Management 623: Compensation

1
Management 623Compensation Performance
Management

• Session 19
• April 6th, 2006
• Dr. J. Bruce Prince

2
Agenda

• Discuss individual performance can be rewarded
  and the multiple incentive systems that do this
• Merit pay
• Incentive Bonus Systems

3
Coming Up

• Tuesday, April 11th
• CinC Booklet, pp. 59-71, FastCat 3 instructions
• Case of the Unpopular Pay Plan
• Thursday, April 13th
• Discussion of reading on rewarding organizational
  level excellence
• Tuesday, April 18th
• A Measure of Delight case discussion
• Case critique opportunity see questions on web
  get the case from HBSP site

4
Rewarding Individual Performance

• Culturally makes sense in US ( West)
• Linking pay to performance seen as fair
• Makes theoretical sense in improving
• Motivation retention of right employees
• But often doesnt work because
• Performance measurement system problems
• Amount is too small annuity problem
• Poor implementation budget driven nature
• Inadequate employee trust
• Expectancy theory line-of-sight is the
  guiding theoretical view!

5
When Does it Work?

• Performance measurement system
• Measures Comprehensive performance valid
• Clear, stable achievable performance standards
• These are clearly linked to reward pay-out
• Pay levels link to high enough rewards levels
• Objective outcome ( behaviors) measures
• Work requirements are defined clearly, stable
  independent (vs. interdependent)
• NBA example Scoring versus winning what get the
  
• Money recognition are valued (achievement
  oriented)
• Few competing rewards (contrary social norms)

6
Types of Individual Pay

• Merit pay Most used least effective
• See reasons on prior 2 slides
• Incentive pay Piece-rate, sales incentive
• Effectiveness due to clear instrumentality
• But non-rewarded requirements ignored
• Safelite Auto Glass Mary Kay examples
• Bonus pay One time hitoften effective
• Not added to base so can give more (value)
• Measurement trust (instrumentality) still an
  issue

7
Merit Pay Design

• Leniency (easy graders) big problem
• Forced choice (curve) increasingly favored
• Differentiating un-equal performers is key
• Leniency leads to Line-of-sight damage
• low P ? R (instrumentality in expectancy theory)
• Basis for distribution
• Performance always!
• Performance plus salary position in range
• Why do this?

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Ways to Improve Merit Pay Systems

• Improve the performance appraisal system
• Balanced scorecards more comprehensive
• Provide adequate (affordability?)
• Use bonus systems do not fold in last years
  bonus/merit into next years base
• Make base pay lower and incentive-based pay
  higher to control costs
• Supplement with team- firm-performance based
  rewards
• Where you cant measure individual performance,
  use these team and firm rewards instead!

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Use a Multiple Lever Reward Systems

• Reward individual performance when feasible, but
  add on (Comprehensiveness)
• Team, division or organizational (unit) plans
• Focused success (goal) sharing plans
• Collectively meet the goal ? get the reward
• Complexity, Control-able, Communication
• 1st step, temporary unit-performance reward
  system
• Gain sharing productivity cost focus
• Formula creates bonus pool
• Profit sharing profits funds program

10
Stay Strategic Affordability

• What are the key outcomes that drive success?
• Profits, stock appreciation, market share, etc.
• What are the causal factors that drive those
  outcomes?
• Sales, revenue, quality, customer satisfaction,
  etc.
• Key categories
• Financial, operation efficiency, customer, HR
  health
• Build the value creation story from this analysis
• Create an pay-for-performance system consistent
  with this story
• It will produce more marginal revenue than cost