,~., .

Appraising and Rewarding Performance

Chapter Six '

Appraising Rewarding Performance


For twenty-four years Mark McCann worked as a bank teller in a small town. He was the senior person three tellers, and on rare occasions when both bank officers were away, : he was left in charge of the bank. In his community he was a respected citizen. • He belonged to a downtown business club and was an elder in his church. 'Recently he confided to a trusted friend, "I'm looking for another job-just , . anything to get away from that bank." Further questioning revealed that he had been quite satisfied with his job and was still satisfied except for one event. Because of a local. labor shortage, one teller's position went unfilled for three months. Finally, in desperation, the bank recruited a young, untrained college man from another city, In order to get him, the bank paid him a monthly salary $25 higher than Mark's. Mark suddenly felt bypassed and forgotten. His whole , world had come tumbling down the day he learned of the new teller's rate. He felt that his community social standing had collapsed and that his self-image was destroyed. The employee he was training was earninq $25 more each month! This case illustrates how economic rewards are important to employees and how pay relationships carry immense social value: Management has not always recognized their social importance to workers. the nineteenth and early twentieth centuries employees were presumed to want primarily money; therefore, money was believed to produce direct motivation-the more money offered, the more motivation. Roethlisberger and his followers successfully buried this idea by showing that economic rewards operated through the attitudes 'of workers in the social system to produce an indirect incentive. In this chapter we 'discuss the complex relationship between economic reward systems and organizational behavior. Mere details about these systems will be found in books about compensation and human resource management;. only their significant 'behavioral aspects are examined here. The chapter focuses first on how incentives are combined with other parts of wag'eadministration to build a complete reward system' that encourages motivation. Then we discuss money as a means of rewarding employees, motivational models applied to pay, cost-reward comparisons, and behavioral considerations in performance appraisal. Finally, we discuss incentive pay, an approach in' which each worker's pay varies in relation to employee or organizational performance.



Bll( sometimes-s-and we would venture to say oft en-an ....r. ' l' pc, torrrumce can be blamed largely,r his [or he J boss. on ,

emp I' oyee 5 poor



and Jean-Louis Barsoux

Mos, eopte want feedback "as long , or COurse,I as't . . ,.,' , /JerCC'D':::m. ., Wheri'/cdiJes they tend to like it . Wh en .

" mirrors t h' se I'f err J

. It d oesn 'h, t ey d on'r. t






TOr2 ;>-=-wardSystems Mo~.

an Economic and Social Medium of Exchanze

The K,:;je of Money in Motivational Models Beha-·:.:cal Considerations ~\ The C:a:racteristics in Performan L~ A pprars al ~ .


of Good Feedback Programs

• The F:-:.:::ess of Attribution '/ How <r:d Why to Link Pay. with Perfo=ce ~, , Uses

Profit-Sha';ing: Gain-Sharing.

and Skill-Based Pay Programs

Many types of pay are required for a complete economic reward system] Job analysis and wage surveys rate jobs, comparing one job with another to determine base pay (according to levels of responsibility and market pressure). Performance appraisal and incentives rate employees on their performance and reward their contributions. Profit sharing rates the organization in terms of its general economic performance and rewards employees as partners in it. Together these three systems-base pay, ,performance rewards, and profit sharing-are the incentive foundation of a complete .: pay program, as diagrammed in the reward pyramid in Figure 6-1. Each can Contribute something to. the employee's economic satisfaction. 'U1e three systems are complementary because each reflects a different set of factors ., in the ~otal situation. Base pay and skill-based pay motivate employees .to progress to 'jobs of-higher skills and responsibility. Performance, pay is an incentive to improve performance on the job. Profit sharing motivates workers toward teamwork to improve ,"an organization's performance.

Relating pay to objectives


Part Two


and Ret.lXlTCl ystems S

Appraising and Rewarding Performance

Chapter Six

security in this era of downsizing. The results are clear: Its sales level per employee is 2 to 3 times the manufacturing standard; its products are noted for their reliability; and the post. probationary turnover rate is less than 3 percent per year-including deaths and retirements.




(Overtime, call-in pay, shift differential, elc.)::,;<







A wide range of noneconomic programs also exists to supplement an organization's complete pay program. 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. Many 'firms provide · a wide array of other benefits for their employees, such as on-site day care facilities and wellness programs. The number of options and their costs to em·ployers have risen dramatically and are often as much as 35 to 40 percent of total compensation.

(Seniority increases, etc.)

It is evident from Figure 6- I that money is important to employees for a number of reasons. Certainly, money is valuable because of the goods and services that it will purchase. This aspect is its economic value as a medium of exchange for allocation of economic resources; however, money also is a social medium of exchange. All of us have seen its importance as a statussymbol for those who have it and can thus save it, spend it conspicuously, or give it away generously. Money has status value when it is being received and when it is being spent. It represents to employees what !lieir employer thinks of them. It is also an indication of one employee's status relative to that of other employees. It has about as many values as it has possessors. Here is an example of how people respond differently to it:


Money has social value.

iURE 6-1 reward pyramid: The eup of a complete program (read from om)

Other payments, primarily non incentive in nature, are added to the incentive foundation. Seniority pay adjustments are made to reward workers for extended service and to encourage them to remain with their employer. If an employer asks workers 'to ,~acrifice by working overtime, working on their day off, or working undesirable hours, the workers may be paid extra for the inconvenience. Other payments are given for pen ods when an employee does not work, such as vacations, holidays, jury service, and .layoffs subject to guaranteed pay. The additions to the incentive foundation of the reward pyramid have little direct incentive value because they do not increase according to improved job performance. Some of these additions may result in indirect incentive through better attitudes. Other additions, such as seniority pay, actually. may decrease worker incentive. It is clear that not one factor but many factors enter into computation of a worker's paycheck. Some of these factors are related less to incentive than they are to such broad objectives as security, equity, and social justice. An effective program of economic rewards is a balance of most of these factors, as shown in this example: Lincoln ~Iectric Company provides a classic and unique combination of compensation proto ItSemployees to cre~te a complete reward 'program, in conjunction with other disuncuve management policies. It offers piecework pay. shared profits, suggesrion.systems, year-end bonuses, an~ stock-ownership opportunities. It couples these with no paid holidays or SIckdays, mandatory overtime, no seniority system, and no definite lines of promotion. It does, however, boast a 50-year record of no layoffs, which provides a huge measure of job:

A manager gave two field sales representativesthe same increase in pay becauseeach had done a good job. One sales representative-was highly pleased with Oilsrecognition.She felt she was respected and rewarded because the raise placed her in a higher income bracket.The other sales representative was angered because he knew theraise amounted to the minimum standard avail-

able; so he considered it an insult rather than an adequate reward for the outstandingjob he felt he was doing. He felt that.he was not properly recognized, and he saw this small raise as a serious blow 10 his own esteem and self-respect. This same raise also affected the security of the two employees in a different manner.The first employee now fell she had obtained more security,but the second employee felt that his security was in jeopardy.

". Application

.of the Motivational·


A useful way to think about money as a reward is to apply it to some of the motivational models presented in Chapter 5. Achievement-oriented employees maintain' a symbolic scorecard in their minds by 'monitorin'g their total pay and comparing it with that of others. Their pay .. is a measure of their accomplishments. Money also relates to other drives, since peo.,. pIe 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 ..




Money satisfies . many drives and needs.

Needs In tlie Herzberg m~del, pay is vie~ed primarily as hygiene factor, ·.although it may have atleast short-term.motivationalvalue aswell. In theother need. based models, pay is most easily seen in its capacity to satisfy the lower-order needs . {suchas Maslow's ph~siologicaI arid _-security needs 6r Alderfer's existence' needs).


r _--.-





However, McCann's



easily. needs



it relates example

to other







in the opening

for this chapter. states that


As you will recall, Valence X Expectancy



High' High
want more; desired follow . perY better Upon There a systems is no simple answer must will

High Low High Low

Desirable Undesirable Undesirable Desirable

X Instrumentality motivator,

= l\;otivation
an employee reward in producing

Desirable and undesirable instrumentality conditions

This means

that if money must

is to act as a strong that effort trust

of It (valence),


will be successful that the monetary

Low Low

f"rmance (expectancy), and must performance (instrumentality). Valence an employee's vationat small ilarly, srnce ~mployee Increase of money personal

is not easily values, may have For example,

influenced experiences, little valence.

by management. and needs

It is contingent

for employers for increased perspective. in their attempts productivity, The employee's comparison, The employee the point consider to create approach similar identifies they all the costs workat least to this to the and are of

as well

as the macrornon. income, applies income. tends than even to an Sim-



environment. pay who cherishes value since tends

if an employee and desires needs social of status

has an independent only more a subsistence society directly to people,

of .economic

rewards a rough

but they must

The same conclusion

'attempt to understand 'complex problem . break-even . compares analysis personal equal,

the employee's

other of money money


is to make costs

type of cost-reward assessments. to determine

. Cast-reward

the direct

to people

in an affluent meanings

to decline, higher-order may its eco-

that is used in financial and rewards in Figure as shown

to satisfy value

lower-order has many

at which

needs However,

employees when

approximately the mental compare benefits, although comparison Chapter

6-3. Employees

en has

r,cck It for its social nornie

(a measure

and esteem)

higher performance, energy those and costs

such as effort. that must with and of these is si.uilar that in this with point

time. acquisition to innovation (such

of knowledge and problem

and new skills, and solving. and Then they as pay, autonomy, discussed in are (such


has low valence.

money as a reward (it has valence
With regard t<;>instrumentality, to additional deliver or personal management performers. will lead employees as 'high

This dual role means for them). many employees

that most employees are not sure that almost

do respond
additional They based taking the same are and

be devoted noneconomic may

all the possible be more

as status, model that difficult

economic esteem. This


pcrformance xcc some pay IIlore Increases

pay (the performance-reward performance, often believe than opportunity substantially yet receive that on performance. for building the They

connection). promotions trust

the value process 5, except

to assess).

input-outcome do not yet


to part of the equity analysis Both we assume costs

of motivation the employees rewards

on seniority where

relationships has much

Instrumentality.' between

I, an. area POSItive Increased Ilehavior rewards

compare themselves always valued. The break-even level of expected Performance tends point.





action, because it can change performance and reward.


is the point at which-costs as shown cannot the break-even typically

and rewards

are equal below

for a certain Employee it, for two the exact satisfactory

performance, to be near Second,

by' point point,

B on the chart.
as to pinpoint a personally

but generally


under behavior and reward rewards




conditions are shown



contingent as situations between

reasons. First, break-even

the employee

.be so precise

modification employees are withheld When (instrumentality


in Fizure


the employee

tries to maintain

I and. 4. In each .case "cr"()rm~Ct:

can see that there from these about

is a direct

connection states

is high). The undesirable high performers conditions are how to perform allowed

are situations many'



2 anti 3, where C~lJployees d""atlsfied

or given

to low performto occur, be highly .


is low).

will at least be confused With the reward system.

and may even

Consider the cases of four employees, each of whom was treated differently by the employer, lind the possible thoughts running through their minds. Shannon 'received a substantial pay mcrease for her outstanding performance ("I think I'll try even harder in 'the future since good work is obviously noticed"). Chet's productivity record mirrored Shannon's but he received only a token salary increase ("If that's all my effort is.·worth to them, going to really cut back next year"). Travis did not have a good performance record, but because' Ihc organization enjoyed a successful ycar'che was still given a healthy raise ("This is a great place to work; I can slide by and still do all right"). Pam had an equally poor record, .," her supervisor withheld any increase from her ("I guess ifI want to get ahead, I need to perform better in the. future"): In each case the reward received (when compared with '. performance) sent a strong signal-but not always the intended one=--to the employeev about the likelihood of future rewards based. on ·performance. .' "

Cost of performance in relation to reward for an employee. Employee performance level will tend to be between A' and S'.






Part Two

MmivQ[ion and Reward Systems

AP";'ai'ing and Rewarding Perfannance

Chapter Six


relationship in which rewards are relatively favorable in relation to \,m,IlLi.anLce with the Law In addition to the complexities involved in applying mance tends to be somewhere in the range of line A' B'. . '. motivational models and building on both extrinsic and intrinsic factors, comSeveral reservations must be expressed about this analysis, however. In Figure management is also complicated by the need to comply with a wide range. employee costs are shown rising more steeply near the highest level of perforrn;U;;; and state laws. The most significant one is the federal Equal Pay Act of expectation to represent the additional effort and concentration required. Further,'~ which affects employers who are engaged in interstate commerce and most shape of each employee's lines (and the location of each one's break-even point) 'wiD ~~,';';",n1r,vp,es of federal. state, and local governments. Also legislated by many states, be unique, representing the personal value placed on both costs and rewards (an demands that reward systems be designed and administered so that people illustration of individual differences in action). Also, the reward line is shown as I the same work receive equal pay regardless of the sex of the person holding straight line, such as that provided by a piece-rate system, but in most instances i: ·job. This law is designed to prevent one form of sexual discrimination, eliminatrises only in steps after-a certain amount of performance improvement occurs. If man. historical discrepancies in which females were sometimes paid less than males. Comparable worth agement can make the perceived reward line rise more steeply by means of offering program, called comparable worth, also seeks to guarantee equal pay for or emphasizing larger or different rewards, then 'he break-even point will be at a work. This approach demands that reward systems be designed so that people higher level of performance. Alternatively, if management can convince employees comparable jobs-those of equal value to the 'employer-receive similar levels of that their cost line is not really that steep, then the break-even point will also appear . pay. For example, a hospital might determine that a laboratory technician position at a higher level of performance. . requires comparable education, decision-making ability, and stress managenient skills as that of an internal auditor .and therefore might set comparable levels of cornpen->.. Many salespeople work on some form of commission plan that provides them with periodic sation for each. This program also has the intent of ending historical patterns of bonuses. In many cases, the bonuses become larger as the salesperson reaches higher levels discrimination against those people who hold sex-stereotyped jobs (such as females



of performance, under the assumption thnt Ihis will stretch [he employee to excel. However, this principle is sometimes ignored. as it was bv a distributor interviewed bv one of the .. working as registered nurses). authors. He actually reduced the level of bonuses provided as his salespeople .... reached new Other Factors Many other elements confound the compensation process. In pli.1ICCllIS of sales during the month, His explanation? .., dont want my employees gelling contrast to legal and psychological pressures for equity (matching inputs and outcomes rich off of me," he said.



in the Use of Money

Difficult to integrate

Rewards Money is essentially an extrinsic reward rather than an intrinsic one, so it is easily administered in behavior modification programs. However, it also has all the limitations of extrinsic benefits. No mailer how closely management attaches pay to performance, pay is still something that originates out· side the job and is useful only away from the job. Therefore, it tends to be less irnrnediately satisfying (han intrinsic job rewards. For example, the personal satisfaction'of a job well done is a powerful motivator for many people. Economic rewards, by contrast, cannot provide all the needed rewards for a psychologically '~ealthy person. An important task for management is-integrating extrinsic and intrinsic rewards suecessfully. One problem is that employees differ in the amount of intrinsic and extrin· sic rewards that they want, and jobs and organizational conditions also differ. Another ORGANIZATIONAL BEHAVIOR AND problem occurs when employers begin paying employees for work they previously . PERFORMANCE APPRAISAL 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 Organizations require consistent levels of high performance from their employees in administer intrinsic rewards on a systematic' basis. These conditions suggest that what order to survive in a highly competitive environment (see "What Managers Are Readis needed is a contingency approach to rewards that considers needs of workers, type ing"). Many firms use some form of results-oriented planning and control systems. of job, organizational environment, and different rewards. Special benefits, such as ;,Manageme'nt by objectives (MBO) is a cyclical process that often consists of four recognition or status, are sometimes especially valuable to employees because they steps as a way to attain desired performance: have more psychological and social meaning. The following example illustrates hall' Objective seffing-joint determination by manager and employee of appropriextrinsic and ·intrinsic rewards are often intertwined in recognition programs: ., ate levels of future performance for the employee, within the context of overThe Wells Fargo Bank developed a program to recognize and reinforce the behavior pf all unit 'goals and resources. These objectives are often set for the next calenindividuals who made exceptional contributions to"customer service." Although the . . dar year. included both cash rewards and a wide array of other prize selections of substantial Action planning:_'_participative or even independent planning by the employee as its peak experience revolved· around a recognition dinner and celebration for the to' how to reach those objectives. Providing some autonomy to employees is winners with the top company executives at a classy San Francisco restaurant.

Extrinsic and Intrinsic

in comparison with those of others), some individuals advocate equality. They would prefer that all employees receive the same rewards, regardless of their unique skills orlevel of performance. Clearly, equity and equality are totally different bases for . comparing compensation. Secrecy in pay programs is sometimes subject to debate. Some orzanizations suard all information about compensation from employees; otho ., ers freely share it in the belief that openness is preferable. Control can also be an ;. issue. Should reward systems be (leslgned by staff experts, or should employees be allowed to participate in their creation and governance? The level of flexibility has : been subject to debate. Even though some clothing products claim "one size fits ali," ...it may not be reasonable to expect that all dimensions of compensation will meet the .; needs of all employees. Clearly, the administration of organizational. reward. systems 'involves many issues, and unique answers will. be provided by different firms.

Appraising and Reu'(lrdin,~ Per!oTnwJlce Chapter




f Pfeffer argues that most companies have viewed em'yees as a cost item and not as the unique competitive ienee that they are or can be. He suggests that people will irk harder and smarter and demonstrate increased comtrnent and responsibility if they- have control over their Jrk, have an opportunity to apply their knowledge for the Janization's benefit. and are involved in cooperative relanships with their manager.s.· Seven high-performance magement practices are essential elements for success: Provision of employment security Selective hiring of competent people

3. Use of self-managed teams 4. Making high compensation formance contingent on

performance appraisal system

.an organizational necessity
based on well-defined. objective criteria based on careful job analysis only job-related criteria . supported by adequate studies applied by trained, qualified raters Is applied objectively throughout the oryanization 'Can be shown to be nondiscriminatory as defined by law

5. Making continual 'investments in employees throug'h training ~' 6. Reducing status differences across organizational levels' 7. Providing power to employees through information sharing
Source: Jeffrey Pfeffer. The Hunmn Eonasion: Building Profits bJ Pnning PIon/lIe First. Boston: Harvard Business School. 1998.

Necessary criteria to ensure equal employment opportunity in performance.appraisal


invaluable; they are more likely committed to the plan's success. 3. Periodic rel'ie"'s-joint assessrneut and employee. perfor.i.ed informally

to use their inuenuitv. -.

as wel] as feel more among their tasks; as the saying goes. "If you know where you want to go, you are more likely to get there." 3. Mutual goal selling between silpervisor and employee-this is the belief that people will work harder [or goals or objectives that they have participated II) seuuig. Arnons their desires are to perform a worthwhile task, share Ina group effort. share in seuing their objectives, share in the rewards of their efforts. and COIItinue personal growth. The (Theory Y) assumption is that people want to s:'!lSly some of their needs .through work and that they will do so if management will provide them with a supportive environment. 4. Clarification of behavioral expec({lriolis-lilis is often done via a ""h{/I'iorallv anchored raring scale (BARS), which provides the employee and ma~ager with concrete examples of various levels 'of behaviors. Brief descriptions ot outstanding, very good, acceptable, below average, and unacceptable behaviors are specified for each major dimension of a job. thus cueing the employee In advan~e regarding the organization's expectations. BARS help reduce" manager-s tendency to focus on altitudes, personality, and quirks of an employee and shift the emphasis toward productive behaviors. / .. . 5: Extensive feedback sysrems-employees can fine-tune their pcrformance better If they know how they are doing in the eyes of the orgaruzauon.
MIIII/ol gool setting

of progress toward objectives by manager and sometimes <poruaneouslv. 4. Annua! el'{i//(1I!i0I1-1110re formal asscsvmen: or -,ucccss in achicvins {he cmployees annual objectives. coupled with a renewal of the plannin~ cycle, Some M BO systems also usc performance appraisal to tie rewards for employees to the level 01' results attained. easons for . nployee appraisal Performance appraisal plays a key role in reward svsterns, It is the process of evaluating the performance 01' employees, ,;haring that inforrn.nion with them, and searching for ways to improve their performance .. -vpprnisal is necessary in ol:der 10 (I) allocate resources in a dynamic environment. (2) motivate and reward ernployees.. (3) give employees feedback about their work, (-1) maintain fair relationships within groups, (5) coach and develop employees. and (6) comply with regulations. It is also a formal opportunity to do what should be done much more frequently in organizations-express appreciation for employee contriburions.f Appraisal systems. therefore, are necessary for proper management and. for employee development. . The social environment surrounding ,)rganiza"tlon's has changed considerably in -recent years. Federal and state laws have added to the complexity and difficulty of appraisal plans. For example, as shown in Figure 6--1. criteria for compliance witb equal. employment opportunity laws are stringent. :--'1anagement needs to desian and operate its appraisal systems carefully in order to comply with these laws. -



The Appraisal


'erformance mphasis and goals


A generation ago, appraisal programs tended to emphasize employee traits, deficiencies, and abilities, but modern appraisal philosophy emphasizes present performance and future goals. Modern philosophy 'also ,;tresses employee participation in mutually setting goals with the supervisor and knowledge of results. Thus the. hallmarks of modern appraisal philosophy are as follows: ' 1. Performance orientation=-u is not enough for employees to put forth effort; t1;ai. effort must result in the attainment of desired outcomes (products or services). ,. 2. Focus on goals or objecrives-as the discussion of MBO shows, employees need':' to have a clear idea of what they are supposed to be doing and the priorities.:

Most organizational appraisal systems require supervisors to assess employees on various aspects of their productivity (results), behavior, or personal trans. Examples of these three dimensions include quality of work and quantity of output, attendance and initiative, and general attitude. Many appraisal systems also point toward both historical performance and the. individual's potential for growth and advancement. The . actual forms and procedures used for assessing this information vary Widely. Some organizations ask supervisors to write essays describing the employee's performance: Others recommend that they accumulate a record of critical incidents (both posiuve and negative}; 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. Resardless of the system used, the assessment is then communicated to the ·.:emplo"yee in an appraisal interview. This is a session in which the supervisor

Part Two

Mocivacion and Reword Systems

Apt>raising'and Rewarding Per{annanre

Chapter Six

provides feedback to the employee on past performance, discusses any problems' that have arisen, and invites a response. Then the two parties. set objectives for the' next time period, and the employee is informed about her or his future salary. The' appraisal interview also provides a rich opportunity to motivate the employeeUsing the Herzberg model, for example, might encourage a manager to explore' which maintenance factors currently create dissatisfaction for an employee. If those can be resolved, then the discussion can turn toward ways to build into the job more opportunities for achievement, responsibility, and' challenge. Suggested Approaches Extensive research has been done on the appraisal process and the characteristics of the most effective ones. Appraisal interviews are most likely to be successful when the appraiser • Is knowledgeable • Has' previously • Has gathered about the employee's job standards about performance in the organization can set measurable performance specific evidence frequently

• Seeks and uses inputs from other observers • Sharply limits the amount of criticism focus their improvement efforts) Provides support. acceptance. Listens actively to the employee's Shares responsibility Allows participation for outcomes

to a few major items (so the employees .

'lI1d praise for tasks well clone input and reactions and offers future assistance

in the discussion


The last point has been extended even further.Tn recent approaches to the performance appraisal interview. Some organizations in both the private and public sectors include, as a formal part of the process, self-appraisal. This is an opportunity for the employee to.be introspective and to offer a personal assessment of his or her accornplishments, strengths, and weaknesses. Questions directed to the employee' might include "What' has gore extremely well for you during this period?" "What kinds of problems have you had?" "What ideas do you have for improving your contributions?" Employee responses to these questions are then compared with the • ~.~pervisol '., ev ... ...uion of the employee. This approach allows differences of opinion to' be discussed openly and resolved. Problems can arise in self-appraisals, however." Some poor performers tend to diminish their level of difficulties and attribute their problems to situational factors around them, and a few will rate themselves too leniently. These limitations, however, are offset by the fact that most employees are quite candid when asked to identify . their strengths and weaknesses, and are able to compare their performance with previous expectations. In addition, self-assessmer..s are much less threatenins to one's self-esteem than are those received from others. Therefore, self-appraisals provide a more fertile soil for growth and change.

Generally, performance feedback leads to both improved performance and attitudes-if handled properly by the manager. ing feedback is a challenging task for managers, however. Feedback is more to be accepted and cause some improvement when it .is properly presented (see ines for effective feedback in Figure 6-5). In general, it should focus on job behaviors, rely on objective data rather than subjective opinions and . ' be well-timed by being given scon after a critical event, and be checked 'for understanding by the receiver. Overall, it bas the greatest chance for inducing a behavioral change if it is genuinely desired by the employee and is connected to job tasks and if the receiver is allowed to choose a new behavior from alternative recommendations offered. Iii spite of the importance of performance feedback, many managers fail to provide . enough of it on an ongoing basis. They may feel too busy, they may assume that employees are already aware of their performance level, or they may be reluctant to share bad news because of the negative reaction they expect it to generate. Another possible reason-not having enough valid information to create a substantive conc.usion-i-can be overcome by the fast-growing practice of 360-degrce feedback (also known as multir.uer reedbuck or full-circle feedback). This is' the process of systematically gathering data on a person's skills, abilities, and behaviors from a variety of sources-s-tbe manager. peers, subordinates, and even customers or clients.'? These perspectives are examined to see where problems exist in the eyes of 'one or more groups. The results can :11,0 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. The ~60-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 for change. The product of this multidirectional appraisal approach is nch feedback (both positive and negative) that, if used properly, can aid in performance improvements. It requires the cooperation of others .to provide honest feedback, assurances that the data will remain confidential, and skilled facilitators to help recipients understand the complex information and develop





Guidelines for effective performance fee2back

Relate it to the

for unders1anding.


Feedback Programs

All appraisal systems build on the assumption that employees need feedback about their performance (a basic element of the communication model described in Chapter 3): Feedback helps them know what to do and how well they are meeting their goals: i( shows that others are interested in what they are doing. Assuming that performance. is satisfactory, feedback enhances an employee's self-image and feeling 'of co'm~;: '

Determine ~ ij is



Part Two


and Reward Sys[c~'ms

Ap{Yraising and Rewarding Per{rmnance

Chapter Six

useful 4


plans for improvement. intimidating of rating forms




programs (dcvelopruent


Observation/description .Understanding Prediction/control 145

time-consuming, administration

to the recipients, and expensive and training in how to use them),


The role of a skilled facilitator is vital to the success of 360-degree feedback at AT&T, where a trained staff person from human resources often fills that role," The facilitalo~ there consolidate the inputs, identify the points Of consensus, heip the appraisee convert tll< natural focus on negative feedbac'; into a discussion of usinz strenzths to overcome flaws and aiel in developing concrete action plans for creating ne~essar/' changes. The presenc~ of a facilitator also acts as a buffer, preventing the manager from attacking those who provided honest inputs.

process agers.


The need

to perform difficult behavioral party views

the multiple and even problems

functions threatening inherent

in the appraisal for many man. It

on most other tasks in the person's to which the person's The combination .for an employee's to greater peers behave

job. The third element in a similar fashion. results

is its cOl1se'nsus-the potential





the appraisal

interview each

In addition,

there are several because (These

in the process': the other tendencies, face easily subordinate requiring arise

of these three assessments performance to a difficult

in several


The process of making and using attributions

can be confrontational, his view we discuss calls

is trying are distorted

to convince

that her or

on a task. It could or an easy

be attributed

to high or low ability, when there Task difwhen

is more accurate.

by attributional desire to save

role leads posijob

or lesser effort,

task, or to -good or poor luck. Abilas explanations

later in this chapter.) perspective:

It is typically while because places

emotional, since

the manager's

ity and effort are personal attributions; is a judgment the behavior inconsistent. of high consistency stands ficulty and luck are situationot Following

they tend to be given

Personal versus

for a critical and results,

the employee's the manager the employee

and low distinctiveness attributions; and different

and low consensus.

to defensiveness. behavior tion, Further,

It is judgmental,
and this aspect performance careful

must evaluate in a clearly sensitivity issues for managers, the that

the employee's

they tend to be used as explanations from that of peers, process can be used:


out as distinctive is an example

while also being,


are complex of performance, upon

tasks and

of how the attribution



to the needs of spontathey They cynical

employees. Managers are also called neously within 'the discussion itself. Managers specific could about back sometimes Perhaps fail to conduct they failed performance difficult lack vital skills, be reluctant the probability given. All these

to handle

effective improvementsIn


interviews Maybe

because appraisal. grown

to gather topics,

data systematically. or they could

they weren't the employee

on the expected precess

the previous fail to involve may distort have will occur. on the

to address

After each professional football game, the head coach sits down with the assistant coaches grades each player's performance. Did the athlete play better or worse than normal? Did tile' player perform better or worse than teammates" Did the player excel at some tasks and nul at others? After appraising the athlete's conduct, the coach must also determine whether the strong or weak performance was the result of superior or inferior ability, greater or lesser effort. an experienced or inexperienced opponent, or good or bad luck (attributions). Then the coach will likely give some praise and constructive feedback.to the players,

in the' assessment appraisals

and discussion. game can and even place


managers changes limits

Since choice , behavior problems. factors

attributions of explanations.

are subjective another'S. credit is seen when

assessments, factor In general, when they their

we are interested is whether people tend

in what affects a self-serving


that attitudinal factors

or behavioral powerful properly

A few may see and feedof the the use of

One important for success assessing

we are evaluating to exhibit own and often the their

our own

as a meaningless unless


the ratings usefulness through

or interpreting undue This (personal causes tendency traits) pattern-a People assume

Self-serving bios

bias, claiming

and minimizing overestimate own outcomes

responsibility assign 6-7). exhibited 'lacked

appraisal interview, other inputs.

it is conducted

or modified


of internal external when the Fundamentol


successes bias-is enough if they and


for their own less successful fundamental tend to attribute failed each that others with others'



and assign Heider The behavior employee's functional manager

of Attributions
literature. causes

Attribution Attribution


has provided It stems Kelley basic 6-6,

an intriguing by which from goals people


The opposite judging tasks, others. and, they

to try hard ability party

tion 10 the appraisal

is the process behavior by Harold the four in Figure and often

·{.l/isal explanations.


to good or simply failed.

luck or easy

attribution bias

for their Own and others' and refined parallels process in Chapter closely

the work of Fritz of organizational

and has been expanded attribution outlined behavior makes

and others. tJ

appropriate comparison relative. tendencies these biases

personal process accent self-image emerge

characteristics is at work, by manipulating during

or overall

The interpersonal his or her own Attributional and ' that is, people sees the .. Percepto 2.' Perceptual


to improve attributions. of employees. set; managers

1.. As shown

a manager

observes some,
or dysthe the behavior.

assessments between managerial

or its consequences unit. Seeking attribution, (influence)

describes it as functional
and diagnose behaviors for it. Then

the existing clearly Attributions what

role differences

and employees,

for the work a causal

to understand (tentative future employee



the manager of that

tries to predict attribution. Three behavior. basic

and control factors pattern)

as a product




the effects

of perceptual glass


tend to perceive are assessed or unstable as attributions (an infrequent are made the behavior occurrence), performance regarding is relatively The second anindividual's stable across

they expect

to perceive.


how an optimist as half empty?) discussed

glass as half full, whereas tual sets sometimes Managers, therefore, cause " ..see. In this way, perceptual

the pessimist us to misread

sees thesame a situation of theirown

The first is its consislency-whether the person's

.and see, only perceptual

what' we expect in Chapter

time (a similar


sets are much' like' the paradigms

is its dislinctiveness-whether

is different

on this task tha~;,

need to be aware

sets' and 'the effectsof

Part Two

'Mouccnon and Reward Systems

Appra~sjng and RewaTding


Chapter Six



Different attributions for an employee's behavior

"~);'~;~~d~~( characteristics ,~,_em •.~,
. "";.~"*,~"('\;.

-':'{,atJiHty6rstrcing effort) <.';\,'" t, . .:'.Situational factors (easy task.' . or good luck) Situational factors (hard or bad luck) Personal characteristics (low' ability or poor effort)

Employee'~' Failure-~ 'Manager ,-----

often' ~aught in a.1 b~tWeeri' ~onflicting'·press~r~s. With no apparent solution.' For example, considera behaviorally aware manager who accepts . to .provide" performance 'jeedback ttl employees. While .practkinq the guidefor effective feedbeck, however, the manager discovers that employees often expea profound. face-saving issue-they hear that their actual performance .is not as 'as ttiey' had perceived it to be.' upon hearing this, some become sto,c and quret, cry, and a few become overtly' angry, hostile, and verbally abusive. . reflecting on this situation, the manager' poses a general question: "Is it ethimanagers to share their honest perceptions of employee performance, at the fisk ~urting them?" What do you think? .

those The


on their perceptual


of others.


they their


to be aware better,

of their ., response believes to an employee's task was that success successful and withhold the result performance. appropriate of ability A manager recognition. may assume The it was due who in a decline processes own the attribuby the to luck or an easy employee.



sets in order the power prophecy the manager

to understand

workers prophecy,

relatively The


idea of perceptual suggests to treat

set extends that the

into the behavior

of individfor an that the


uals effect.


we witness self-fulfilling will cause will respond to perceive to demonstrate

of the self-fulfilling

or the Pygmalion expectations and

or effort.

may experience

a manager's employee

employee employee not only


motivation for the lack of a reward. Managers might benefit from greater and how ~hose processes to reinforce efforts employee task, social among attribution context, (effort-performance be avoided, affect subordinates that failure since


of their own auributional employees. is due while partly I. also has

in a way that confirms that competence competence but

the initial also This

expectations. the supervisor supervisor shows

"I For example,
is more likely for the the per-

their behavior the belief expectancies) employee

toward and behavior

They could also sec': to the workers' discouraging determined

if a supervisor employee ceptual

is told that a new employee

is competent, The

that success abilities,

to provide example


on tile job. ability.

then attributes how important

is due to task difficulty as outlined

or bad luck. Simple

task performanceto tendencies discussed

the employee's earlier.

tions should

is also in Chapter

set and the self-fulfilling


can be .n reversing

the natural


and environment,

impact managers requirement idenu.ying to perceive example, edgeable,


Conducti~g··p-erformance On the positive interview abilities, side, and constructive encourages interests, different need,

appraisals a fO;'mal appraisal thinking managers and and avoid must when has giving about

substantial encourages The about

One supervisor's experience shows the roles that perceptual sets and self-fulfilling expectations can play. One of his machinists strongly wanted three days of vacation in order to go deer hunting. Since the departrnent W3S so rushed that it was even working overtime e\'ery Saturday, the supervisor would not give him time off. The machinist also had a record of tardiness. One morning he arrived thirty minutes late. , The harassed supervisor, without giving much thought to his words, threatened the employee ~ith three days off without pay if he was tardy again that month. 'Guess who was tardy the next morning? You arc correct. The machinist perceived the threat 'as an opportunity to go on his desired deer hunt. The supervisor saw no other choice than to give the machinist a disciplinary penalty of three days off without pay. In this way, the management policies were applied and :he machinist reached his goal of going deer hunting, but the needed work was not done on schedule.

on the appraiser.


to do more analytical of a face-to-face each employee's that each greater has participation a strong

their employees. Managers

to be more specific be treated demonstrated appraisals

and motivation.

often begin that way. For is knowlacceptable because they


is truly

may be more appropriate independence

an employee

performance in the past. Realistically, however, do not want ing negative ees, who agers simply process. agers to disrupt feedback. require there


sometimes smooth difficult monitoring

an existing more

relationship and

with an employee reviews. In other

by providemploycases, manman-

It is particularly frequent

to deal. with low-performing coming incentive to them

Applications of Attribution
our earlier result discussion high (see Chapter people level achievement-oriented of their

may Where

The attributional 5) of other claim that Although may

model their

can be easily approaches.



do not see any organizational is no extrinsic it entirely,


from the appraisal the task,

motivational goals are most

For example, are the direct when they if they are tOO

or intrinsic

to perform

accomplishments motivational to determine who may

of effort.

may neglect

as in this example:

are challenging, employees difficult to attain. In conjunction feel future that effort. Users with the environment

will examine

them closely . and,

the expectancy prevents

model, success

an employee therefore,. are cautioned

fails on a task may. reduce the level carefully


of behavior






Gordy, an employee in a utility, reported that for many years his supervisor would simply hand him a folded slip of paper with his next year's salary written on it. This was the sum total of his "performance appraisal"! Only recently did the utility become concerned about effective ofoaniz.ationai behavior practices and begin training and rewarding ItS managers for appraising employees. Now Gordy enjoys the benefits of open discussion of his performance and mutual goal setting.


--_._ ....

----_.- ---"-'--~~-"--'-"""'-

- -- _ ....:-......__"'--_ .. _,
t Two

and Reward Systems

Apf1Taising and Rewarding Pe.r{omumce

Chapter Six



Even when appraisal interviews are capably conducted by managers. it is whether they will produce long-term performance changes by themselves. The a acts only as a source of feedback and a psychic reward, and economic incentives still needed to obtain employee motivation. Various economic incentive approaches described next; along with assessments of their advantages and disadvantages.


:~, '


. ':'!'



";': •. ' '. :;";'.:'.:r'



Piece rate;·sales commission Piece rate on Iy for pieces meeting the . standard; commission only. for sales that are without bad debts

Major incentive measures to link pay with performance




,.. iII·:'!t

I, t I~




in reaching goals'

and Types /

Bonus for s~liinganestabl;~~ed number of items during a predetermineq time span .~Profit sharing Gain sharing . Skill-based pay


An economic incentive system of some type can be applied to almost any job. 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. Additional objectives include making it easier to recruit and retain good employees, stimulating desirable role behaviors such as creativity. encouraging the development of valued skills, and satisfying key employee needs. The criteria for these incentives could include employee output, company profit, cost savings, units shipped, level of customer service, or the 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 profu-sl-ring pian. Our discussion of economic incentives focuses 011 their overall nature. purpose, and behavior implications. We do not auernpt to discuss all types ofincentives or all details about the,". The ones selected for presentation are wagc incentives. which are a widely used individual incentive, and profit sharing and gain sharing. which are popular group incentives. Skill-based pay systems are increasing in popularity. especially in new industrial operaricns.Readers are urged to review Figure 6-1 to see how incentives are combined with other parts of wage administration to make a complete pay program. Although most of our discussion is on long-run incentive programs, temporary incentives also. have a role to play in compensation. Sometimes they provide just the. right amount of added motivation to cause a desired increase in performance. Here is an example:
A manufacturer of specialized business equipment experienced a substantial decline in sales for one of its models. The decline IVOS so severe that it had scheduled" one-month closing of this model's production line during the Christmas season. At the sales manager"$ suggestion. the company offered to give its salespeople a new $10 bill for each item of this model sold during the month of December. The offer was made in the context of an exira Christmas bonus opportunity. The response was so great that the production line was kept opernting, and some salespeople earned over 54,000 in bonus money paid in $10 bills. A $4.000 bonus amounted to to to 20 percent of a typical salesperson's annual income

) " . I !j::il
~ ',I

Ii I::


· reach established goals. For example. a bonus might be given for selling fifteen automobiles during a month. but there would be no bonus for selling only fourteen. Rewards also may be gi\'en on the basis of profit success, as In a profit-sharing pian. Another measure is to link pay with cost efficiency. An example is galn sharing, discussed later in this chapter. Skill-based p.ay systems rewald individuals for their capabilities. Regardless of the type of incentive that rs used. Its objec'. tive is to link a portion of a worker's pay to some measure of employee or Olganizational performance.



Incentives provide several potential employee aclvantages. A. major advantage is that they increase elllpiuyee_b_e~:.ff(instrumentality) that reward \I ill Jol· low high pelionnance. If we assume that money has valence .to an employee, then motivation should increase. . . Incentives also appear favorable from the point of view of equity theory. Those who perform better are rewarded more. This kind of Input-outcome balance .'S perceived by many people to be equitable. Further, If more pay is a valued reward, then incentive systems are favorable from the point of view of behavior modIficatIon. They provide a desirable consequence (pay) that should reinforce behaVior. Rewards,such as sales commissions, often are rather immediate and frequent, which tS consistent with the philosophy of behav ior modificauon. .... r Another advantage from the employee's point of view IS that mcenuv es .are · comparatively objective. They can be computed from the ~umber of pieces, dollars, or similar objective criteria. Compared with a supervisor s subjecuve perforti1<lnce ratings, the objective approach tends to have higher acceptance by employees. Improved motivation



Linking Pay with Performance


Difficulties With so man)' favorable conditions supporting incentives, it seems ~hat There are several broad types of incentives that link pay with performance. Major ones' workers would welcome almost any incentive because of-the rewards It could bnng. are shown in Figure 6-8. Perhaps the most popular measure is for the amount of output However there arc difficulties that tend to offset S0l11e of the advantages. Potential to detemnine pay, as illustrated by a sales commission or a piece rate, It provides a simequity is' offset by other developments that are perceived as .inequities. In behavior ple, direct connection between performance and reward. Those workers who produce terms, certain unfavorable consequences exist alongside the favorable more are rewarded more. Often pay is determined by a combination quantity-quality . ,~. modification of more pay, so they tend to reduce the potential advantages of incenmeasure in order to ensure that a high quality' of product or .service is maintained. For: . ._ consequences example, a piece rate usually is paid for only those pieces that meet quality standards. '. -!- tive pay. When workers make their cost-reward analyses, they fin~ tnat.costs have nsen alone with rewards The result may be that the break-even point has changed very In other instances an incentive bonus is given only to those employees who :: o· .


______ -----~.----r'~~...





Part Two


and Reward Systems

APtrraising and ReWfirdinl'.Per{ormance

chapter Six

;0 Evaluate pros and cons.

little, if at all. The extra problems caused by the incentive may offset much of the nomic gain expected. For example; new employees may have difficulty leaming . system; other employees with declining energy may experience a decrease in total pay;:'. and some unions may resist the incentive idea. ~.~ The organization, too, can experience problems. It is difficult to establish a basis for incentive pay-one that motivates higher performance across a broad range of employees without producing undesirable side effects. Some incentive systems are also costly to monitor, requiring extensive record-keeping procedures. The key thought is that incentive systems produce both positive and negative employee consequences, as shown in Figure 6-9. Both must be evaluated in determining the desirability of an incentive system. Economic consequences are likely to be positive, but the direction of psychological and social consequences is less certain.

even feel they are making a contribution to society by helping in the attempt to aproductivity leadership position among nations. Some incentives may encourcooperation between workers because of the need for employees to work together earn incentive awards. . One of the authors visited a small assembly plant in rural Illinois. After other workers .performed a variety of preliminary tasks, two-person crews on an incentive system installed a
variety of hardware-hinges. braces. locks. .decorative trim, and handles-on large pieces of



.. furniture. The work speed of the crew that was observed was almost unbelievable, as the work'ers seemed to be flying around their workstation. Their productive interaction was almost like a ballet-it was perfectly choreographed and wordlessly performed. They always seemed to know not only their individual assignrnenl but what their partner would be doing. with only '~n occasional nod of the head needed as a signal between them, They had been given a fair

Wage Incentives
More Pay for More Production Basically. wage ince·,:'·,cs ;)(ovide more pay for more production. The main reason for use of wage incentives is clear: They nearly always increase productivity while decreasinu unit labor costs. Workers under normal conditions without wage incentives have th-e capacity to produce more, and wage incentives are one way to release that potential. The increased productivity often is substantial.
One example is Nucor,

piece rate, they had the necessary skills and tools, and they both wanted to earn higher pay. As a result they worked furiously for a couple of hours at a time, took breaks whenever they
'needed them, and still earned more incentive pay than any other team in the faCIO!)'.

builder and operator of steel-producing rninirnills. It pays weekly

bonuses. based on a measure of acceptable production. Groups typically receive a bonus more than 100 percent above base pay. Turnover rates. after the stan-up period, are so small
that the company does not even bother measuring them,IS

Difficulties Production wage incentives furnish an example of the kinds of difficulties that may develop with many incentive plans, despite their potential benefits. Management's job is to try to prevent or reduce th(( problems while increasing benefits, so that the incentive plan works more effectively. The basic human difficulty with wage incentives of this type is that disruptions in the social system may IC:1C1 to feelings of inequity and dissatisfaction. At times these disruptions arc 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, ' . '

Disruption ofsocial systems

Criteria for incentive systems

In order to be successful, a wageincentive needs to be simple enough for employees to have a strong belief that reward will follow performance. If the plan is so complex that workers have difficulty relating performance to reward, then higher motivation is. less likely to develop. The objectives, eligibility requirements, performance criteria, and payment system all need to be established and understood by the participants. When incentive systems operate successfully, they are evaluated favorably by par- . ticiparus, probably because they provide psychological as well as economic rewards. Employees receive satisfaction from a job well done, which fulfills their achievement drive. Their self-image may improve because of greater feelings of competence. They·

For any wage incentive plan to be successful, it needs to be coordinated carefully . with the whole operating system. If there are long periods when employees must wait for work to arrive at their workplace. then the incentive loses its punch. If the incentive is likely to replace workers, then management needs to plan for their use elsewhere so that employee security Is-i,o"t threatened. If work methods are erratic, then they must be standardized so that a fair rate of reward can be established. This is a complex process leading to many difficulties. Rate setting 1. Wage incentives normally require establish·ment 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 operator. Rate setters are often resented not only because subjective judgment is involved but also because they are believed to be a cause of change and more difficult standards. . 2. Wage incentives may make the supervisor's job more complex. Supervisors must be familiar with the system, so that they can explain it to employees. Paperwork increases, resulting in greater chance of error and more employee dissatisfaction. Relationships are compounded, and supervisors are required to resolve different expectations from higher management, rate setters, workers, and unions. 3. A thorny problem with production wage incentives involves loose rates. A rate is "loose" when employees are able to reach standard output with less than normal effort. When management adjusts the rate to a higher standard, employees predictably experience a feeling of inequity. 4. Wage incentives may cause disharmony between incentive workers, and hourly workers. When the two groups perform work in a sequence, hourly workers may feel discriminated against because they earn ·less. If the incentive workers increase output, hourly workers farther along the process must work faster to prevent a



Idvantages and isadvantaqes of icentives linking pay /ith performance

• Cost (to both employer • System complexity Declining or variable • Union resistance • Delay in receipt • Rigidity of system. • Narrowness pay

and employee)


Loose rates

of performance




~~. . .


Part Two

Motiva(ion and Reward Systems

ApfJTaising and RewaTding Perfarmance

Chapter Six


Output restrictions

bottleneck. The incentive, workers earn more for their increased output, but the' hourly workers do not. Hourly workers who precede incentive workers in the production process can, on occasion take it easy and produce less with no cut in pay. But the incentive worker's income is cut when less work is available. The same problem OCCUfSif, an hourly worker is absent and reduces the flow of material to incentive work- . ers, Conflicts of this type are so difficult to resolve that it is best for management not, to mix the two groups in any closely integrated .production sequence. 5. Another difficulty with wage incentives is that they may resultin 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 organization. and the fact that people are not comfortable always working at full

~fOI:lmlticmwhenever employees want it. (You may wish to review the discussion management in "What Managers Are Reading" in Chapter 3.) Even in those situations disadvantages exist: where profit sharing seems appropriate,




'Profits are not directly related to an employee's ditions may nullify an employee's hard work.

effort on the job. Poor market con-

Indirect relationship Delay Lack of predictability Union skepticism


"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 workers may prefer the security of a more stable wage or , salary.



'4. Some union leaders have historically been suspicious of profit sharing. They fear that it would undermine union loyalty, result in varied total earnings from company to company, and weaken their organizing campaigns. More progressive unions have, however, welcomed the opportunity for' their members to share in cor'. porate profits. The social aspects of profit sharing. are just as significant as its economic and tax", aspects, if not more so. For profit ~haring to develop a genuine community of interest, workers need to understand how it works and feel a sense of fairness in its provisions. If they do not. they may recent it. as in the following situation: Marvin Schmidt. an idealistic Owner of a ;inall retail store, employed twenty-live people. , He had worked hard to build his meager investment into a prosperous store in the shari period of seven years, Much of his success resulted from loyal. cooperative employees who
had worked for him several years. He recognized their contributions and wanted

Mutual interest is emphasized,

Nature and Merits Profit sharing is a system that distributes to employees some portion of the! profits of business, either immediately (in the form of cash bonuses) or deferred until a later date (held in trust in the form of employee-owned shares). The growth of profit sharing has been encouraged by federal tax laws that allow employee income taxes to be deferred on funds placed in profit-sharing pension plans. Basic pay rates, performance pay increases, and most other incentive systems recognize i;ldividual c.:;rferences, 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, Smaller organizations in competitive industries thai 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, If the firms are successful, the rewards are great. 111is possibility builds strong motivation among employees to see the big picture and allows the organization to forge ahead of its competitors. The Andersen Corporation is a billion-dollar company that makes various types of windows for the housing industry, The company began a profit-sharing plan in 1914, and it has grown
.......... with the success of the company ever since then. In a recent year, the company distributed


them extra rewards. but he always had been short of capital. Finally. he had a very prosperous year. so he decided to begin a cash profit-sharing , plan to be given as a bonus at Christmas, The generous bonus amounted 10 30 percent
of each person's pay for the Y!!.3(._)t.was announced and given as a surprise with the

weekly payclieck immediately preceding Christmas, Not one employee thanked him, and most of his employees were cool and uncooperative Ihere~fler. He eventually learned that they felt if he could give that large a bonus. he must have been unjustly exploiting them for years. even though they admitted they had been receiving more than the prevailing wage.

over $1 DO million to its full-time employees through its profit-sharing plan, This bonus amounted to approximately forty-three weeks of extra compensation for each employee.l'' In general, profit sharing tends to work better for fast-growing, profitable organizations in which there are opportunities for substantial employee rewards, It also' works better, of course. when general economic conditions are favorable. It is Jess likely to be useful in stable and declining organizations with low profit margins and intense competition, Profit sharing generally is well received and understood By i, managers and high-level professional people, because their decisions and actions are more likely to have asignificant effect on their firm's profits. Since operating workers, especially in large firms. have 'more difficulty connecting their individual actions with the firm's profitability, profit sharing may have less initial appeal to them. In ,;I; situations where it has worked effectively, managers have openly shared financial ' reports.with all levels of workers, actively trained employees to understand statements, and provided on-site computer terminals fO,f immediate access to

Gain Sharing
'Another useful group incentive is gain sharing; or production sharing. A gain-sharing plan is a program that establishes a historical base period of organizational performance, measures improvements, and shares thegains with employees On some formula basis. Examples of the performance factors measured include inventory levels, labor hours per Untl'of product, usage of materials and supplies,and quality of finished goods." The' tdea is to pinpoint areas that are controllable by employees and then give them an incen~Yefor identifying and implementing ideas that will result in cost savings, as the follOWing example shows: An example of gain-sharing plans is the one used at Turner Brothers Trucking-a company that tears down and reassembles drilling rigs, services pipe, and operates large cranes. IS To' its huge liability and workers' compensation premiums, the company offered a group' ',,"'nl.w,·p, $50 each for every month in which total losses from injuries, cargo" damage, ,: , driving accidents were less than $3DO.The results were dramatic; Ihe ratio of the gain",sharing amount paid to employees compared with expected safety costs was 1:4 for the first'


rrt Two MOliualion and

Reward Systems

few years after the program

was introduced.

and it dropped

even further thereafter:

will-win program demonstrated that employees could not only control their safety rCC(Kd but would do so for a fairly modest cost to the organization. .,~

zational improved suggestions,


Gain-sharing and are much an incentive

plans more for

use several than coordination

fundamental They often and

ideas encourage

from oro and

..ok., S

to' establish accurate measures of performance. and the connection between performance and rewards ~~~ards that people value; if you don't know mone-

6. Be aware of the unintended consequences that are associated with any reward system. and try to minimize these. 7. Utilize the advantages of 360-degree feedback systems for providing employees with a broad and rich source of performance feedback. 8. Monitor your own behavior. and that of your employees. for signs of inappropriate attributions of behavior during performance appraisals. .


pay systems. relations

employee promrn since ihe

they value. ask them. it clear to employees how the orqanizations sure that employees


rewards relate to their various needs and drives. believe their goals are attainteamwork. provide teamif they perform well. are trying to promote




union gains status because it takes responsibility toward technological change improve because efficiency leads to their larger outlook bonuses. Gain sharing specialty

for the benefits gained. Attiruds workers are aware that greaie broadens the understanding

of •.""","O"ov. not individual. rewards.

em~o~~u~ey~eala~crpicwreoft~~Mem~rough~eir~nici~tionrnilia~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~than confining Contingency key factors, allow creation to the narrow of their job. is contingent sufficient cost areas, upon a nurnber d 1_,IW'var~cllg(~S operating and relative history to stabili~' wiili Although They skill-based provide pay systems strong motivation workforce be relatively multiple their highest performed, Second, skills an employee's flexible should are quite sense new. they have several their .•..

such of standards, In addition, must

The success small existence management

of gain sharing size of the unit, of controllable the benefits to such of criticism system

as moderately

strengths. skills. the organization least temporarily. the employee's ~e rate that would tem would employees

for employees of self-esteem. boredom high, skills) since workers earn skills.

to develop

Ii;! ~I . .


they reinforce with a highly rotate

and they prosomeone First. than syssome the and be reduced. higher

ofthe business.
the organization employees,

must be receptive

to employee

participation increases Manages

that can fill in when should is often only

be willing should ideas

to share

of production a cooperative from employees.

absent. Since workers hourly


jobs to learn them. (for having using overpaid.

and the union

be favorable


Pay satisfaction rate received

for two reasons. in a perfect As a result, should being the same perceive matched pay.

need to be 'receptive A guin-sharing

and tolerant

program replaced


at Tech

Form Industries
The company


a smaIl

be paid Ior the task being be constantly in the sense

of tubular

systems for cars.l!>

was experi·

all employees both

encing severe external problems with rejected products and customer dissatisfaction, and internally the state of lnbor-managernenr relations was severely strained. After careful design and implementation of the new program, a two-year follow-up study .evealed a decreased 83 percent in defective products returned. a 50 percent decline in direct labor hours sp'~ on repairs, and a grievance rate that diminished by 41 percent. TFI. its customers, and iu employees were delighted with the results. Some that isk pay at-risk receive both designates gain-sharing must a portion as lillie programs share have broadened gains base target and the basic losses. Du idea to include fibers 6 percent are met, the notioo department of it) as may w()fJie~

may even feel temporarily that all employees There from are several early cost jobs, should

system as equitable in the knowledge

of their costs with the same disadvantages with

and rewards

have backed voluntarily .however.) normal. (Tilis away learn Second.

to skin-based it. First, hourly offset' since pay

pay, and some most employees

firms will than espe-


higher-level a substan.ial

the average be more

rate will be greater by productivity Third, must be made,


in both

Pont's objectives,




of the employee's of their bonus. effects


(for example, if objectives

: ... .strneru it places may

in employee on them will qualify the organization works

training to move

pay_2o If the work unit does not achieve as 94 percent and negative up to a 12 percent

its growth


cially in the time spent .like skill-based The subsequent employee


by supervisors pressure lead

and peers.

not all employees up the skill ladder. including for skill higher areas. rates

pay rate;

pay because dissatisfaction Fourth,

may r~~eive

In this way, employees of their efforts.

can truly


to a variety

of consequences, themselves to pay them best wher;

the positive




iliat they will be' unlikely

to use, causing

In contrast

(which pay someone skill-based for what to hold a job) they know increases learned; and wage incentives

than they deserve from a performance Skill-based pay, like other incentive

standpoint. programs, expectations on which

the organizational be understood for higher pay for. Under in this ,

to salaries


culture of the finn is generally . by employees, evaluated, levels, it must be possible and there must ·these conditions


and trusting.

The system


pay for the level of performance),

pay (also called

capabiliues" their work require

they must have realistic be some

about their prospects skills

multiskill pay) rewards
for the range, start working their primary companies depth,


bow to do. Employees for either developing within most others

are paid They

for them to learn new skills and to have these skills promptly limits they can qualify incentives is consistent with the other discussed performance.

and types of skills

in which

they demonstrate

at a flat hourly job or learning increases provide

rate and receive how to perform for each

skills withio unit. Some employees

the program

other jobs

chapter, since it :lin.ks el11~loyee pay with the potential

for increased

new job

to acquire blocks of related new skills, which may take several years to learn. Substantial amounts of training must be made available for the system to work,' and med1-I':,~,,ods for fairly employee's; pricing jobs and certifying work teams employee skill. levels need to be established and skill of then trainee. ' Some skill-based pay systems others' .allow have supervisors to assess evaluate the knowledge 'of each

_:___ rewards n several

~_:_~ provide motivational

__ social

~ as well as economic blending with value: models,

-: They play equity, expectancy,

~ behavior

_ 155

a key role.

the progress



... .

Part Two

Motivation and Reward Syscems

Appraising and Rewarding Per/onnancc! Chapter



and need-based approaches. Employees perform a rough and work somewhat near but below the break-even point. Performance appraisal provides a systematic basis for assessment of contributions, coaching for improved performance, and distribution of rewards. Modern appraisal philosophy focuses' on performance, objectives, goal setting, and feedback. Newer appraisal approaches, such as self-appraisal 360-degree feedback systems, provide additional perspectives on employee formance and suggestions 'for improvement. Nevertheless, the appraisal interviewc~ be difficult for both manager and employee.


One significant confounding factor in appraisals is the likelihood that one or bod parties ~v".l engage in inappropriate attributions. These are the perceptual assignll1la of alternative causes to one's behavior based on preconceptions and faulty reasonie they serve to cause difficulties between the manager and the app.aisee unless they;' resolved through careful analysis. Incentive systems provide different amounts of pay in relation to some m performance. They tend to increase employee expectations that rewards will folio. performance, although the delay may range from a week to a year. Incentives ort~ stimulate greater productivity but also tend to produce some offsetuns negative can sequences '. Wage incentives reward greater output by individuals or g-roL,,;s, wheres profit sharing emphasizexnuuua! interest with the employer to build a successle
~rganizati~n. tional Gain sharing emphasizes improvement in various indexes of organiz-

Think of a lime when you assessed, either formally or informally, someone else's level' of performance and found it deficient by your standards, To what did you attribute the reasons for the inadequate performance? Were you engaging in any attributional tendencies? How could you avoid doing so? Assume that, in the first six months of. your first job, your manager asks you to _ 'participate in' filling out a feedback form describing his or her 'strengths and weaknesses, How comfortable will you feel in doing this? Now assume that your man, ager asks you to engage in the same process, seeking feedback from your peers, inanager, and customers. Now what is your reaction? Explain. What are the major measures used to link pay with production? Which ones, if any, were used in the last job you had? Discuss the effectiveness of the measure or measures used. ' Would you use "rofit sharing, gain sharing, skill-based pay, or wage incentives in any of the following jobs? Discuss your choice in each instance. a. Employee in a small, fast-growing com purer company b. Teacher in a public school
c. Clerk processing insurance claims in an insurance office



performance. whereas skill-based pay rewards employees for acquiring levels or types of skills. Since employees have different needs to be served types of pay programs are required for a complete economic reward sy·slcm.'

man' .

Terms and Concepts for Review

Appraisal Attribution Comparable Complete


Output restriction

At-risk pay worth pay program comparison incentive system attribution plan bias

Perceptual Performance Performance Piece rate

set appraisal feedback

Profit sharing Rate setting

d. Automobile repair mechanic in a small repair shop e. Farm worker picking peaches f. Production worker in a shoe factory making men's shoes Divide into small groups, each led by a member who has worked for a sales commission. Discuss how the commission" related 10 both equity theory and expectancy theory, and report highlights of your discussion to your entire classroom group. 8. Have you ever participated in restriction of output in a job or in an academic course? If so, discuss why you did it and what its consequences were. 9. "Skill-based pay is a waste of company money, because we are paying for potentia/ performance instead of actual performance." Discuss this statement. 10. During your first ten years afrerTeaving college, what fraction of your salary would you be willing to put at risk-both for possible gain and for possible loss? During the last ten years before you retire, how much would you be willing to put at risk? Explain. How well do you exhibit good reward and performance appraisal skills? Read the following statements carefully. Circle the number on the response scale that most closely reflects the degree to which each statement accurately describes you When you reward employees and conduct a performance appraisal. Add up your total points, and prepare a brief action plan for self-improvement. Be ready to report your SCore for tabulation across the entire group. Good description Poor description

-, Economic

Equal Pay Act of 1963 Fundamental Gain sharing Gain-sharing Incentives Loose rates Management by Objectives (MBO)

Self-fulfilling Self-serving Skill-based 360-degree

prophecy bias pay feedback

~ Assess Your () Own Skills

Wage incentives the roles that money plays in each of the motivational models. 2. I plan to administer monetary rewards on a contingent basis, providing high rewards for good performance and much lesser rewards for weaker performance.

Discussion Questions

1. I recognize and understand

1. Explain how money can be both an economic and a social As a student, how do YOII use money as a social medium 2. Think of a JOD that you formerly had or now have. a. Discuss specifically how the expectancy model applied b. DISCUSS how you felt (feel) about the equity of your (feel) that way., c. Develop and explain a cost-reward comparison

medium of exchanf of exchange? ' (applies) to' your pay-arid why you .,










chart for your pay and














Arlmzi:.ill.,! Part Two !':lurivarion and Rcu>arJ S~'sh!'ms

(IntI I?..:w(m/illg Performance

Chapter Six


J. I recognize the importance of helping employees understand the need for balance between their rewards and their contributions. .1. [ understand the necessity of
providing employees with opportunities

ing them the usual w;lge rate (the minimum



wage), he had trouble 159

obtaining cnougf applicants for the job. Worse still. many of them seemed to lack motivation once he hireJ them. This situation created problems of empty shelves and 10 9 8






slow service at the checkout lanes. In an attempt to solve the problem, Brad met with small groups of the workers to get their ideas He (lJ:.;p ...-onsulred with a lee:'! expert on compensation issues. Some
workers said they wanted

for both extrinsic 10 9 8 6 5

higher hourly

wage rate: others said they wanted some


and intrinsic rewards. I am comfortable with the rive



incentive t(' work faster: some had 110 comment whatsoever. The consultant rccornmended that Br:«: consider usill~ some of the more contemporary compenxation systems,

hallmarks of modern appraisal philosophy and would use those
in my own appraisals of employees. 6. I cnvi-ion









the performance :\ppr~1isr\! interviewus an opportunitv for
much more than simply gi\'illg
Iccdb.wk In employees.

Questiun:.; 1. \Vhich of best 2. Can


major cconnmic incemive "yslems discussed in this chapter : ..... Ih ..







l'or Brad? more im-cntivc S\'slen~s be combined. with :1Il CV(!11 urcarcr likcli110Ild of SUC(c ..... \\"hal lllig:11 be g'aillcu through ;1 cOI;lbination, <~ and wh.u would he the

ol \\\1r~iilg


7. I would he comtort.rblc rcceivinc kcdb:!\"'r.; from all p.uticipant: in-a .-;M)wd:..·~;\:\'" :lppr:ti.'..:tI procc .... :-. S. ! I.·oull,.; :".·:Idily fU!ld\\' IhL' ~uid('lill-':"" ;',)1' gi\ in_:! pL:rj'nnll:!lk\: J'L'L'db:!ck In ;,_'rnplll> ..":" ~. Ivan
\"';:"':' sec 111)\\ an cmplov cc ...

COSIS (fnf b~;lh Pbi':1 Groccrv .\IlL! the cmpldyt:L's)? 3. In your l\:':'\Ill!nen\:~lii()Il, which moti v.uiou:tl theories ll:,iilg·.'

arc you n: )~I ...:pccific:dly















1. Read rhc (,dln\\ ing .... ul' xr.u...I1h: II IS about people and inclic.uc your dcgrL'L' Ill' -.:1 ' III

Exreriential Exercise

SL'IJ'w.,c['\ iilg bias could disrort thai p~rs(J!1', :,.;1 f-appr:lis;ll. Ill. l undcr-i.uul .uuiburion the tundumcntai bias

s ~

or dis:l~rl'l'Il1L'!ll

on thc rating scales. Strongly Slrongly





agree 6 5

disagree 2 5

I could -uccessfuttv

avoid it. .-\dtl






vour totul points for rhe len questions R~~":l)rdth:u number here. and report it w hen it is requested. __
II' yDlr ;,,\,.'()rl.:.'d bCl\\'('CII ~'lI-lnU dL'nh)fl~lrJli!lg poiru-. you appear to ha\'c:l skills, solid capabiiuy for




a. Mos: people don: want equity: they want 10 earn more than their peers. b. Skill-ba-ed pav won: work well because employees will learn the minimum
nece .... sarv to earn :1 higher rate and then

gond. reward .uul performance appraix.il



scored between 61-HO points,

should take ~ close look at the items wilh


scores and explore ways to improve

those items.

> ou should be .rvare that a weaker skill kvd r~garding several items could be dcuinvcnt.rl [0 vour future success as 3 lllan:1.~er.
!f ~'l1U :-c\.'icd less 111:111 60 poin:«. \\'c encourage you to review relevant m:~t('rial

forget what they learned, c. Most employee, arc too comfortable with the ;tatuS quo to wan: to devore effort to learning new skills. d. Most employees neither understand what
profu- arc nor appreciate tht:ir importance: therefore profit-:,h~lring systems are




Ol~tile chapter and watch for rel3~ed

in subsequent


:!nJ "l!i:~r SPlIJ:CCS.

idcn.iiy your three lowest score», :'~nJ write the question
. Write

numbers here: _.
all action pian for

doomed to fai I. c. If J;keu to participate
feedback progr:!lil




in a 360-degrec
their own


. __

brief p:lr~lgraph, d;_'l:liling to yoursch


you might sharpen

each of these skills.


Plaza Grocery
Brad Holden was the executive vice president for Plaza Gr~cery, a family-owned chain of six grocery stores in a medium-sized metropolitan area. The current problenl he was facing dealt with the stock clerks/carryout workers in the storps. Despite pay-

manager. most employees would distort their assessments in some W:I)' rather than be honest. f. The division between management and labor is so great that both gain-sharing and profit-sharing systems are likely to fail.









Partt'Two Motivation and Reward


g. Since people do not want to hear about their weaknesses and failures, performance appraisal interviews will not 'change 5 employee behavior. 2 3 4 h. The idea that employees assess the costs and rewards associated with any major behavior is ridiculous; they simply decide whether or not they feel like doing 5 something and then do it or don't do it. 2 3 4 2. Meeting in small discussion groups, tabulate the responses to each question (frequency distribution and mean) and explore reasons for any significant disagreements within your group's ratings. 3. In your group, develop alternative statements for any items you do not support (ratings of 3,4, or 5) at present. Explain how your new statements reflect your knowledge of human behavior gained through reading the early chapters of this book.


v ", ~ .•

Leadership and Empowerment




---t". ,
.... /'


~- ..--.---.


... -_._. _



s... ~W


Sign up to vote on this title
UsefulNot useful