COMPENSATION
MANAGEMENT
Brief Notes for Students
HRSB 353
Chapter 9: Pay-for-
Performance:
The Evidence
LEARNING OBJECTIVES
1. Discuss the relation of the content,
process, and reinforcement theories
of motivation to compensation.
2. Discuss the important design issues
in creating a pay for performance
program.
3. Discuss why a pay for performance
program might not work in an
organization.
Employee performance depends on
three general factors:
Employee performance = f (S,K,M)
where:
S = Skill and ability to perform task
K = Knowledge of facts, rules,
principles, and procedures
M = Motivation to perform
Performance Measurement Relates to
Compensation Strategy
Variability in Organizational Performance
Low Variability: few High Variability: regular
swings in overall and large swings in overall
corporate performance corporate performance.
Variability and Unstable, Cell A – provide wide Cell B – provide wide
ease of unclear, and range of rewards range of rewards
measurement changing beyond just money. beyond just money.
in individual objectives Include significant Emphasize base pay
performance incentive component. with low incentive
portion.
Stable and Cell C – emphasize Cell D – emphasize
easily monetary rewards with monetary rewards. Large
measured large incentive base pay with low
component. incentive portion.
What Behaviors Do Employers
Care About?
How do we get good employment
prospects to join our company?
How do we retain these good
employees once they join?
How do we get employees to develop
skills for current and future jobs?
How do we get employees to perform
well on their current job?
What Motivates Employees?
In the simplest sense, motivation involves
three elements:
1. what is important to a person, and
2. offering it in exchange for some
3. desired behavior
What Motivation Theories Say
Content Theories (what is important to a
person)
Maslow’s Need Hierarchy
Herzberg’s 2-Factor Theory
Process Theories (the nature of the exchange)
Expectancy Theory
Equity Theory
Agency Theory
Reinforcement Theories (desired behavior)
Goal Setting
Reinforcement
Motivation Theories (Content
Theories)
Motivation Theories (Content
Theories)
Motivation Theories (Process
Theories)
Motivation Theories (Process
Theories)
Motivation Theories (Process
Theories)
Motivation Theories (Reinforcement
Theories)
Motivation Theories (Reinforcement
Theories)
Components of a Total Reward System
1. Compensation Wages, Commissions and Bonuses
2.. Benefits Vacations, Health Insurance
3. Social Interaction Friendly Workplace
4. Security Stable, Consistent Position and Rewards
5. Status / Recognition Respect, Prominence Due to Work
6. Work Variety Opportunity to Experience Different Things
7. Workload Right Amount of Work (not too much, not too little)
8. Work Importance Is Work Valued by Society
9. Authority / Control / Autonomy Ability to Influence Others; Control Own Destiny
10. Advancement Chance to Get Ahead
11. Feedback Receive Information Helping to Improve
Performance
12. Work Conditions Hazard Free
13. Development Opportunity Training to Learn New Knowledge / Skills / Abilities
Across the Board
Cost of Living
Base Pay
Increase
Lump Sum
Merit Pay
Bonus
Wage
Components
Individual Success
Incentive Sharing Plans
Risk
Gain Sharing Profit Sharing Sharing Plans
Wage Components
Wage Components (continued)
Wage Components (continued)
Wage Components (continued)
Performance Depends on the
Employee’s Perception of: (1 of 2)
The probability the performance will
meet or exceed manager’s objective.
The probability that if the objective is
met, the manager will give extrinsic
rewards.
The probability the extrinsic rewards
will satisfy some needs.
Performance Depends on the
Employee’s Perception of: (2 of 2)
The probability that doing the task will
provide intrinsic rewards.
The probability the intrinsic rewards
will satisfy needs.
How much satisfaction of these needs
is important or valued.
Does Compensation Motivate
Behavior: Specific Comments
Do people join a firm because of pay?
Do people stay in a firm (or leave)
because of pay?
Do employees more readily agree to
develop job skills because of pay?
Do employees perform better on their
jobs because of pay?
The Fit Between People and Rewards
Examples of Group Incentive Plans
Company Pay Component
Corning Competitive Base Pay. Group Bonus based on
meeting certain quality measures, customer
satisfaction measures, and protection targets.
Nucor Plant Manager base pay 25 percent below
market. Five percent of excess over target goes
to bonus. Bonus often equals base pay in
amount.
PepsiCo Competitive Base Pay. All employees get stock
options equal to 10 percent of base pay.
Employees share in corporate triumphs and
failures as stock prices rise or fall.
Designing A Pay-For-Performance
Plan
Efficiency Equity or Fairness
Strategy Distributive justice
Structure Procedural justice
Standards Compliance
Objectives Comply with
Measures existing laws
Eligibility
Enhance and
Funding
maintain firm’s
reputation
Summary
Employee performance depends upon some
blend of skill, knowledge, and motivation.
Absent any of these three ingredients,
performance is likely to be sub-optimal.
Rewards must:
Help organizations attract and retain
employees
Make high performance an attractive option
for employees
Encourage employees to build new skills
and gradually foster commitment to the
organization
Review Questions
1. Do you think incentive pay will motivate
faster performance? Is this desirable?
2. Should rewards focus mostly on money,
or should employers work hard to
incorporate the other 12 rewards
discussed in this chapter?
3. If you wanted workers to perceive their
compensation package as secure, what
components would you include and
which would you avoid?
Review Questions (continued)
4. How does procedural justice differ from
distributive justice?
a. Defend the position that supervisors have
considerable control over procedural
justice in their departments but little control
over distributive justice.
b. How might you use the principles of
procedural justice to avoid having an
employee quit because she believes her
boss gave her an unfair evaluation?
