Chapter 11

Rewarding
Performance

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Chapter 11 Overview

Pay for Performance Plans

Challenges
Meeting the Challenges
Types of Pay for Performance Plans
Individual
Group
Plant
Corporate
Pay for Performance Plans
For Executives
For Sales Persons
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Pay-for-performance
Pay-for-Performance (P-f-P)
Incentive System
Rewards individuals and groups based on
their contributions

Challenges
Do only what you get paid for syndrome
Unethical behaviorpressure to produce
Can foster competition, not cooperation

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Pay-for-Performance: Challenges

Factors beyond employee control

Difficulties in measuring performance
Psychological contract
Credibility gap
Job dissatisfaction and stress
Potential reduction of intrinsic drives

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 Meeting the Challenges

Link pay and performance

Piece-rate system
Use P-f-P as part of broader HRM system
Build employee trust
Culture can support or counter mgmt efforts
Promote the belief that performance
makes a difference
Infuse into organizations climate

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Meeting the Challenges
Use multiple layers of rewards
Different types of pay incentives
Increase employee involvement
Participate in pay plan design
Stress importance of acting ethically
Use motivation and nonfinancial
incentives

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Types of Pay-for-Performance Plans

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Individual Plans

Individual-based plans
Merit pay, bonuses, and awards
Advantages:
Performance rewarded likely to be repeated
Incentives can help shape persons goals
Rewarding individual performance is
equitable
Fit with individualistic culture in the U.S.

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Individual Plans

Disadvantages:
Can promote single-
mindedness
Many do not see link
between pay and
performance
Quality goals may not be
given priority
May promotes inflexibility

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Individual Plans

Most likely to succeed when:

Individual contributions can be isolated
The job demands autonomy
Cooperation is less critical to successful
performance
Competition is to be encouraged

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Team-based Plans

Cash or noncash
Generally given
to all equally
Some teams
decide how
bonus
distributed

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Team-Based Plans
Advantages:
Foster group cohesiveness
Easier to assess team performance
Disadvantages:
Possible lack of fit with individual culture
Free-riders
Social pressures to limit performance
Difficulties identifying meaningful groups
Intergroup competition
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Team-Based Plans
Most likely to succeed when:
Work so intertwined, hard to identify
individual contributions
Organizations structure facilitates groups
and teams
o Are few levels in hierarchy
o Technology allows for separation of work
into independent groups
Objective is to foster entrepreneurship in
self-managed work groups
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Plantwide Plans
Gainsharing
Assumes competition to be avoided

Advantages:
Encourages active employee input
Can increase cooperation levels
Subject to fewer measurement errors
Easier to calculate
Workers more likely to accept program

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Plantwide Plans

Disadvantages:
Protects low performers
Management-labor conflict
Improvements easier when first instituted

Conditions favoring plantwide plans

Small to mid-size firms
Technology can improve efficiency
Participative management
Product market is stable
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Corporatewide Plans

Profit Sharing
Employee Stock
Ownership Plan
(ESOP)

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Corporatewide Plans
Advantages:
Financial flexibility for the firm
Increased employee commitment
Tax advantages

Disadvantages:
Employees may bear financial risk
Limited effect on productivity
May have long-term ramifications on
firms financial position
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Corporatewide Plans

Conditions favoring corporatewide plans:

Larger organizations
Interdependence of different business
segments
Cyclical market conditions
o During short term volatility, help firms save

o Are in retirement plans, so most employees

not immediately affected
The presence of other incentives
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Designing Executive P-f-P Plans
Executive Plans:
Cant always tell if pay tied to performance
Salary and short-term incentives
Long-term incentives
Golden Parachutes
Perks stealth wealth
Board of Directors
Sets top managements pay
More involved than in past

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Key Strategic Pay Questions

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Designing Salespeoples P-f-P Plans

For Salespeople:
Straight Salary
o Maintain good customer relations
o Service existing accounts
Straight Commission
o Generate more sales through new accts
Combination or Mixed Plans

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Rewarding Excellence in Customer
Service

Customer service
rewards more
common
May be individual,
team, or plant-
based

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Summary and Conclusions
Pay-for-performance: many challenges
Meeting the challenges requires planning
Should be part of larger compensation system
Should fit with overall strategic plan of org.
Pay-for-performance at four levels:
Individual, group, plant, organization wide
If P-f-P plan becomes entrenched
Employees will expect them regularly
P-f-P for executives and salespeople
requires additional thought

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