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Chapter 6 Appraising and Rewarding Performance Chapter Overview This chapter focuses on money as a means of rewarding employees, motivational models applied to pay, cost-reward breakeven analysis, and behavioral considerations in performance appraisal. The first part of the chapter addresses the use of money as a means of rewarding employees. Organizational behavior as it relates to the performance appraisal process is considered in the next section, which is followed by economic incentive systems and wage incentives. Finally, profit and gain sharing programs are discussed. Chapter Learning Objectives After reading this chapter, students should understand: 1. Total reward systems 2. Money as an economic and social medium of exchange 3. The role of money in motivational models 4. Behavioral considerations in performance appraisal 5. The characteristics of good feedback programs 6. The process of attribution 7. How and why to link pay with performance 8. Uses of profit-sharing, gain-sharing and skill-based pay programs Discussion and Project Ideas Although money will not buy happiness, it still is the principal medium of exchange for satisfying certain types of employee wants. Therefore, organizational behavior becomes quite involved in the pay systems of an organization. It is the objective of this chapter to discuss at some length the human implications of job evaluation, performance appraisal, and pay plans. This chapter offers an excellent opportunity for class recitation. For example, have individual students discuss some of their personal experiences with performance appraisal, job evaluation, and pay plans. Specific exercises and assignments emphasizing key points are described below. Select two students to assume the roles described below and to act out a performance appraisal. Have the other students serve as observers. If available, record and play back the appraisal. At the conclusion of the appraisal, develop a list of good points and ways to improve the appraisal process through class discussion. Employee: Alice Williams—You have been an account executive for a local stockbroker for the past 10 years. In prior years, your performance has been excellent. Lately, however, your performance has slipped. You have been late for work several times and also have been absent a number of times. On a couple of occasions, clients have called your boss because they could not reach you. Part of your problem has to do with your recent divorce. You spend a lot more time partying now because you feel better when you are out with people rather than sitting at home. You feel this is fairly normal behavior considering the hard times you have had lately. You feel this is a stage you’re going through and are confident things will eventually improve. You feel no particular need to reveal your personal problems to your manager. Manager: Helen Walker—You are the manager of six account executives at a local stockbroker. Alice Williams, one of your account executives, has been an excellent employee for the previous 10 years. Recently, however, she has been having problems. She has been absent eight times in the past 6 months. She has been late 12 times, sometimes as much as two hours late. As a result, her clients have been calling you to try to get in touch with her. In addition, she has lost a couple of accounts and many more have become inactive. Her sales have dropped 20% over the last 6 months. It is time for her annual performance appraisal. What will you say? If class size and time permit, negotiate individual contracts for student projects at the beginning of the year. Look through the instructor’s manual and develop a list of projects from which students can select. Then, set up each individual performance contract on a mini-performance appraisal system. A sample contract follows. When this chapter is covered, conduct a mini-appraisal with each student and assign a project grade. Discuss this process with your students as an example of a performance appraisal. Sample Contract: Performance Contract Purpose: Goal: Evaluation Standards: Performance Strengths: Performance Weaknesses: Final Grade: Suggestions for Improvement: Ask one or several students who have worked under piece rate incentive systems to prepare short reports describing the systems and the ways in which employees reacted to the systems. Are there any systematic differences in employees’ reactions to the systems that can be accounted for by the designs of the systems? Select several jobs in the surrounding area for which students will be able to have relatively free access to information regarding pay and fringe benefits. Have the students prepare, organize, and present this information according to the pay pyramid diagrammed in Figure 6.1. Discuss the differences in the pay and incentives for the various jobs. What is the relative attractiveness of these various jobs for young people, older people, males, females, married people, single individuals, etc.? Many organizations provide the opportunity for their employees to select their means of compensation through cafeteria benefit programs. Other companies have very individualized and unique systems for employee compensation. Have one or several students prepare a comprehensive report on these programs and present it to the class. Invite to class an insurance salesperson who handles group policies for organizations. This individual should be well qualified to describe the variety of compensation options available, such as tax deferred annuities, disability plans, hospitalization plans, mutual investment funds, etc. Have the individual relate the plans described to the pay pyramid diagrammed in Figure 6.1. A person from the personnel department of a progressive organization might also be qualified to do a similar presentation. What do students actually value in compensation? Do they even consider benefits compensation or just expected? Does their firm offer any unique compensation programs or reward programs? Lecture Outline Introduction • Economic rewards are powerfully important to employees and pay relationships carry immense social value. • Researchers have showed that economic rewards operated through the attitudes of workers in the social system to produce an indirect incentive. • This chapter focuses on how incentives are combined with other parts of wage administration to build a complete reward system. A Complete Program • Many types of pay are required for a complete economic reward system. o Job analysis and wage surveys rate jobs, comparing one job with another to determine base pay (according to levels of responsibility and market pressure). o Performance appraisal and incentives rate employees on their performance and reward their contributions. o Profit sharing rates the organization in terms of its general economic performance and rewards employees as partners in it. o These three systems systems—base pay, performance rewards, and profit sharing—are the incentive foundation of a complete pay program. • Base pay and skill-based pay motivates employees to progress to jobs of higher skills and responsibility. o Performance pay is an incentive to improve performance on the job. o Profit sharing motivates workers toward teamwork to improve an organization’s performance. • Other payments, primarily non-incentive in nature are added to the incentive foundation. o Seniority pay adjustments are made to reward workers for extended service and to encourage them to remain with their employer. o If an employer asks workers to sacrifice by working overtime, working on their day off, or working undesirable hours, the workers may be paid extra for inconvenience. o Other payments are given for periods when an employee does not work, such as vacations, holidays, etc. • The additions to the foundation of the reward pyramid have little direct incentive value because they do not increase according to improved job performance. o However, some of these additions may result in indirect incentive through better attitudes. o Other additions, such as seniority pay, actually may decrease worker incentive since they are not tied to performance outcomes. o Some of these factors are related less to incentive than they are to things such as security, equity, and social justice. o An effective program of economic rewards is a balance of most of these factors. • A wide range of noneconomic programs also exist to supplement an organization’s complete pay program. o Some firms reward their employees with contingent time off for exemplary performance; others allow employees to earn “comp time” (compensatory time) for hours worked but not paid for. o Many firms provide a wide array of other benefits for their employees, such as on-site day care facilities and wellness-promotion programs. Money as a Means of Rewarding Employees • Money is important to employees for a number of reasons. o It is valuable because of the goods and services it will purchase. o It also is a social medium of exchange. o It represents to employees what their employer thinks of them. o It is also an indication of one employee’s status relative to that of other employees. • Money has about as many values as it has possessors. Application of the Motivational Models • Drives o Achievement-oriented employees maintain a symbolic scorecard in their minds by monitoring their total pay and comparing it with that of others. o Their pay is a measure of their accomplishments. o Money also relates to other drives, since people can use it to buy their way into expensive clubs (affiliation) and give them the capacity (power) to influence others, such as through political contributions. • Needs o In the Herzberg model, pay is viewed primarily as a hygiene factor, although it may have at least short-term motivational value as well. o In the other need-based models, pay is most easily seen in its capacity to satisfy the lower-order needs (such as Maslow’s physiological and security needs or Alderfer’s existence needs). • Expectancy o Expectancy theory states that Valence × Expectancy × Instrumentality = Motivation o This means that if money is to act as a strong motivator, an employee must: Want more of it (valence) Believe that will be successful in producing desired performance (expectancy) Trust that the monetary reward will follow better performance o Valance of money is not easily influenced by management. It is contingent upon an employee’s personal values, experiences, and needs, as well as the macro motivational environment. Since money has many social meanings to people, employees may seek it for its social value even when its economic value has low valence. o This dual role means that most employees do respond to money as a reward. o With regard to instrumentality, many employees are not sure that additional performance will lead to additional pay. They often believe that promotions are based more on seniority or personal relationships than on performance. o Instrumentality is an area where management has much opportunity for building trust and taking positive action, because it can change substantially the connection between increased performance and reward. • Behavior Modification o The two desired conditions for applying contingent rewards under behavior modification principles are shown in Figure 6.2 as situations 1 and 4. o In each case, employees can see that there is a direct connection between performance and reward (instrumentality is high). o The undesirable states are situations 2 and 3, where rewards are withheld from high performers or given to low performers (instrumentality is low). o When these conditions are allowed to occur, many employees will at least be confused about how to perform and may even be highly dissatisfied with the reward system. • Equity o There is no simple answer for employers in their attempts to create workable systems of economic rewards for increased productivity, but they must at least attempt to understand the employee’s perspective. o The employee’s approach to this complex problem is to make a rough type of cost–reward comparison, similar to the break-even analysis that is used in financial assessments. o The employee identifies and compares personal costs and rewards to determine the point at which they are approximately equal (Figure 6.3). o Employees consider all the costs of higher performance, such as effort, time, acquisition of knowledge and new skills, and mental energy that must be devoted to innovation and problem solving. o Then, they compare those costs with all possible rewards, both economic (pay, benefits, and holidays) and non-economic (status, esteem, and autonomy, although the value of these may be more difficult to assess). o The break-even point is the point at which cost and rewards are equal for a certain level of expected performance. o Employee performance tends to be near the break-even point, but general below it, for two reasons: The employee typically cannot be so precise as to pinpoint the exact break-even point. The employee tries to maintain a personally satisfactory relationship in which rewards are relatively favorable in relation to costs. Additional Considerations in the Use of Money • Extrinsic and Intrinsic Rewards o Money is essentially an extrinsic reward rather than an intrinsic one, so it is easily administered in behavior modification programs. o However, it also has all the limitations of extrinsic benefits. No matter how closely management attaches pay to performance, pay is still something that originates outside the job and is useful only away from the job. Money tends to be less immediately satisfying than intrinsic job rewards. o An important task for management is integrating extrinsic and intrinsic rewards successfully. One problem is that employees differ in the amount of intrinsic and extrinsic rewards that they want, and jobs and organizational conditions also differ. Another problem occurs when employers begin paying employees for work they previously found satisfying, since some evidence indicates that payment of an extrinsic reward decreases the intrinsic satisfaction received. In addition, it is difficult for managers to administer intrinsic rewards on a systematic basis. o These conditions suggest that what is needed is a contingency approach to rewards that considers needs of workers, type of job, organizational environment, and different rewards. • Compliance with the Law o In addition to the complexities involved in applying various motivational models and building on both extrinsic and intrinsic factors, compensation management is also complicated by the need to comply with a wide range of federal and state laws. o The most significant one is the federal Equal Pay Act of 1963, which affects employers who are engaged in interstate commerce and most employees of federal, state, and local governments. Also legislated by many states, the law demands that reward systems be designed and administered so people doing the same work receive equal pay regardless of the sex of the person holding the job. This law is designed to prevent one form of sexual discrimination, eliminating historical discrepancies in which females were sometimes paid less than males. o Another problem called comparable worth, also seeks to guarantee equal pay for equal work. This approach demands that reward systems be designed so people in different but comparable jobs—those of equal value to the employer—receive similar levels of pay. This program also has the intent of to ending historical patterns of discrimination against those people who hold sex-stereotyped jobs. • Other Factors o Many other elements confound the compensation process. In contrast to legal and psychological pressure for equity, some individuals advocate equality. They would prefer that all employees receive the same rewards, regardless of their unique skills or level of performance. Secrecy in pay programs is sometimes subject to debate. Control can also be an issue. The level of flexibility has been subject to debate. Organizational Behavior and Performance Appraisal • Many firms use some form of results-oriented planning and control systems. • Management by objectives (MBO) is a cyclical process that often consists of four-steps as a way to attain desired performance: o Objective setting—joint determination by manager and employee of appropriate levels of future employee performance for the employee, within the context of overall unit goals and resources. These objectives are often set for the next calendar or fiscal year. o Action planning—participative or even independent planning by the employee as to how to reach those objectives. Providing some autonomy to employees is invaluable. o Periodic reviews—joint assessment of progress toward objectives by manager and employee, performed informally and sometimes spontaneously. o Annual evaluation—more formal assessment of success in achieving the employee’s annual objectives coupled with a renewal of the planning cycle. • Performance appraisal plays a key role in reward systems. o It is the process of evaluating the performance of employees, sharing that information with them, and searching for ways to improve their performance. o Appraisal is necessary in order to: Allocate scarce resources in a dynamic environment Motivate and reward employees Give employees feedback about their work Maintain fair relationships within groups Coach and develop employees Comply with regulations o Criteria for compliance with equal employment opportunity laws are stringent (Figure 6.4). Appraisal Philosophy • A few decades ago, appraisal programs tended to emphasize employee traits, deficiencies, and abilities, but modern appraisal philosophy emphasizes present performance and future goals. • Modern philosophy also stresses employee participation in mutually setting goals with the supervisor and knowledge of results. • The hallmarks of modern appraisal philosophy are as follows: o Performance orientation—it is not enough for employees to put forth effort; that effort must result in the attainment of desired outcomes. o Focus on goals or objectives—employees need to have a clear idea of what they are supposed to be doing and the priorities among their tasks. o Mutual goal setting between supervisor and employee—this is the belief that people will work harder for goals or objectives that they have participated in setting. o Clarification of behavioral expectations—this is often done via a behaviorally anchored rating scale (BARS), which provides the employee and managers with concrete examples of various levels of behaviors. BARS help reduce a managers’ tendency to focus on attitudes, personality, and quirks of employees and shift the emphasis toward productive behaviors. o Extensive feedback systems—employees can fine-tune their performance if they know how they are doing in the eyes of the organization, and receive this information regularly and candidly. The Appraisal Interview • Most organizational appraisal systems require supervisors to assess employees on various aspects of their productivity (results) and work-related behaviors. • Many appraisal systems also point toward both historical performance and the individual’s potential for growth and advancement. • Some organizations (and the military) ask supervisors to write essays describing the employee’s performance. o Others recommend that they accumulate a record of critical incidents (both positive and negative). o Many firms use various types of graphic rating scales that grade employees on A-B-C-D-E or 1-2-3-4-5 systems. • Regardless of the system used, the assessment is then communicated to the employee in an appraisal interview. o This is a situation in which the supervisor: Provides feedback to the employee on past performance Discusses any problems that have arisen Invites a response o In some organizations, the employee is informed about her or his future salary. In others, the pay issue is delayed until several months later. o The appraisal interview also provides a rich opportunity to motivate the employees. • Suggested Approaches o Appraisal interviews are most likely to be successful when the appraiser: Is knowledgeable about the employee’s job Has previously set measurable performance standards Has gathered specific evidence about performance Seeks and uses inputs from other observers in the organization Sharply limits the amount of criticism to a few major items Provides support, acceptance, and praise for tasks well done Listens actively to the employee’s input and reactions Shares responsibility for outcomes and offers future assistance Allows participation in the discussion • Some organizations in both the private and public sectors, include as a formal part of the process, self-appraisal. o This is an opportunity for employees to be introspective and to offer a personal assessment of his or her accomplishments, strengths, and weaknesses. o This approach allows differences of opinion to be discussed openly and resolved. • However, problems can arise in self-appraisals. o Some poor performers tend to diminish their level of difficulties and attribute their problems to situational factors around them. o A few rate themselves too leniently or try to impress their manager by stretching the truth. • However, the limitations are offset by the fact that most employees are quite candid when asked to identify their strengths and weaknesses, and are able to accurately compare their performance with previous expectations. o In addition, self-assessments are much is less threatening to one’s self-esteem than those received from others. Performance Feedback • All appraisal systems build on the assumption that employees need feedback about their performance. • Generally, performance feedback leads to both improved performance and improved attitudes—if handled by the proper manager. • Feedback has the greatest chance for inducing a behavioral change if: o It is desired genuinely desired by the employee o It is connected to job tasks o The receiver is allowed to choose a new behavior from alternative recommendations offered • A more contemporary approach to appraisals is to combine the features of electronic monitoring of performance with electronic feedback. o These software systems allow data collection that is detailed, unobtrusive, and continuous, while also accumulating information from a variety of sources in real time. • In spite of the importance of performance feedback, many managers fail to provide enough of it on an ongoing basis. o They may feel too busy. o They may assume that employees are already aware of their performance level. o They may be reluctant to share bad news because of the negative reaction they expect it to generate. • Another possible reason for poor feedback—not having enough valid information to create a substantive conclusion—can be overcome by the use of 360-degree feedback. o This is the process of systematically gathering data on a person’s skills, abilities, and behaviors from a variety of sources—the manager, peers, subordinates, and even customers or clients. o The results can be compared across time to see if improvements have been made or compared with organizational norms to see if a person is better or worse than others. o The 360-degree feedback system works best if individuals match the data gathered with their own self-assessments, for this approach encourages candid confrontation of one’s need to change. o The product of this multidirectional appraisal approach is rich feedback (both positive and negative) that, if used properly, can aid in performance improvements. o To provide honest feedback, assurances that the data will remain confidential is required. o However, 360-degree feedback programs can be time-consuming, intimidating to recipients, and expensive (development and administration of rating forms and training in how to use them). • Praise is the provision of approval or admiration for an employee’s positive qualities or worthwhile achievements. o Many workers have a strong desire to be valued and have their contributions be acknowledged, and therefore they crave praise. o Timely, meaningful and personalized praise communicates a strong message to both the recipient and the entire organization, adds to feelings of self-esteem and self-efficacy, and builds stronger employee commitment. • Appraisal Problems o The need to perform the multiple functions in the appraisal process makes the appraisal interview difficult and even threatening for managers. o In addition, several behavioral problems are inherent in the process. It can be confrontational, because each party is trying to convince the other that her or his view is more accurate. It is typically emotional since the manager’s role calls for a critical perspective, while the employee’s desire to save face easily leads to defensiveness. It is judgmental, because the manager must evaluate the employee’s behavior and results, and this aspect places the employee in a subordinate position. It is a complex task for managers, requiring job understanding, careful observation of performance, and sensitivity to the needs of employees. o Managers sometimes fail to conduct effective appraisal interviews because they lack vital skills. Perhaps they failed to gather data systematically. Maybe they weren’t specific on the expected performance improvements in the previous appraisal. They could be reluctant to address difficult or sensitive topics, or they could fail to involve the employee in the assessment process and discussion. Some managers may have grown cynical about the probability that attitudinal or behavioral changes will occur in their employees. A few may see appraisals as a meaningless game and even intentionally distort the ratings and feedback given. o All these factors can place powerful limits on the usefulness of the appraisal interview, unless it is conducted properly or modified through the use of other inputs. • Nature of Attributions o Attribution is the process by which people interpret and assign causes for their own and others’ behavior (Figure 6.6). o The attribution process closely parallels the four basic goals of organizational behavior. A manager observes some employee’s behavior or its consequences and often describes it as functional or dysfunctional for the work unit. Seeking to understand and diagnose the behavior, the manager makes a casual attribution for it. Then, the manager tries to predict and control future employee behaviors as a product of that attribution. o The assessment of functionality results in several potential explanations for an employee’s performance on a task. It could be high or low ability, to greater or lesser effort, to a difficult or easy task, or to good or poor luck. o Ability and effort are personal attributions. They tend to be given as explanations when there is a judgment of high consistency, low distinctiveness, and low consensus. o Task difficulty and luck are situational attributions. They tend to be used as explanations when the behavior stands out as distinctive and different from that of peers, while also being inconsistent. o Attributions are subjective assessments. One important factor is whether we are evaluating our own behavior or interpreting another’s. o In general, people tend to exhibit a self-serving bias, claiming undue credit for their success and minimizing their own responsibility for problems. This tendency is seen when they overestimate the influence of internal factors (personal traits) when assessing their own successes and assign external (situational) causes for their own less successful outcomes (Figure 6.7). o The opposite pattern—a fundamental attribution bias—is often exhibited when judging others. The interpersonal comparison process is at work, with each party trying to improve his or her own relative self-image by manipulating assessments and attributions. o Attributional tendencies accent the existing role differences between managers and employees, and these biases emerge during managerial appraisals of employees. • Related Ideas o Attributions illustrate the effects of perceptual set—that is, people tend to perceive what they expect to perceive. o The relatively passive idea of perceptual set extends into the behavior of individuals when we witness the power of the self-fulfilling prophecy, or the Pygmalion effect. The self-fulfilling prophecy suggests that a manager’s expectations for an employee may cause the manager to treat the employee differently and that the employee will respond in a way that confirms the initial expectations. • Applications of Attribution o The attributional model can be easily integrated with other motivational approaches. o Although goals are most motivational when they are challenging, employees will examine them closely to determine if they are too difficult to attain. o In conjunction with the expectancy model, an employee who fails on a task may feel that the environment prevents success, and therefore, may reduce the level of future efforts. o The employee, who believes that success was the result of ability or effort, may experience a decline in motivation for the lack of a reward. o Managers benefit from greater awareness of their own attributional processes and how those processes affect their behavior toward employees. They could also seek to reinforce among the subordinates the belief that success is due to the workers’ own efforts (effort-performance expectancies) and abilities, while discouraging the employee attribution that failure is due to task difficulty or bad luck. This psychological process is known as the Galatea effect, in which high expectations by employees themselves lead to high performance. The Galatea effect stems from employee perceptions of self-efficacy on the task, as well as general self-confidence. o Both the Pygmalion effect and the Galatea effect rest on the underlying belief that people’s behaviors tend to be consistent with (someone’s) expectations (either their own or another’s). o Overly simple attributions by managers should be avoided, since employee behavior is also partly determined by the task, social context, and environment. • Other Perceptual Problems o Numerous perceptual distortions (inaccurate mental records or interpretations of events) often arise during the performance assessment process. o If perceptual distortions are not recognized, they can have seriously detrimental effects on the validity of the appraisal process. o A few of these distortions, which result in rating errors are: Halo effect—allowing an appraiser’s overall assessment of an employee (whether positive or negative) to affect the rating of specific performance factors. Central tendency—the act of avoiding the use of very high or very low ratings (even when they are legitimate), such that the vast bulk of individual ratings fall into the middle of the scale. Leniency effect—the distortion or skewing of most ratings toward the high end of the scale, either consciously (to make one’s employees, and therefore oneself look good to others), or unconsciously (to avoid conflict when giving feedback). Harshness effect—this is the opposite of leniency; it is the distortion of ratings toward the low end of the scale. Recency effect—this is the act of allowing employee behaviors or accomplishments that occurred just before the appraisal to have more impact than earlier factors during the appraisal period. First impression—this occurs when a manager initially likes (or dislikes) an employee and his or her early behavior, and then clings to that same assessment despite actual declines (or improvements) across time. • Managerial Effects o Conducting performance appraisals also has substantial impact on the appraiser. o On the positive side, appraisal system encourages the manager to do more analytical and constructive thinking about their employees. The requirement of a face-to-face interview encourages managers to be more specific about identifying each employee’s abilities, interests, and motivation. Managers often begin to perceive that each employee is truly different and must be treated that way. o Realistically, however, managers sometimes avoid giving appraisals because they do not want to disrupt an existing smooth relationship with an employee by providing negative feedback. In other cases, managers do not see any organizational rewards coming to them from the appraisal process. With no extrinsic or intrinsic incentive to perform the task, managers may neglect it entirely. o Even when appraisal interviews are capably confirmed, they still may fail to produce long-term performance changes by themselves. The appraisal acts only as a source of feedback and a psychic reward, and economic incentives are still needed to obtain employee motivation. Economic Incentive Systems Purposes and Types • Performance management stems from a belief that employee performance can be managed and improved, whether it comes about through goal setting, a streamlined organizational structure, better technology, new arrangements of working schedules, high involvement of employees, or better motivation of employees. o One component of performance management is the use of various systems of rewards and incentives to encourage better productivity. • The success of the system implicitly rests on four key pillars: o Clearly defining the desired objective o Identifying a cause-effect model to assess drivers of results that are both persistent (reliable) and predictive (valid) o Defining specific activities that employees need to engage in for success o Collecting data regularly to demonstrate the results to employees • An economic incentive system of some type can be applied to almost any job. o The basic idea of such systems is to induce a high level of individual, group, or organizational performance by making an employee’s pay contingent on one or more of those dimensions. o Additional objectives include: Facilitating recruitment and retention of good employees Stimulating desirable role behaviors such as creativity Encouraging the development of valued skills Satisfying key employee needs • The criteria for the incentives could include. o Employee output o Company profit o Cost savings o Units shipped o Level of customer service o Ratio of labor cost to total sales • Evaluation of performance may be individual or collective, and the payment may be immediate or delayed, as in a profit-sharing plan. • The discussion of economic incentives focuses on their overall nature, purpose, and behavior implications. o The programs selected for presentation are wage incentives, which are a widely used individual incentive, and profit sharing and gain sharing, which are popular group incentives. o Skill-based pay systems are increasing in popularity, especially in new industrial operations. • Incentives are combined with other parts of wage administration to make a complete pay program. Incentives Linking Pay with Performance • Several broad types of variable reward incentives link pay with performance; major ones are shown in Figure 6.8. o Perhaps the most popular measure is for the amount of output to determine pay, as illustrated by a sales commission or a piece rate. Those workers who produce more are rewarded more. Often pay is determined by a combination quantity-quality measure in order to ensure that a high quality of product or service is maintained. • Regardless of the type of incentive used, its objective is to link a portion of a worker’s pay to some measure of employee or organizational performance (output, goals, etc.). • Advantages o Incentives increase employee beliefs (instrumentality) that rewards will follow high performance. o An escalating input–outcome balance is perceived by many people to be equitable. o They provide a desirable consequence (pay) that should reinforce behavior. o Incentives are comparatively objective and verifiable. • Difficulties o Potential equity is offset by other developments that are perceived as inequities. o In behavior modification terms, certain unfavorable consequences exist alongside the favorable consequences of more pay, so they tend to reduce the potential advantages of incentive pay. o To establish a fair basis for incentive pay—one that motivates higher performance across a broad range of employees without producing undesirable side effects—is difficult. o Some incentive systems are also costly to monitor, requiring extensive record-keeping procedures. Wage Incentives • Pay for Performance o Wage incentives, which are a form of merit pay, provide more pay for more output or results, often referred to as pay for performance. o The main reason for the use of wage incentives is that they nearly always increase productivity while decreasing labor costs per unit of production. Workers under normal conditions without wage incentives have the capacity to produce more, and wage incentives are one way to induce employees to work up to their potential. o In order to be successful, a wage incentive needs to be simple enough for employees to have a strong belief that reward will follow performance. The objectives, eligibility requirements, performance criteria, and payment system all need to be established and understood by the participants. o When incentive systems operate successfully, they are evaluated favorably by participants, probably because they provide psychological as well as economic rewards. o Employees receive satisfaction from a job well done, which fulfills their achievement drive. o Some incentives may encourage cooperation between workers because of the need for employees to work together to earn incentive awards. • Difficulties o Wage incentives furnish an example of the kinds of difficulties that may develop with many incentive plans, despite their potential benefits. o Management’s job is to try to prevent or reduce the problems while increasing benefits, so that the incentive plan works more effectively. o The basic human difficulty with wage incentives of this type is that disruptions in the social system may lead to feelings of inequity and dissatisfaction. o At times these disruptions are severe enough to make incentive workers less satisfied with their pay than workers who are paid an hourly wage, even though the incentive workers are earning more. o For any pay for performance plan to be successful, it needs to be coordinated carefully with the whole operating system; this is a complex process leading to many difficulties: Wage incentives normally require establishment of performance standards. Rate setting is the process of determining the standard output for each job, which becomes the fair day’s work for the individual. Wage incentives make the supervisor’s job more complex. Supervisors must be familiar with the system so they can explain it convincingly to employees. Relationships are compounded, and supervisors are required to resolve different expectations from higher management, rate setters, workers, and unions. A thorny problem with wage incentives involves loose rates. A rate is “loose” when employees are able to reach standard output with less than reasonable levels of effort. Wage incentives may cause disharmony between incentive workers and hourly workers. The incentive workers earn more for their increased output, but the hourly workers do not. Another difficulty with wage incentives is that they may result in output restriction, by which workers limit their production and thus defeat the purpose of the incentive. This phenomenon is caused by several factors: Group insecurities that the production standard will be raised Resistance to change by the informal social group The fact that people are not comfortable always working at full capacity Profit Sharing • Nature and Merits o Profit sharing is a system that distributes to employees some portions of the profits of business, either immediately or deferred until a later date. o Basic pay rates, performance pay increases, and most other incentive systems recognize individual differences, whereas profit sharing recognizes mutual interests. Employees become interested in the economic success of their employer when they see that their own rewards are affected by it. Greater institutional teamwork tends to develop. o Small organizations in competitive industries that demand high commitment from employees in order to make technological breakthroughs or bring new products to market faster are prime candidates for profit-sharing programs. o In general, profit-sharing tends to works better for fast-growing, profitable organizations that offer opportunities for substantial employee rewards. It also works better, when general economic conditions are favorable. It is less likely to be useful in stable and declining organizations with low profit margins and intense competition. It generally is well received and understood by managers and high-level professional people, because their decisions and actions are more likely to have a significant effect on their firm’s profits. In situations where it has worked effectively, managers have: Openly shared financial reports with all levels of workers Actively trained employees to understand financial statements Provided on-site computer terminals for immediate access to relevant information whenever employees want it • Difficulties o Even in those situations where profit sharing seems appropriate, some general disadvantages exist: Profits are not directly related to an employee’s efforts on the job. Employees must wait for their reward, and this lengthy delay diminishes its impact. Since profits are somewhat unpredictable, total worker income may vary from year to year. Some union leaders have been suspicious of profit sharing. They fear it would undermine union loyalty, result in varied total earnings from company to company, and weaken their organizing campaigns. Gain Sharing • Another useful group incentive is gain-sharing, or production sharing. • A gain-sharing plan establishes a historical base period of organizational performance, measures improvements, and shares the gains with employees on some formula basis. • Examples of the performance factors measured include: o Inventory levels o Labor hours per unit of product o Usage of materials and supplies o Quality of finished goods • The idea is to pinpoint areas that are controllable by employees and then give them an incentive for identifying and implementing ideas that will result in cost savings. • Behavioral Basis o Gain-sharing plans use several fundamental ideas from organizational behavior and are much more than pay systems. They encourage employee suggestions. They provide an incentive for coordination and teamwork. They promote improved communication. o Union-management relations often improve, since the union gains status because it takes responsibility for the benefits gained. o Attitudes toward technological change improve because workers are aware that greater efficiency leads to larger bonuses. o Gain sharing broadens the understanding of employees as they see a larger picture of the system through their participation rather than confining their outlook to the narrow specialty of their job. • Contingency Factors o The success of gain sharing is contingent upon a number of key factors, such as: The moderately small size of the unit A sufficient operating history to allow the creation of standards The existence of controllable cost areas The relative stability of the business o Management must be receptive to employee participation. The organization must be willing to share the benefits of production increases with employees. The union should be favorable to such a cooperative effort. Skill-Based Pay • In contrast to salaries and wage incentives, skill-based pay (also called knowledge-based pay or multi skill pay) rewards individuals for what they know how to do. o Employees are paid for the range, depth, and types of skills in which they demonstrate capabilities. • Employees start working at a flat hourly rate and receive increases for either developing skills within their primary job or learning how to perform other jobs within their work units. o Substantial amounts of training must be made available for the system to work, and methods for fairly pricing jobs and certifying employee skill levels need to be established. o Some skill-based pay systems have supervisors evaluate the knowledge and skill of the employees; others allow work teams to assess the progress of each trainee. • Advantages o Skill-based pay systems provide strong motivation for employees to develop their work-related skills o They reinforce an employee’s sense of self-esteem. o They provide the organization with a highly flexible workforce that can fill in when someone is absent. o Since workers rotate among jobs to learn them, boredom should be reduced, at least temporarily. o Pay satisfaction should be relatively high for two reasons: The employee’s hourly rate received is often higher than the rate that would be paid for the task being performed, since only in a perfect system would all employees be constantly using their highest skills. Workers should perceive the system as equitable both in the sense of their costs and rewards being matched and in the knowledge that all employees with the same skills earn the same pay. • Disadvantages o Skill-based pay presents several disadvantages and some firms have backed away from early experiments with it: Since most employees will voluntarily learn higher-level jobs, the average hourly pay rate will be greater than normal. A substantial investment in employee training must be made, especially in the time spent coaching by supervisors and peers. Not all employees like skill-based pay because it places pressure on them to move up the skill ladder. The subsequent dissatisfaction may lead to a variety of consequences, including employee turnover. Some employees will qualify themselves for skill areas that they will be unlikely to use, causing the organization to pay them higher rates than they deserve from a performance standpoint. o Skill-based pay, like other incentive programs, works best when the organizational culture of the firm is generally supportive and trusting. The system should be understood by all employees. The employees must have realistic expectations about their prospects for higher pay levels. It must be possible for the employees to learn new skills and to have the skills promptly evaluated. There must be some limits on which skills employees can qualify for. o Under these conditions, the program is consistent with the other incentives, since it links employee pay with the potential for increased performance. Instructor Manual for Organizational Behavior: Human Behavior at Work John W. Newstrom 9780078112829, 9781259254420
