1

Measuring and Paying

For Performance

Increasing organizational
productivity is one of the
hottest current topics in
executive suites.

Managers discovered that

simply paying employees
more will not result in
increased output and
improved quality.
2
Measuring and Paying
For Performance

The strong economy of the 5!s

and "!s and the high inflation
of the #!s and early $!s helped
esta%lish the expectation
among wor&ers that their pay
and %enefits would %e
increased' as needed' to &eep
pace with the changes in the
cost of living.
3
Measuring and Paying
For Performance

These ad(ustments were' more

often than not' granted without
consideration to individual
performance or organizational
productivity.

)hat emerged was a mind*set

of (o% and pay entitlement.
4
Measuring and Paying
For Performance

+ll of which has come to an end

with the current wave of
restructuring and downsizing
activities that are so prevalent
on the economic landscape.

,mployees understand that the

days of (o% ownership and
entitlement have ended.
5
Measuring and Paying
For Performance

-rganizations %egan to realize

that if they were to %ecome
more competitive' they would
have to change this mindset of
.I/m owed it0 to .I/ve earned it0.
6
Measuring and Paying
For Performance

The result has %een a

movement toward more
incentives and awards lin&ed
directly to desired employee
%ehaviors' contri%utions' or
results.
7
Measuring and Paying
For Performance

More specifically the outcome

has %een an increase in varia%le
compensation components and
a decrease in fixed
components.
8
Pay*For*Performance In +
1nowledge -riented 2ervice
2ector ,conomy
The 1nowledge 3irected )or&er

The shift from manufacturing 4low

data retention5 (o%s to &nowledge
directed service 4high data
retention5 (o%s has introduced more
complexity and created %arriers to
traditional (o% analysis and
performance measurement.
9
Pay*for*performance In +
1nowledge -riented 2ervice
2ector ,conomy

These %arriers limit the use of

industrial engineering motion
and time practices for designing
pay*for*performance programs
for the &nowledge*directed
wor&er.
10
Motivation Theories

-ver the years many scholars and

researchers have made contri%utions
to understanding why people %ehave
the way they do.

Those involved in designing reward

systems or pay*for*performance
programs also want to understand
more a%out human %ehavior.
11
Motivation Theories
6ontent Theories -f Motivation

Focus! in on the needs individuals

attempt to satisfy through various &inds
of actions or %ehavior. This theory
relates to a %asic definition of motivation
* activities underta&en to satisfy a need.

+nother meaning of motivation is the

inducement or incentive to action.
12
Motivation Theories
Intrinsic Motivator

Those drives generated from

within the individual. 2elf*
esteem and increased
responsi%ility coming from a well
designed (o% are intrinsic
motivators.
13
Motivation Theories
,xtrinsic Motivator

6omes from outside the

individual. Pay that comes from
the organization and the pat on
the %ac& from a supervisor in
recognition of a (o% well done are
examples of extrinsic motivation.
14
Popular 6ontent Theories
Maslow

Placed needs in five levels and

developed the proposition that
lower level needs must %e
reasona%ly satisfied %efore a
person attempts to satisfy the
higher order needs.
15
Popular 6ontent Theories
7erz%erg

8epac&aged Maslow into the

concepts of 9hygiene. factors and
9motivators..

The two factor theory of

motivation identified the intrinsic
and extrinsic motivator.
16
Popular 6ontent Theories
7erz%erg

Ma(or distinction %etween

hygiene and motivator is 0length
of time0 the particular factor
continues to drive %ehavior.
: Pay for instance has a short life of
not more than ; days.
17
Popular 6ontent Theories
3e 6harms and 3eci

6laimed that pay*for*performance could

reduce employee motivation and %loc&
improved performance.

+ pay incentive program without a

strong relationship to the wor&
performed' %ehaviors demonstrated'
and results achieved can act as a
demotivator.
18
Process Theory -f Motivation

,xpand on the content theories

%y descri%ing how the
motivational process wor&s.

8ecognition of motivation as a
process with identifia%le and
potentially o%serva%le parts.
19
Popular Process Theories
<room ,xpectancy Theory

8epresents ideas or thoughts an

individual develops a%out the
consequences that may result
from a certain action.
20
Popular Process Theories
2&inners -perant 6onditioning
Theory

-perant %ehavior depends on its

consequences and the influence the
environment has in shaping' changing'
and directing %ehavior. 4Positive
reinforcement' punishment' negative
reinforcement' and extinction5.
21
=essons From Process
Theories

Pay*for*performance will %e
more effective when the
employee recognizes a direct
effect relationship %etween
activities performed' results
achieved' and rewards gained.
22
=essons From Process
Theories

Motivational value increases

when the timing of the delivery
of the rewards closely
approximates the
demonstration of %ehavior' the
completion of an assignment' or
the achievement of the result.
23
>sing Incentives

)hen properly designed and

administered' incentive programs
can relate to an entirely different
set of employee %ehavior factors
than do wages and salaries.
24
>sing Incentives

Incentives can provide all &inds of

recognition...They act as the 0gold
star0' the carrot' the pat on the
%ac&...They communicate the
message' 0we recognize what you
have done0' 0than& you0.
25
Team*?ased Pay

To support accepta%le team

operations' a new &ind of
performance related pay system
has emerged.
26
Team*?ased Pay

This pay system has %een given a

wide variety of titles' %ut the three
%asic titles that appear to %e the
most applica%le are@
: 2&ill*%ased pay
: Pay*for*&nowledge
: Pay*for*mastery
27
Merit Pay

+n ad(ustment to %ase pay that

relates directly to employee
performance.

It has evolved over time in most

organizations into a an annual
pay raise to literally every
employee in the organization.
28
Merit Pay

,. ,. =awler promoted the idea

that merit pay is a terri%le way
to increase productivity.
: 7e o%served that the difference in
merit pay %etween the
outstanding and poor performers
is so small that there is no
incentive value at all.
29
Merit Pay

Teel disagreed stating that over

the long haul a significant
difference did surface.
30
Performance +ppraisal
Issues and -pportunities

+ formal process' normally

conducted %y means of
completing an instrument that
identifies and documents a (o%
holders contri%utions and
wor&place %ehaviors' it occurs
constantly in every organization
4formally or otherwise5.
31
Performance +ppraisal
Issues +nd -pportunities

)hen appraisal is done poorly'

or even done under
unsatisfactory operating
conditions' it may lead to
increased employee anxiety and
hostility' and eventually to poor
use of %oth human and non*
human resources' increased
costs' and declining productivity.
32
Performance +ppraisal
Issues +nd -pportunities

)hile performance appraisal

data and information is useful
in a num%er of areas our focus
in this chapter is compensation
administration.
33
Performance +ppraisal and
6ourt 8ulings

There is a strong correlation

%etween (o% evaluation'
performance measurement'
and ,,- requirements.
34
Performance +ppraisal and
6ourt 8ulings

The ,,-6 and the courts

recognize the impact that the
appraisal process has on
employment opportunities

+nd the possi%ility of inherent

%ias in many parts of the
process.
35
Performance +ppraisal and
6ourt 8ulings

Ariggs <s 3u&e Power

: =andmar& case * esta%lished
disparate impact theory**personnel
policies and practices that are
neutral on their face can have an
adverse impact on protected
groups.
36
Performance +ppraisal and
6ourt 8ulings

Ariggs <s 3u&e Power

: Measuring and rating performance
%ased on the unique (o%
requirements of each incum%ent is
a significant first step in
complying with the court
requirements set forth in Ariggs.
37
Performance +ppraisal and
6ourt 8ulings

8owe <s Aeneral Motors

: 2upervisory recommendations
%ased on su%(ective and vague
standards *
: Inadequate performance appraisal
processes led court to conclude that
discriminatory practices were
present.
38
Performance +ppraisal
,,-6 and the 6ourts
Auidelines and 8equirements

Performance rating methods must %e

(o% related or validated.

6ontent or performance rating

methods must %e %ased on through
(o% analysis.
39
Performance +ppraisal
,,-6 and the 6ourts

8aters must have %een a%le

consistently to o%serve ratees/
perform their assignments.

8aters must use the same rating

criteria' and ratings must %e scored
under standardized conditions.
40
Performance +ppraisal
,,-6 and the 6ourts

6riteria used for appraising

performance must not unfairly
depress the scores of minority
groups.

+ppraisal forms and instructions to

raters are an essential part of the
process and require validation.
41
Performance +ppraisal
,,-6 and the 6ourts

6riteria such as regularity of

attendance' tenure' and training time
are usually not considered part of
actual wor& proficiency.

?ecause they are frequently used as

a performance appraisal criteria'
they require validation evidence.
42
Performance +ppraisal
,,-6 and the 6ourts

For performance predictors to

%e accepta%le to the ,,-6 and
the federal courts' they must %e
valid and relia%le.
43
+ 6ost ,ffectiveness +nalysis

Performance appraisal is a la%or

intense activity and it contains a
strong dissatisfaction component
%ecause in some manner pay
ad(ustments' short and long term
incentives' and promotions are
tied to the ratings.
44
+ 6ost ,ffectiveness +nalysis

?ecause of the pro%lems

involved' organizations
implementing a formal
performance appraisal program
must ma&e some hard
decisions regarding the use to
%e made of the outputs.
45

The responsi%ilities and duties

of the (o% definition %ecome
transformed into performance
dimensions and rating items.

+fter esta%lishing performance

dimensions' rating scales can
%e designed for each rating
item.
3esigning a Bo% 6ontent*?ased
Program
46
3esigning a Bo% 6ontent*?ased
Program

3uring the rating period' the supervisor

documents o%served %ehaviors and
achieved results to support a selected
rating score.

Finally' all rating scores are entered

into a computerized data%ase'
permitting the parties involved to
analyze rating scores from a variety of
critical perspectives.
47
Performance 3imensions

Those qualities or features of a

(o% or the activities 4C to C55 that
ta&e place at a wor& site that are
conducive to measurement.

There must %e sufficient

dimensions to cover the most
important aspects of the (o%.
48
Performance 3imensions

3imensions must not %e included

that would result in contamination.

3imensions must %e weighted to

minimize distortion.
49
8ating 2cale 3esign

The desired strength of all

rating scale techniques are that
they@
: +re easy to administer
: Translate into quantitative terms
: Permit standardization
: 8elate to rating items
50
Performance 2tandards

6riterion...Aauge...Dardstic&...
>sed to measure an employee!s
performance.

+ performance standard may

measure a defined part or the
total (o% and are useful only when
they are commonly understood
and voluntarily ac&nowledged and
accepted.
51
Performance 2tandards
They Must ?e@

<alid.... Measura%le... 6hallenging...

8ealistic 3ifferentiating... Timely...
-%serva%le
They Must Provide@

+ mandatory guideline for wor& output

or a minimum accepta%le level of
employee %ehavior.
52
Performance +ppraisals
3ocumenting

There are at least three &ind of

accepta%le documentation@
: 6ritical incidents
: -n*going demonstrated %ehaviors
: 8esults o%tained
53
Performance +ppraisals
-ther Issues

8aters other than the immediate

supervisor 4peers * su%ordinates *
customers5

8ater error and rater training

4halo effect*horn effect * central
tendency*strictElenient * latest
%ehavior5

Monitoring of performance
appraisal ratings