12 Recognizing Employee Chapter Contributions with Pay Objectives Irwin/McGraw-Hill • Describe the fundamental pay programs for recognizing employees’ contributions to the organization’s success • List the advantages and disadvantages of the pay programs • List the major factors to consider in matching the pay strategy to the organization’s strategy • Explain the importance of process issues such as communication in compensation management • Describe how U.S pay practices compare with those of other countries © The McGraw-Hill Companies, Inc., 2000 How Does Pay Influence Individuals? 12-2     EquityTheory Theory chapter chapter 11 11 Equity ReinforcementTheory Theory Reinforcement ExpectancyTheory Theory chapter chapter 55 Expectancy AgencyTheory Theory Agency principalsas asowners owners  principals agents as asmanagers managers  agents Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000 12-3 Types of Agency Costs Perquisites Perquisites Attitudes toward toward risk risk 22 Attitudes Decision-making horizons horizons 33 Decision-making 11 Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000 Factors in the Choice of a Compensation Package 12-4       RiskAversion Aversion Risk OutcomeUncertainty Uncertainty Outcome JobProgrammability Programmability Job MeasurableJob JobOutcome Outcome Measurable Abilityto to Pay Pay Ability Tradition Tradition Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000 12-5 Individual Pay Programs: Design Features Frequency of Payout Performance Measures - Annually Profit Sharing - Bonus Ownership - Equity changes - Bonus - Semiannual or annual - Sale of stock - Monthly / quarterly - when skill is acquired - Boss’ appraisal - Output, productivity - Profit - All Incentive Pay - Change in base - Bonus - Stock value - All - Production costs - Skill acquisition - Production /service unit - All Programs Merit Pay Gainsharing Skill-based Irwin/McGraw-Hill Payment Method - Change in base - Weekly Coverage - Direct labor - All © The McGraw-Hill Companies, Inc., 2000 12-6 Programs Merit Pay Incentive Pay Profit Sharing Individual Pay Programs: Consequences Performance Motivation - Change in base - little Ownership - some in small units - Little Gainsharing - Little Skill-based - Learning Irwin/McGraw-Hill Attraction Culture Costs - High performers - High performers - All - Individual competition - Intra-group competition - Cooperation - High maintenance - Good system of appraisal - Variable - All - Knowledge of business - Sense of ownership - Learning - Ability to pay - Cost not variable - can be high - Retain employees - those who want to learn © The McGraw-Hill Companies, Inc., 2000 12-7 Individual Pay Programs: Contingencies Programs Merit Pay Organization Structure Management Style - Control Ownership - Independent jobs - Measurable jobs / units - Autonomous units - Any company Gainsharing Skill-based Incentive Pay Profit Sharing Irwin/McGraw-Hill Type of Work - Participation desirable - Participation - Individual, easy to measure - Individual appraisal - All types - Participation - All types - Most companies - Participation - All types - Most companies - Participation - Professional © The McGraw-Hill Companies, Inc., 2000 Merit Pay Programs: Characteristics 12-8      Triesto toidentify identifyindividual individualperformance performance Tries differences differences Supervisor provides providesmost mostperformance performance Supervisor information information Payis islinked linked to to performance performance appraisal appraisal results results Pay Feedbackis isinfrequent infrequent Feedback Feedbackis ismostly mostlyone one way way supervisor supervisor to to Feedback subordinate subordinate Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000 Merit Pay Programs: Criticisms 12-9       Individualperformance performance differences differencesare aredue due largely largely Individual to SYSTEM SYSTEM to Discouragesteamwork teamwork Discourages Systemis isnot notfair fair System Too much muchreliance reliance on onsupervisor supervisor for for rating rating Too proceduralissue issue  procedural Payincrease increase are arenot not representative representative of of performance performance Pay distributiveissue issue  distributive Contributesto to entitlement entitlement mentality mentality Contributes Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000 Individual Incentives 12-10 Used rarely for the following reasons: 11 22 33 44 55 66 Most jobs jobshave haveno nophysical physicaloutput output Most Manyadministrative administrativeproblems problems Many Individualsfocus focusonly onlyon onthe theincentive incentive Individuals Doesnot not fit fitwith withteam teamapproach approach Does Doesnot notreward rewardobtaining obtainingmultiple multipleskills skills Does Rewardsoutput outputat atthe theexpense expense of ofquality qualityor or Rewards service service Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000 Profit Sharing 12-11 Advantages Advantages Encouragesemployees employeesto tothink thinklike likeOWNERS OWNERS  Encourages Paymentsare arenot not part part of of base basepay pay  Payments Disadvantages Disadvantages Manyplans plansdefer defer actual actualpayments payments  Many Fewplans planspay payout outduring duringbusiness businessdownturns downturns  Few Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000 Ownership 12-12     Similarto to profit profitsharing sharing with with employee employee focus focuson on Similar organizationalsuccess success even evenstronger stronger organizational Employeeownership ownershipthrough through stock stockoptions options Employee Stockoptions optionstypically typicallyreserved reserved for forexecutives, executives, Stock however,the the trend trendis istoward towardpushing pushingpushing pushing however, eligibilityfurther further down down in inthe the organization organization eligibility ESOPs ESOPs Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000 Gainsharing 12-13     Encouragespursuit pursuitof of broader(team) broader(team) goals goals Encourages Measuresperformance performance that thatis iscontrollable controllable by by Measures employee employee Distributespayouts payouts frequently frequently Distributes Conditionsfor forsuccess successinclude: include: Conditions –– –– –– –– –– –– Irwin/McGraw-Hill managementcommitment commitment management commitmentto tocontinuous continuousimprovement improvementand andchange change commitment willingnessto toaccept acceptemployee employeeinput input willingness highlevel levelof ofcooperation cooperationand andinformation informationsharing sharing high agreementon onproductivity productivity standards standards agreement employmentsecurity security employment © The McGraw-Hill Companies, Inc., 2000 Process and Context Issues 12-14 Employee participation participation in in decision decision Employee making making Communication  Communication Pay and and process: process: intertwined intertwined effects effects  Pay  Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000 12-15 Matching Strategy to Operating Strategy Business Unit Strategy Defenders Prospectors Low High Short-term Long-term Pay level (short run) Above market Below market Pay level (long run) Above market Above market Benefits Level Above market Below market Centralized Decentralized Job Skills Pay Strategy Dimension Risk Sharing (variable pay) Time Orientation Where Pay Decision Made Pay Unit of Analysis Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000 [...]...Profit Sharing 12-11 Advantages Advantages Encouragesemployees employeesto tothink thinklike likeOWNERS OWNERS  Encourages Paymentsare arenot not part part of of base basepay pay  Payments Disadvantages Disadvantages Manyplans plansdefer defer actual actualpayments payments  Many Fewplans planspay payout outduring duringbusiness businessdownturns downturns  Few Irwin/McGraw-Hill © The McGraw-Hill... Pay  Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000 12-15 Matching Strategy to Operating Strategy Business Unit Strategy Defenders Prospectors Low High Short-term Long-term Pay level (short run) Above market Below market Pay level (long run) Above market Above market Benefits Level Above market Below market Centralized Decentralized Job Skills Pay Strategy Dimension Risk Sharing (variable... istoward towardpushing pushingpushing pushing however, eligibilityfurther further down down in inthe the organization organization eligibility ESOPs ESOPs Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000 Gainsharing 12-13     Encouragespursuit pursuitof of broader(team) broader(team) goals goals Encourages Measuresperformance performance that thatis iscontrollable controllable by by Measures... andinformation informationsharing sharing high agreementon onproductivity productivity standards standards agreement employmentsecurity security employment © The McGraw-Hill Companies, Inc., 2000 Process and Context Issues 12-14 Employee participation participation in in decision decision Employee making making Communication  Communication Pay and and process: process: intertwined intertwined effects... Distributespayouts payouts frequently frequently Distributes Conditionsfor forsuccess successinclude: include: Conditions –– –– –– –– –– –– Irwin/McGraw-Hill managementcommitment commitment management commitmentto tocontinuous continuousimprovement improvementand andchange change commitment willingnessto toaccept acceptemployee employeeinput input willingness highlevel levelof ofcooperation cooperationand andinformation... Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000 Ownership 12-12     Similarto to profit profitsharing sharing with with employee employee focus focuson on Similar organizationalsuccess success even evenstronger stronger organizational Employeeownership ownershipthrough through stock stockoptions options Employee Stockoptions optionstypically typicallyreserved reserved for forexecutives, executives,... Above market Above market Benefits Level Above market Below market Centralized Decentralized Job Skills Pay Strategy Dimension Risk Sharing (variable pay) Time Orientation Where Pay Decision Made Pay Unit of Analysis Irwin/McGraw-Hill © The McGraw-Hill Companies, Inc., 2000