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COMPENSATION

Third Canadian Edition Milkovich, Newman, Cole

10-1 2010 McGraw Hill Ryerson

THE PAY MODEL


STRATEGIC POLICIES
ALIGNMENT

TECHNIQUES
INTERNAL STRUCTURE

STRATEGIC OBJECTIVES

COMPETITIVENESS

PAY STRUCTURE

INCENTIVE

EFFICIENCY Performance Quality Customers Stockholders Costs FAIRNESS

CONTRIBUTORS

PROGRAMS

MANAGEMENT

EVALUATION

COMPLIANCE
10-2

2010 McGraw Hill Ryerson

Employee Performance
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

10-3 2010 McGraw Hill Ryerson

Performance Measurement Relates to Compensation Strategy


Variability in Organizational Performance

Low Variability: few swings in overall corporate performance Variability and ease of measurement in individual performance Unstable, unclear, and changing objectives Cell A provide wide range of rewards beyond just money. Include significant incentive component.

High Variability: regular and large swings in overall corporate performance. Cell B provide wide range of rewards beyond just money. Emphasize base pay with low incentive portion.

Stable and easily measured

Cell C emphasize monetary rewards with large incentive component.


2010 McGraw Hill Ryerson

Cell D emphasize monetary rewards. Large base pay with low incentive portion.
10-4

What Behaviours 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?
10-5 2010 McGraw Hill Ryerson

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 behaviour

10-6 2010 McGraw Hill Ryerson

What Motivation Theories Say


Content Theories (what is important to a person)
Maslows Need Hierarchy Herzbergs 2-Factor Theory

Process Theories (the nature of the exchange)


Expectancy Theory Equity Theory Agency Theory

Reinforcement Theories (desired behaviour)


Goal Setting Reinforcement
10-7 2010 McGraw Hill Ryerson

Does Compensation Motivate Behaviour?


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?

10-8 2010 McGraw Hill Ryerson

Performance Appraisal
Process of evaluating or appraising an employees performance on the job Often plagued by errors

10-9 2010 McGraw Hill Ryerson

Common Errors in the Appraisal Process


halo error negative halo error first impression error recency error leniency error strictness error central tendency error similar-to-me error spillover error
10-10 2010 McGraw Hill Ryerson

Strategies to Better Understand and Measure Job Performance (and reduce errors)
Improve appraisal formats Select the right raters Understand how raters process information Train raters to rate more accurately
10-11 2010 McGraw Hill Ryerson

Performance Appraisal Formats


Comparative ranking alternation ranking paired comparison Attribute graphic rating scales Behavioural BARS Results/outcomes MBO
10-12 2010 McGraw Hill Ryerson

An Evaluation of Performance Appraisal Formats


CRITERIA

Format
Ranking

Employee Development

Administration

HR Research

Cost

Validity

poor

poor

average

good

average

Standard Rating Scale


BARS MBO

average

average

average

good

average

good

good

good

average

good

excellent

poor

poor

poor

excellent
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2010 McGraw Hill Ryerson

Select the Right Raters


supervisors peers self customers subordinates 360-degree feedback (may include all five of the above raters)
10-14 2010 McGraw Hill Ryerson

Information Processing Errors


Errors in rating process Errors in observation (attention) Errors in storage and recall Errors in actual evaluation
10-15 2010 McGraw Hill Ryerson

Information Processing Errors

Training Raters to Rate More Accurately


rater-error training
to reduce psychometric errors

performance dimension training


reviews dimensions to be used in rating

performance-standard training
provides frame of reference

10-16 2010 McGraw Hill Ryerson

Effective Performance Evaluation Process


1. Performance dimensions should be relevant to the organizations strategy 2. Involve employees at every stage 3. Raters need to be trained 4. Raters must be motivated to rate accurately 5. Raters should maintain a diary of employee performance 6. Raters should diagnose in advance whether problems are due to motivation, skill deficiency, or external environment
10-17 2010 McGraw Hill Ryerson

Designing a Pay-ForPerformance Plan


Efficiency
Strategy Structure Standards -Objectives -Measures -Eligibility -Funding

Equity or Fairness
Distributive justice Procedural justice

Compliance
Comply with existing laws Enhance and maintain firms reputation
10-18 2010 McGraw Hill Ryerson

Linking Pay with Performance


Merit pay grids combine 3 variables: 1. Level of performance 2. Distribution of employees within pay ranges 3. Merit budget increase percentage

10-19 2010 McGraw Hill Ryerson

Merit Pay Grid


Performance Position in Salary Range
4th quartile 3rd quartile 2nd quartile 1st quartile

Unsatisfactory
0% 0% 0% 0%

Satisfactory
1% 2% 3% 4%

Very good Excellent


2% 3% 4% 5% 3% 4% 5% 6%

10-20 2010 McGraw Hill Ryerson

Conclusion
employee performance depends on skill, knowledge, and motivation process of performance appraisal can be timeconsuming and stressful training supervisors in performance appraisal can improve the quality of appraisals designing a pay-for-performance plan involves efficiency in setting clear standards that support strategic objectives; fairness; and legislative compliance merit guidelines and promotional increases are forms of pay for performance
10-21 2010 McGraw Hill Ryerson