Performance Based Pay

• Strategic implications of pay for

performance
• Assumptions of incentive plans
• Individual and group incentive
systems
• Managing merit pay systems
 Strategic Implications of
Merit Pay
• Global need for positive push
• Rewarding the right behaviors
 Assumptions of Incentives
• Why pay individuals differently
– Pay ranges
– Broad banding
• Ability, expectancy, instrumentality
• Performance variation
• Performance measurement
• The trust factor
 Individual Plans
• Merit pay
• Awards and bonuses
• Piece rates
• Commissions
 Group Plans
• Profit sharing
– Advantage: Employee involvement
– Disadvantage: The risk factor, lack of
control, sense of inequity
• Gain sharing
– Advantage: Employee involvement
– Disadvantage: Trust essential, union
opposition, not useful in piece work
 Gain Sharing & Profit
Sharing
• Gain Sharing • Profit Sharing
– Based on local – Based on total firm
productivity financial
– Benefit comes performance
close in time to – Benefit is deferred
actual performance to annual
administration or
even put into
pension system
Employee Stock Ownership
Plans
• Every employee a part owner
• Works better when done for reasons
of management commitment than for
financial reasons
• It does not automatically improve
employee performance, attitudes or
sense of control
 Incentive System Failure
• Hardly noticeable rewards
• Inadequate performance appraisal
• Ambiguous links between
performance and reward
• Higher union wages
• Adaptation problem
 Incentive System Success
• Clearly noticeable rewards
• Accurate appraisal
• Managers adept in appraising and
feedback
• Visible link between performance
and reward
• Wide range of increases
 Administrative Issues
• Concerns: Fairness, Risk, Efficiency
• Communication
• Pay Secrecy
• Pay satisfaction
 Merit Pay Systems

Employee
Motivation

Join Stay Perform

External Equity External Internal Employee

Equity Equity Equity

Labor Market Job Evaluation Job Analysis Perfornance Pay Grades & Merit Pay
&Compenstion & Analysis & Evaluation Appraisal Ranges Systems
Surveys

Adapted From Hills, Bergmann, & Scarpello, Compensation Decision Making, 2 Ed.
 Backwards & Forwards
• Summing up: Today are topics began with the
strategic implications of pay for performance, we
then examined assumptions underlying incentive
systems and several individual and group merit
pay plans. We concluded with a look at the
management issues in applying the incentive
systems. What makes some plans fail, why do
they work
• Looking Ahead: Next time we dig into the topic of
benefits — health, holidays and pension at our
next session.