this includes not just
  lower level employees, but also higher level
  managers

7
Game Theory and the Principle Agent Problem

• This model arises if the principal cannot
  directly observe the productivity of the
  employee this is rooted in information asymmetry
• Utility for Apay disutility due to effort
• Utility for Bprofit pay

8
An Example of Principal-Agent Issues

• Which sounds like a better option for a cab
  company?
• Pay cab drivers a flat wage regardless of how
  many fares they get
• Give cab drivers partial ownership of the cab and
  medallion so the revenues are split 50/50,
  thereby allowing the employer to capture some of
  the extra money the cabbie is driving
• Give cab drivers total ownership of the cab and
  medallion, so the cabbie pays a fixed rental cost
  and gets all the revenues
• Issues for this job
• Costly to measure performance directly
• Possibility of collusion between cabbie and
  passenger
• Source Lazear, Personnel Economics

9
An Example of Principal-Agent Issues

• Ed Lazears conclusion
• The cabbie could just turn off the meter and have
  some customers pay him directly at a rate below
  the fare
• The cabbie could turn off the meter and charge
  75 of the fare so both the passenger and the
  cabbie are still better off than either would be
  at the full fare
• The cabbie would always leave the meter on and
  the company doesnt care even if s/he doesnt

10
Basic structural theoriesAdvantages of
incentive pay

• Agent equation
• Satisfaction pay-effort
• Principal equation
• Satisfactionperformance(effort)-pay
• What are the implications of this model?
• Examples of typical agency problems
• Effort levels
• Expense accounts
• Budget decisions

11
Basic structural theoriesAdvantages of
incentive pay

• Solution incentive alignment
• Make pay related to some measure of effort
• Agent is now satisfaction pay(performance)-effor
  t
• Of course, this effective only when performance
  is under the employees control

12
A More Nuanced View of Agency

• The assumption is that managers can evaluate
  whether performance is equal to market value.
• The effort beyond minimum is (b?a) (b?c) (d
  e)
• Note that the relationship between performance
  and effort is critical

13
Implications of the Agency Model

• Tie principal and agent incentives
• Compensation based on performance
• Methods for achieving this outcome
• Compensation based on revenues
• Methods for achieving this outcome
• Ensure employees are closely monitored for
  activities where incentives are not aligned

14
Methods of Solving Principal Agent Problems

• Simple pay based on managerial review
• Either bonuses or permanent raises
• Pay for outcomes, not time or effort
• Commissions, piece rates, and contract work
• Observe worker behaviors electronically
• Time spent on phone cues, number of cases closed
  for procedural work
• Make employees part owners
• Stock option plans, profit sharing,
  co-operatives, franchises

15
Expectancy A Unifying Framework

• Vroom sees a three stage process where
  individuals judge an activity.
• All three stages need to have positive values to
  create effort
• This is related to models of risk and return in
  finance
• Valent outcomes can be positive and negative,
  including the opportunity cost of effort (e.g.,
  the negative valence of studying for a test is
  partially due to your desire to do something more
  fun)

Effort
Expectancy Can I do the task?
Instrumentality What are the likely outcomes?
Valence Do I value the outcomes?
16
Expectancy TheoryPractical Examples

• For each of the following tasks, what are
  expectancy, instrumentality, and valence
  considerations.
• Taking a test
• Making a sale
• Designing a corporate webpage
• How do you
• Increase expectancy of success?
• Increase instrumentality of performance?
• Identify rewards that have high valence?

17
Expectancy Core Antecedents

• When self-confident people see a good idea, they
  love it
• Jack Welch, CEO of GE
• Self-efficacy
• Perception of ones own competence
• Linked to self-regulation by Bandura
• I have a goal
• At each step I assess my progress
• More success makes me devote more resources to
  the task
• Areas where self-efficacy affects outcomes
• Therapy for depression
• Therapy for phobia
• Smoking prevention
• Learning new tasks

18
Expectancy Immediate Antecedents

• Can we change self-efficacy?
• Enactive masteryexperience with simple parts of
  tasks that are easier to accomplish
• Vicarious modelingwatching someone similar to
  you perform effectively
• Verbal persuasionthe coach giving you you can
  do it feedback
• Arousalgetting psyched up
• Are there dangers of too much self-efficacy?

19
Valence Need Theories

• Must meet lower level needs before one can
  consider the next level
• Each level up is triggered only after the one
  below it is achieved
• Obviously implies the higher levels are better

Self-actualization
Esteem
Love
Safety
Physiological
20
Valence Need Theories

• Difference feminism (e.g., Carol Gilligan)
• Like Kohlberg, Maslow emphasizes individualism
  over caring
• Gilligan believes that this model describes male
  psychology, but women have a different
  perspective on development
• Empirical problems
• The principle of prepotency does not match
  available evidence from research
• Examples of specific people
• Viktor Frankl developed a very prominent
  psychological theory while in a concentration
  camp
• Van Gogh was in a constant state of peak but
  had none of the other needs met
• Galileo was desperate for money and very focused
  on improving his physical state

21
Alternative Models of NeedsBased on William
James

• Existence
• Basic physical needs
• Relatedness
• Social interactions
• Growth
• Aesthetic pleasure and learning
• This preserves the concept of complex human needs
  without the baggage of prepotency

22
Valence Need Theories

• Murray and McClellands manifest needs
• Need for achievement
• Need for power
• Need for affiliation
• While related to ERG, there is an important
  difference
• People dont all want the same thing
• Personality traits are critical

23
Managerial Implications

• People have complex needs that must be addressed
  at several levels
• Because people are different from one another,
  you must design programs to match multiple needs
• The needs are not in competition, and meeting one
  need can benefit another

24
Basic Motivational Theories

• Think about a goal youve set for yourself
• What types of goals have been successful?
• What types of goals have been unsuccessful?
• What functions do goals serve?
• Goal setting
• Difficult, specific goals help focus energy
• Rewards improve the effectiveness of goal setting
• What does it add to expectancy?
• Personal choice
• The importance of attention and focus

25
Simple Examples of Goal Setting

• Think about a goal youve set for yourself
• What types of goals have been successful?
• What types of goals have been unsuccessful?
• What functions do goals serve?
• Set a goal for your performance on the next test
  and write it up based on what weve said so far

26
Goal SettingHistorical Research

• On the basis of differences in performance in
  relation to ability, a low-motivation and a
  high-motivation group were selected for 2 retests
  on the same task.
• The low-motivation group was given specific goals
  to reach, and the high-motivation group was told
  to do its best.
• By the end of the 2nd retest, the group given
  specific goals had "caught" the do-best group
  both in terms of performance and in terms of
  favorable attitudes toward the task.

27
Goal SettingHistorical Research

• Data were collected on the net weight of 36
  logging trucks in 6 logging operations for 12
  consecutive months. Results show that performance
  improved immediately upon the assignment of a
  specific difficult goal.
• Similar experiments were run using typists,
  figure selection laboratory tasks, clerical
  sorting tasks, and brainstorming tasks

28
Goal SettingHistorical Research

• Performance and satisfaction of 113 40-60 yr old
  blue-collar unionized workers in a large
  telephone company was assessed.
• Three experimental groups received either
  extrinsic feedback, intrinsic feedback, or
  extrinsic and intrinsic feedback in addition to
  goal setting, while a 4th group received only
  goal-setting instructions.
• Performance measures (cost performance,
  absenteeism, safety, and service) show goal
  setting enhanced performance without knowledge of
  results
• When feedback was added to a goal-setting
  program, performance was further enhanced.

29
Goal SettingMajor Principles

• Specific, difficult goals lead to higher
  performance than do easy goals or abstract goals
  like urging people to do their best
• Given that there is goal commitment, the higher
  the goal, the higher the performance
• Praise, feedback, or involvement in decision
  making only work insofar as they lead to the
  setting of specific goals and commitment to goals
• Goal setting can influence choice of activities,
  persistence, effort, and problem solving

30
Goal Setting The Most Proven Motivational Tool

• This finding is extremely robust across settings
• Lumber workers
• Scientists
• Salespeople
• Dockworkers
• Union bargaining reps.
• Typists
• An so on, and so on

31
Goal SettingTheories for Why Goals Work

• Increases instrumentality
• Outcomes are well defined
• Clear indications of success
• Self-reinforcing properties
• Achieving goals is self-reinforcing
• May lead to setting future goals
• Increases focus
• Coordinate mental resources
• Ignore non-goal activities

32
Goal SettingWhen it Works Best

• Things that make goals more or less effective
• Specific vs. do your best
• Difficult vs. easy
• Self-set vs. participative
• Frequent vs. occasional feedback
• Rewards vs. individualized
• When might goals may be a problem?

33
Goal SettingTheories for Why Goals Work

• Increases instrumentality of performance
• Outcomes well defined
• Performance is self-reinforcing
• Increases focus on specific parts of the task
• Tendency to ignore non-goal activities has been
  shown

34
The MBO Model for Incentives Across Levels
Organizational Objectives
Improve organizational profitability by 5
annually
Divisional Objectives
Increase revenues by 10
Reduce production costs by 2
Increase sales by 10
Increase sales by 10
Reduce production errors
Decrease materials costs
Departmental Objectives
Individual Objectives
35
Goal SettingNot Always Good Outcomes

• Having goals to perform well actually reduces
  adaptation in changing contexts, while goals to
  learn increase adaptation (LePine, JAP, 2005)
• Having goals to perform well are consistently
  related to poorer learning across a variety of
  study methods
• Goals have been linked to reduction in creativity
  based on the increase in focus

36
Goal Setting and Unethical Behavior

• Design a simple experiment wherein subjects
  completed anagram tasks (e.g., how many words can
  you make from the word potato?)
• Respondents were told to grade their own papers
  they believed that there was no way to tell after
  the fact whose answer sheet was whose, but there
  was a secret code on each sheet
• Some respondents were given a do your best goal
• Some were given a goal with rewards for
  acheivement
• Some were given a goal without rewards
• What do you think happened?
• Schweitzer, Ordóñez, and Douma, AMJ, 2007

37
Goal Setting and Unethical Behavior

• Results showed that individuals in the goal
  setting and reward goal conditions were more
  likely to overstate the number of correct answers
• Implications
• Selection?
• Self-reported progress?
• Tasks with ambiguous outcomes?

38
Basic Motivation TheoriesSelf-Determination
Theory

• People do a task (e.g., putting puzzles together)
• Some are paid, some are not
• Those not paid like the task more
• Those who are not paid report enjoying the task
  more and work harder without supervision
• People do a simple grading task for 1, others
  given 20
• Those who are paid less again say the task is
  more fun
• Sometimes more likely to volunteer in the future

39
Self-Determination andthe Importance of
Attributions

• Extrinsic motivation
• Causes
• Effects
• Intrinsic motivation
• Causes
• Effects
• The role of cognitive dissonance and
  self-theories in planning behavior

40
Basic motivation theoriesCognitive evaluation
theory

• Implication
• Intrinsic motivation high effort without
  supervision
• Extrinsic motivation need to prod people to work
  harder
• What are some potential criticisms of this theory?

41
Incentives Can Improve Self-Determination?

• Reward contingencies can actually indicate
  freedom of action (i.e. I chose to work for this
  reward)
• Although being pushed to achieve a reward can
  increase external attributions of causality,
  being shown a reward and freely choosing it can
  increase internal attributions of causality
• People like to demonstrate competence and feel
  more capable and free when they achieve their
  goals

42
Incentives Can Improve Self-Determination?

• Rewards for meeting performance standards
  increase self-determination and perceived
  competence if it has informational value, as
  shown in multiple studies by Eisenberger,
  Rhoades, and Cameron
• Deci, Koester, and Ryan (Psych Bull, 1999)
  acknowledge that in adult work samples, rewards
  have informational value and less control value
• This does not disagree with the central tenet of
  self-determination (autonomy increases motivation
  and enjoyment of a task), but it does squarely
  disagree with the idea that rewards always
  diminish performance

43
Goal Accomplishment and Well Being

• We usually assume that pursuing goals is good for
  us, but that may not be the case
• Contrast individuals with
• goals that are due to self-motivation (because
  you really identify with the goal or because it
  interests you) vs.
• external motivation (because of rewards such as
  money, grades or status or a feeling of guilt if
  you fail)
• Individuals who pursue goals because of
  self-motivation are happier, whereas those who
  pursue them because of extrinsic rewards are less
  happy
• These results obtained in studies with
  contemporaneous measurement (goal content
  assessed at the same time as happiness) or in
  longitudinal tests (goal content measured at time
  one and happiness measured a full year later)
• Sheldon, Ryan, Deci, and Kasser, PSPBull, 2004

44
Goal Accomplishment and Well Being

• We usually assume that pursuing goals is good for
  us, but that may not be the case
• Contrast individuals with
• goals that are based on avoidance of harm or
  negative outcomes
• goals that are based on desire to achieve
  positive outcomes
• Individuals who pursue approach goals are higher
  in self-esteem, optimism and depression
• These results are based on a specific prompt from
  researchers to either adopt and approach or
  avoidance orientation
• Coats, Janoff-Bulman, and Alpert, PSPBull, 1996
• Interesting to note that extroversion and
  self-esteem are associated with approach goal
  orientation and neuroticism is uniquely
  associated with avoidance goal orientation
• Heimpel, Elliot, Wood, JofPers, 2006 Steel,
  Schmidt, and Schultz, PsychBull, 2008

45
Ways to Minimize Self-Determination Problems

• Improve intrinsic motivation
• Examples of job design interventions
• Examples of supervisory interventions
• Change the interpretation of rewards
• Make rewards more intrinsically meaningful
• Provide a balance of intrinsic and extrinsic
  rewards wherever possible

46
Principle Agent Models or Risk Aversion Models?

• Most of the models weve discussed suggest its
  obvious to pay people based on their output or
  some measure of performance
• So why are so many people paid basically the same
  regardless of effort levels?
• Concerns about the accuracy of managerial
  evaluations
• Concerns about poor business affecting
  compensation
• Concerns about co-workers
• What do these have in common?
• Theyre beyond the employees control
• Therefore, they are all risky

47
Principle Agent Models or Risk Aversion Models?

• Risk aversion
• Which would you rather have
• Equivalent in expected value
• 500 for sure vs. 50 chance at 1,000
• Equivalent in personal value
• 500 for sure vs. 50 chance at 5,000
• Why would risk aversion apply to salaries?
• Mortgages, childcare, food, and other fixed
  expenses!
• As a result, many people would never accept
  having their wages at risk

48
Risk Aversion in Greater Detail
49
Why Are Companies Considered Less Risk Averse?

• Number of investments they make are larger
• If one unit does poorly for a short time, other
  units can make it up
• Failure to perform for one individual is averaged
  across those who perform better
• Have more access to slack resources
• Companies typically have more money on hand than
  any individual employee would
• Companies operating at a profit

50
Why Risk Averse Companies Might Like Incentive Pay

• Shifts risk from the company to the employee
• Reduce wages without penalty
• Behavioral decision making experiment
• How fair do you think it is for a company to cut
  employee wages 5 during an economic downturn
• How fair do you think it is for a company to
  suspend a 5 bonus program during an economic
  downturn
• Most people think the cut in bonuses is more fair
• Many companies cut bonuses, raises, or incentive
  programs in recessions rather than cutting wages
• Source Workforce Online, October 24, 2008

51
Implications of Risk Aversion Theory for
Incentive Programs

• Provide employees some areas of shielding to
  reduce risk
• Provide some flexibility in terms of risk to
  accommodate individual differences
• Ensure that the variability associated with
  compensation is maximally under employee control

52
Wrap Up

• Where we are
• Understand how companies establish pay policies
  for jobs
• Understand how companies provide benefits for
  employees
• Where we want to be
• Understand how pay can be modified to fit the
  individual
• How we know how were doing
• What do each of the following theories say about
  incentive compensation plans?
• Expectancy
• Agency
• Goal setting
• Cognitive evaluation
• Risk aversion