7.1Lecture7_incentive compensation_BB

Use of performance reviews

Team bonuses - small group of top executives, decisions directly affect profits Evidence and corporate performance?
Some Examples of Compensation Schemes

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The Incentive Problem and Motivation Problem
Alternatives to Pay/Money






Job security Flexible working arrangements Benefits – carparking, holidays, pensions, etc. Career development and training opportunities (promotions) Convenience of work location Intrinsically satisfying work Pleasant working environment Friendly colleagues Firings and other penalties for bad performance Unvested pensions that are forfeited on dismissal Preferred office assignments for good performance

Problem:
Job V Individual? Job descriptions and flexibility
Performance-Related Pay (PRP) – Good Practice

Senior management committed to the scheme Introduced top-down rather than bottom-up Employee involvement in the design and implementation Existence of a competitive base salary structure A valid job evaluation system which is held in high regard amongst employees Introduced at a pace appropriate to the organisations culture Systematic and regular training for management in performance review and feedback Effective quality control mechanisms for both performance management and performance-related pay systems

Piece rates Time rates Others?
What Is Incentive Pay?
Incentive pay links pay (as a reward) to performance
Create incentives for employees to improve their job performance =>links pay and performance Incentive pay is also called: Pay for performance Performance-based pay systems Performance-based reward systems Reward = Pay? Pay is one possible reward, not the only possible reward Rewards: More than just direct wages and salaries; includes indirect and direct payments in form of bonuses and incentives
Various alternatives (to money) motivation practices
include job enrichment, participation and promotion Problems with alternatives: what works for one worker may not work for another No one can REALLY answer what motivates people

SO: Why Use Incentive Pay?
Incentive pay and goal alignment
Employees work toward their own goals + working toward the organization’s goals If incentive pay works to enhance employee motivation, then the advantages include: Increased employee productivity & job performance Increased retention of high performers Because high performers get more pay than low performers Increased ability of the organization to achieve its objectives Lower costs
Profit Sharing Allocates a specific portion of a firm’s profits to employees – focus on ‘team of teams’ Became popular during the 1980s as workers accepted profit sharing in lieu of wage increases Employee involvement=>commitment and performance

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Incentive Compensation
How does a company determine the relative value of
jobs?

External comparisons with other companies (benchmarking) Outside influences ?? Job evaluation: establish the comparative worth of jobs within a firm
Key Principles for Consideration of Compensation Strategies and Motivation
Involvement



Of employees into design process Commitment to success of system Sense of ownership De-motivators All difficulties preventing workers from achieving high levels of performance should be removed Equity Fair and comparable system Reinforcement Procedures in place to give employees reinforcement, encouragement, guidance and feedback – helps employer know desired reward Relevance and reward Spend time ensuring employees interested in proposed reward Goals Clarity on what earns reward Informs what the organisation considers to be important
Performance-Related Pay – Least Effective:
Level of trust between managers and
employers is low Individual performance is difficult to measure Performance must be measured subjectively When inclusive measures of performance that cover all the activities of the job cannot be developed When large pay awards cannot be given to good performers
Team bonuses

Bonus for each team member depends on whether team goals are met Very common in US - such schemes based on physical output Free-rider problem? Agreement on performance measures
Some Examples of Compensation Schemes