Human Resources Designing Compensation Systems Summary: Promise and Peril in Implementing Pay-for-Performance The purpose

of this article is to analyze a series of experiments done by Beer and Cannon, HBSscholars, which provide an insight on the behaviors taken by management when implementing and consequently eliminating pay-for-performance (PFP) plan, specifically for the case ofHewlett-Packard. These experiments were conducted in 13 different locations; each of which had their own PFP plan, different implementation methods, and reasons for elimination. It also described the assumptions made to analyze adequately each situation considering the scholars find that not much research has been done to how is the decision making process of managers when opting for PFP plans. Main assumption of scholars was that PFP plans are easier to implement in an organization where: y The culture discourages opportunism, y Top management encourages the culturewith examples, and y Employees have long-term careers where reputation is a valuable asset. This is why it was interesting to see what had occurred in HP where high commitment of employees is the culture, at least in the mid 1990s. The scholars focused on 5 of the 13 cases to provide their conclusions. The five divisions were a San Diego site, Boise Printer Formatter Shop, PRCO Loveland, Colorado Memory Systems (a merging division/company), and the Workstations Group. They all implemented different PFP programs which provide an insight on the results. Main reasons for implementing a PFP programs: y Support a transition to self-managed teams, with a focus on teams rather than individual performance. y Implement complementary teams and provide individual performance incentives. y One time need for hard work and motivation to achieve a specific goal. y Increase desired behaviors before merging companies; such as individual initiative and responsibility, willingness to learn, adaptiveness, teaming and collaboration, hustle, willingness to confront conflict, and focus and attentiveness. y Communication of high priority of projects and create focus solely on that. The types of PFP programs that were used to achieve this were:

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mainly due to communication. Group F 2 22-03-2011 . and push for hard work in order to end with high operating profits. but how it would work did not come across as expected. Overall. However. In all situations management felt that the costs outweighed the benefits and employees felt that they could have been motivated in other forms or would have done the jobs expected from them anyway. The company must take into consideration what type of employees they have in order to adequately inform them of how they will be paid. but will value more the respect and importance the company they work for provides to them. The results of the PFP programs were for the most part negative or not as expected. which is the apparent complaint. y Dual bonus systems: stock options for managers and cash bonus for technical staff. and those that had shown to be positive were perceived to be focused on the short term. Safelite Auto Glass management was implementing a PFP plan to create motivation. This is noted on the employee s focus on the guarantee part of the PFP plan. and the impact it might have on company culture. it is our opinion that PFP plans are a delicate matter and the receivers of the benefits must be taken into consideration. strive for employee loyalty. What is it that they really want? Do they really need a money factor to work harder to achieve a goal? Can they perform just as hard with other means of motivation? Is the PFP plan understood? These questions must all be answered before any program is implemented. y Skill-based pay dependant on team and individual performance. Communication is key in situations where the company has a limiting or negative factor. Informing all employees of a very detailed and numerical factor PFP plan might be better to do in person with a more visual approach. This is very similar to the situation at hand in Safelite Auto Glass. In the end. A simple letter informing about how an employee will be paid depending on a certain amount of outputs with guarantees and then reductions or other issues might be a little complicated to understand. Evaluation by peers and management. companies must be aware of the long term effect of implementing short term or long term PFP plans. The plan seemed to be greatly beneficial to both management and technicians. y One time cash bonus if goal was achieved. the process of implementation was having several problems.y Team base pay added to base pay when goals were achieved through levels of performance and skillbased pay system certified by subject matter experts. which was the case with their plan. At the same time. y Quarterly bonus payments dependent on levels of operating profit. employees will always want to be paid more.

they appreciated the PFP program and expected more of them in the future. Peer evaluations were difficult because judging other team members was usually not objective. Group F 3 22-03-2011 . we add the main results encountered when studying PFP plans in each of HP s 5 divisions. In terms of the skill-based pay. y Case 5:Positive results in terms of completion of project and communication of importance and high priority. which affected cross-learning. However. Others were accepting but mentioned they would have worked hard anyway. y Case 3:Some employees felt bribed and insulted. At the same time. adjusting goal was found unacceptable by employees. Credibility was tarnished when amount of expected pay-outs was not received. Management tried to adjust the levels but employees were at a discontent because they were now accustomed to their higher pay. Problems with high performance teams not wanting to accept low performance team members.Additional: Extra insights and conclusions on HP study Results of PFP in each HP division To complement the article summarized before. employees felt they would have worked just as hard. y Case 4:Short term positive results but comparison amongst merging companies made employees feel they were not being provided with the same amount of salary + bonus benefits as parent company employees. y Case 2:Difficult to establish realistic performance goals and most team out performed expectations. employees felt pressured and disliked it. y Case 1:Levels of performance where over achieved and management saw too many costs involved.

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