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Human Resources Management Notes complete

Human resources ( ESCP Business School)

Studocu is not sponsored or endorsed by any college or university

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Session 1: Introduction of Human Resource Management

HR Functions (by Prof. John Budd)

Human resources management is critical to any organization. It has several different functions:

1. Figure out what work needs to be done and how to break this work into effective jobs=>
workflow analysis determines the business processes that need to be completed
2. Job analysis: to figure out how to construct jobs to complete the required business
processes (e.g.: production tasks, business tasks, …)
3. Recruitment & Selection: advertise job, get job applicants, interview applicants, figure
out who has the skills and aptitude for these jobs and who’s gonna be a good fit for the
organization
4. Onboarding: orientation program to integrate newly hired individuals into the team
5. Performance management: evaluate and assess how individual is performing, giving
direction
6. Training & Development
7. Compensation & Rewards

+ there are some specialized HR roles:

 Health & Safety (both stress and physical healthiness)
 Diversity (organization has to be free of discrimination)
 Labor Relations (as workers may decide to unionize)
 HRSI (Human resources information system): use data and metrics to try to unionize the
organization

+ organizational development: continuous assessment of how business is done, how jobs are
structured, what’s the nature of tasks within the organization

The resource-based view

 One of the most popular theoretical frameworks in the management literature. How does
it apply to managing people strategically?

Why do certain companies outperform other companies? According to this view, some
companies have a competitive advantage. There are 3 basic types of resources:
1. Physical capital resources (firm plants, equipment and finances)
2. Organizational capital resources (firm structure, planning, controlling, coordinating &
HR systems)
3. Human capital resources (skills, judgements, intelligence, capabilities of the employees).

To provide a source of competitive advantage, the resources have to have some characteristics,
highlighted by the VRIO framework
 V: value-> does the resource add value to the company by enabling it to explore
opportunities, defend vs threats, increase perceived customer value?
o If no-> competitive disadvantage

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 R: rareness-> are the resources rare?

o If no-> competitive parity (numerous companies use the same resources to
implement the same strategy)
 I: imitability-> are the resources potentially difficult to imitate, at a reasonable price
o If no-> temporary competitive advantage
 O: organization-> is company organized to capture vale from the resource?
o If no-> temporary competitive advantage
o If yes-> sustainable competitive advantage

Human Capital Theory

Human capital= the knowledge, information, ideas, skills & health of individuals. Collection of
traits, talents, abilities, experiences, intelligence, training, judgements, wisdom possessed
individually & collectively by people in a population. It is called capital bc these traits represent
a form of wealth which can be accomplished and directed towards a goal.

Becker distinguishes between:

 Specific HC: refers to skills and knowledge that are useful only to a single employer
 General HC: useful to all employees (e.g.: literacy)

Groysberg, McLean & Nohria add 3 intermediate categories (from general to specific); the main
difference is on their portability (general HC skills are highly portable, while specific HC is the
least portable):
 Strategic HC: experience gained from experience in a situation requiring strategic related
skills (e.g.: cutting costs, thriving growth, maneuvering cyclical markets)
 Industry HR: technical, regulatory, customer, supplier knowledge linked to an industry
 Relationship HR: portion of a manager’s effectiveness stemming from establishing
relationships with team members, colleagues, external networks

The HC theory can help in making significant people management decisions.

 What skills are important when recruiting & selecting new potential employees?
 Which areas should people be trained on?
 What skills are relevant to achieve high performance?
 How is compensation going to be calculated?

Job demands-control model (JDC)

Strongly influencing the understanding of the analysis of the work stress mechanisms (work
affects employees’ well-being).

Karasek argues that work stress results from joint effect of:
1. Demands of work situation (job demand) => INTENSITY
2. Range of decision-making freedom (job control) => AUTONOMY

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 E.g.: under a highly demanding situation, the inability to control your move generates an
enormous amount of pressure

This is true of any work activity. He categorizes jobs in 4 categories:

1. Passive jobs: low demand & low control

2. Low strain jobs: low demand & high level of autonomy
3. Active jobs: high in both demands & control
4. High strain jobs: high demand & low control=> most likely to suffer job strain.

Red arrow describes the expected decline in

employees’ well-being.

Sustained job strain over time results in harmful

stress. At some point, many employees in this
high strain situation won’t be able to keep up
with the pressure.

European Working Conditions Survey uses this framework to analyze the risk level of different
occupations regarding job strain. This is the result given the most recent data:

Valuable take-away: stress is not only related to job demand but also to control & autonomy. For
many jobs, reducing demand is almost impossible, but allowing employees higher control and
autonomy over their jobs can mitigate the negative effect given by the high demand and
contribute substantially to the well-being.

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Session 2: Employer Branding

Introduction
Employer brand= term commonly used to describe an organization investment in its reputation
as an employer and its value preposition to its employees.

 According to the CIPD (Charter Institute of Personal Development), the employer brand
is a set of attributes and qualities (often intangible) that make an organization distinctive.
It promises a particular kind of employment experience and appeals to those people who
would thrive and perform their best within the firm’s culture.
 For the consulting firm Universum, employer branding is the process of promoting the
distinctive qualities of an organization to a desired target group. => to get people we want
to see our company as employer of choice.

Why is it relevant?
 Global need for talent=> highly competitive labor market
 Organizations need to attract and retain the best employees
 Companies with good employer brand receive x2 applications and spend ca 5K less per
new hire
 Some companies are being forced to designed employer’s strategy bc of highly accessible
information (which is not always accurate or aligned with the company’s strategy, e.g.:
Glassdoor)

The brand may contribute to

o manage the psychological contract between employees (i.e.: expectations and beliefs
that employees have about their jobs that are not formally specified in writing)
o signal organizational values & prestige
o build a common identity for employees

Psychological contracts

= set of reciprocal unwritten expectations between an individual employee and the organization.
(+ it is idiosyncratic, as it can be different for every individual)
(+quite unstable, leaves considerable room for breach=feeling that expectations have not been
met. These breaches are likely to have cumulative impact, and may lead the employee to leave
the organization or to adjust by reducing effort to account for lowered outputs).

=> is there something the company can do?

Since the psychological contract is shaped by individual and organizational characteristics,

workplace relationships and HR policies & practices => employer branding can be a useful tool
to manage the expectations of both current and potential employees.

The 6-step Model: preliminary analyses

How can a company build an employer brand? 6 steps framework:

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1. Who am I? => explore company’s identity (organization’s image, both what

organization is and what others see)
A good employer brand will make the others see the entity
organization s.t. there’s as much overlap as possible between
what others see and what the company is.

Essential to consider that the brand in the labor market needs to

make promises that are aligned and coherent with the overall
brand (both at corporate level and at products level).

Since experiences of customers, employees and society as a

whole are connected and interact, for the message to be
authentic it has to be aligned and unfold similarly for different
audiences.

Moreover, clients & customers can become candidates &

employees (and vice versa).

2. Who are my customers? -> gather information regarding what current/potential

employees think employer brand currently is & what they would like it to be.
 Analyze attraction & attrition factors for the employer brand’s customers (=
current & potential employees). This info is usually collected through surveys
or focus groups and is essential to develop a coherent employer brand whose
attributes can be truly experienced in a daily work.
 The info on potential candidates & employees can be collected though
o Primary sources- ask employees or interview target population
o Secondary sources- studies on employer’s attractiveness
rankings/LinkedIn talent trends report

o In this analysis, it may be essential to segment the population.

E.g.: for younger generations social awareness is important to stay
with the firm.

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3. Who are my competitors-> since employer brand must be distinctive, organization must
investigate what other companies- trying to compete for the same talent- are offering.

The 6-step Model: employee value proposition

4. Define a distinctive Employee Value Preposition

 Employee Value Preposition= set of attributes that the labor market and
employees perceive as the value they gain through employment in the
organization.
 It should include the defining qualities the company wants to be associated with
in the future=> defining the Employee Value Preposition involves finding an
answer to: What should I offer to be an employer of choice for the talent I need?
o Compensation
o Respect
o Work-life balance
o Location
o Career opportunities
o Learning & development opportunities
o Innovative environment
o Stability
o Recognition
 Info collected in preliminary analysis should be enough to design a distinctive
EVP oriented towards a desired target group.

The 6-step Model: creating the brand, communicating & evaluating impact=> marketing

5. Create a unique brand & communicate it.

 Strong brands have 4 characteristics:
o Insightful: strong brands connect powerfully with our rational and
emotional needs
o Clear: strong brands are clear about what they offer
o Distinctive: strong brands are cut-through
o Consistent: strong brands deliver against their promises
 Once established, brand needs to be communicated into the job market, through
various different channels: social media, mass media, jobsites, universities, …

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6. Evaluate impact: common KPIs of employer brand evaluation fall into one of these 3
categories

 Establishing specific metrics for this evaluation is essential for the on-going
improvement of the organization’s labor market strategy.
 Should contribute to establishing future objectives, adapting messages, selecting
effective communication channels, …

 Another way to evaluate impact is through external recognition (rankings &

awards)

Session 3: Staffing

P1: Recruitment & Selection

Where does it begin?

Job Analysis= process designed to answer the question on what is the job about. Systematic
process of discovery of the nature of the job by dividing it into smaller units. This is the first step
in the staffing activities bc before looking for someone to recruit and select, it’s essential to know
what position we are looking to fill. It generally results in:

1. Job description: specifying what is done on the job

o Job title
o Location

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o Responsible to
o Responsible for
o Main purpose
o Responsibilities
o Tasks
o Working conditions
o Other matters
2. Person specification: describing capabilities needed to effectively perform on tasks
o Education
o Experience level
o Skills
o Attitudes
o Essential vs desirable characteristics
o Disqualifying factors (e.g.: lack of essential accreditation)

 These are useful tools in several HR activities, such as Recruitment & Selection,
Performance Evaluation, Training & Development, Rewards & Compensation.

n.b.: job analysis has been criticized bc:

o new jobs emerge constantly=> process of analysis is tedious and bureaucratic task
o jobs are unstable=> valid job description today could be obsolete in 6 months
o difficult to find right balance between flexibility & specificity=> the more
specific job description & personal specification, the more difficult is for them to
adapt in time and to emerging needs
o limit innovation and employees’ improvement

 therefore, more organizations are paying less attention to match person to job description,
and more to person-organization fit (= referring to compatibility between employees and
organizations. Idea is to find people who match organizational culture, structure &
practices).

To analyze person-organization fit, important to:

 identify & analyze organizational philosophy & culture
 focus on competencies that individuals should have to succeed in the firm (particularly
behavioral competencies, but also don’t overlook technical competencies)

 Therefore, firm & people analysis rather than job analysis.

 Drawback: may result in cloning= reduced diversity and potential innovation

To sum up, the staffing process begins with 2 parallel activities: job analysis and personal-
organization fit analysis; both are necessary and their relative importance depends on
characteristics of organization. They search two answer 2 main questions:
1. What does the job involve?

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2. What kind of attitudes & behaviors are essential to succeed (both the job and in the org as
a whole)?

Recruitment & Selection methods

Recruitment & selection is a process comprising all the activities a firm undertakes to fill in a
staffing vacancy. It is useful to consider them as separate processes, following job analysis:

 Recruitment: involves initial activity undertaken to attract a pool of suitable applicants

for the vacancy.
 Selection: concerns selecting the most competent individual from the pool gathered in
recruitment.

 Usually this process follows sequentiality, and considerations in one process shape
activity in the other. In fact, good recruitment makes good selection possible.

Recruitment methods:
 Closed searches: search is limited to specific parameters (e.g.: knowing someone who’s
already in the firm, studying at a particular university)
o Word-of-mouth
o Links to schools, colleges, universities
o Recruitment agencies
 Open searches: able to reach a larger and more diverse population
o Newspapers adverts
o Employer’s website
o Other websites
o Radio/TV adverts

 Methods can be informal or formal

 In choosing a mix of methods, firms should be careful to ensure consistency in the
message they are communicating to their potential candidates AND that multi-methods
are not used when one would have sufficed.
 Methods used differ substantially depending on the position to be filled (e.g.:
manufacturing & production positions-> recruitment consultants are commonly used;
public services-> specialized journals). In general, corporate website is very important,
and there’s a growing importance of all networking sites- such as LinkedIn.

Selection methods: range of activities that managers use is quite large (application forms, CVs,
self-selection, interviews, references, assessment centers, probationary periods, …). In general,
they can be divided in two:
 Subjective: relying on individual/group judgement (e.g.: interviewing)
 Objective (e.g.: psychometric tests)

 Typically, it is considered a good practice to use a range of devices.

 The main method seems to be interviewing, both competency-based and following CV
contents. Some new methods are: tools enabling self-selection or gamification.

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 Companies are more and more using multi-method approach!!

Deciding how to select

The methods included in the selection process should be assessed according to a n of criteria:

1. Validity: ability to recruit & select the right person based on prediction of future
performance. Therefore, the methods should be an accurate measure of performance or
features connected to performance
2. Reliability: method is valid over repeated usages and across various candidates. Same
method should always deliver the same result (this is one of the weaknesses of
interviews, which have numerous biases-> they may lead to =/ results depending on the
timing of the interview, characteristics of the candidates- gender, race, etc.=> to
overcome this, companies are more and more implementing competency-based
interviews, providing the interviewer with guidelines to evaluate future performance).
3. Practicability: including cost-effectiveness (cost of process should not be > benefits
deriving from it, in terms of on-boarding the best talent for the firm) & acceptability
(methods need to be acceptable to all parties, meaning that subjects should not be subject
to discriminatory, shaming or unfair techniques).

P2: Selection biases (videos)

Unconscious bias in recruiting

Scientific research shows that when conducting recruiting process the set of information we have
is much less objective than we think.

e.g.: 2010, researchers in Sheffield, England, sent out 3000 CVs for real jobs across cities in the
UK. They put a typical white name on the top of 1000 CVs, an Asian on the top of 1000 and an
African on the top of the other 1000 (the same CV, only the name varied). They found that if the
candidate had a white name, he typically waited 9 applications to get an interview; in the other
cases candidates had to wait 16 applications.

 Scientific research suggest that this pattern is likely unintentional, driven by patterns
wired in our unconscious brains. Neural patterns derived by our experiences and by our
upbringing, but also by the media we absorb.

 Similar researches from Sweden suggest that we are likely not to hire
o people who are overweight,
o people from a different ethnical group,
o people who gained their qualification in another country.

 We also seem hardwired to prefer

o tall people - particularly tall men (as we link this physical quality to be associated
with leaders)

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o attractive people – as they are considered to be more competent and socially

confident
o people with familiar/easy to pronounce names- considered to be more competent

 in general, we tend to prefer individuals who are like us, look like us, sound like us, have
similar interests/social background/education

Brain scans show that we make this rapid, automatic, unconscious judgements about people in
way less than 1 second. By the time that our thoughtful brain kicks in (in about 0.5 second), it is
too late to stop these judgements from affecting our people’s decision. In fact, we just simply
adjust the fact to fit what our unconscious brain has already decided->BUT we convince
ourselves that our decisions are objective.

 E.g.: in a study, female & male candidates names were put on the same CV
o Male CVs were rated as more competent, reliable and likely to respond better to
training
o Moreover, male candidates were offered a starting salary 15% higher to that
offered to female candidates

n.b.: selecting only candidates who are similar to us, we might end up losing the real talent & the
diversity component, that is particularly important for innovation and customer perspective to the
job.

Unconscious bias at work- making the unconscious conscious

Unconscious bias= our worldview can actually exert an influence beyond our conscious
awareness and create ambiguity. These are shortcuts our brains have created so that we can deal
with information we process every single day.

We need to be aware of our biases in order to create something even bigger/better.

Session 4: Performance Management

P1

Purposes of Performance Management

1. Strategic: Link employees’ activities with organizational goals => should encourage
behaviors leading to organizational needs and should inform employees of what is
expected of them to achieve such needs (how does my job fit the overall direction &
purpose of the company);
2. Administrative: furnish valid and useful information for making administrative
decisions about employees (e.g.: salaries, promotions, …) => reward system is heavily
based on information provided by the performance management system;

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3. Informational: serve as communication device, inform employees about how they are
doing and about the organization’s customer’s and supervisor’s expectations. This is
related to the strategic purpose;
4. Developmental: provide feedback, allow managers and peers to provide coaching to their
employees (=> also useful to create a career path=long-term aspect of development, not
only short-term)
5. Organizational maintenance: to create a talent inventory and provide information to be
used in workplace planning and allocation of human resources (key priority for large
organizations, who need to train and prepare their workforce in advance for tomorrow’s
strategy and challenges).
6. Documentation: to collect useful information that can be used for various purposes
(sometimes it is legally mandated).

Balancing these objectives can be difficult because they can be contradictory. In general,
organization choose which ones are most relevant to them and such choice is reflected in the
actual design of performance management system.

Performance Measurement Methods

Quite large number of tools available to organizations to manage performance. We can

categorize them in different ways:

 Relative standard methods: comparing individuals comparing to their peers (simple

ranking, paired comparison, forced distribution)
 Absolute standard methods: consists in comparing individuals with established absolute
criteria related to
o Attributes (graphing rating scales, mixed standard scales)
o Behaviors (critical incident method, behaviorally anchored rating scales BARS,
Behavioral Observation Scale BOS)
 Measuring actual results: (management by objectives)

Simple Ranking: ranking employees’ performance from highest to lowest. Based on these
rankings, companies can take any action (from promotion to termination).
 This is considered to be an easy method, BUT it may get problematic when conducted on
a large scale AND it is criticized bc it is unsystematic and results are drawn on the basis
of snap judgements.

Paired Comparison: each employee is compared to every other employee. A score is obtained by
counting the number of pairs in which the individual is the preferred member.
 P=N(N-1)/2 formula giving us the tot n of pairs to be analyzed
 We see that this method is unfeasible for a company with a lot of employees.

Forced Distribution: most commonly applied for long. Assigns a certain % of employees to a set
of categories (e.g.: poor, avg, good, excellent/ 10%, 50%, 90%). This method obliges to actually
valuate people and divide them into categories (bc there’s a tendency to consider everyone as
performing average or slightly below/above).

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 2 prominent examples:
o GE’s Vitality curve: requiring putting employees in one of 3 categories
 20%: non-producers, should be fired
 70%: work adequately, “vital 70”
 10%: most productive
o Consulting firms/PSFs: 2 groups
 Those moving up the hierarchical ladder
 Those moving out of the company
o N.b.: none of these pioneering firms still apply forced distribution anymore!

P2

Criteria for Effective performance management

2019 book on performance management, Herman & Wineys (?) proposed 15 criteria to
characterized ideal performance management systems. We will focus on 5:
1. Fit with strategy:
 Strategic congruence
 Alignment of individual behaviors with unit and organizational goals
2. Validity: refers to measures including all relevant performance facts and NOT including
irrelevant information. Performance measures should minimize:
 Deficiency: information not gathered but relevant
 Contamination: information gathered but irrelevant (outside of the control of the
employees or unrelated to performance)
3. Reliability: consistent measures
 Inter-rater reliability: if 2 supervisors provide ratings on the same employee and
performance dimension, those ratings should be similar
 Test- retest reliability: measures should be reliable over time
4. Acceptability: considered fair by all participants, who perceive the presence of both
 Distributive justice= includes perceptions of performance evaluation received
relative to work performed and perceptions of the work performed by others
 Procedural justice= perceptions of the procedures used to determine the ratings. It
van increase through
i. Impact on the process
ii. Evaluator perception
iii. Evaluation criteria
iv. Reinforce individual social standing (e.g.: humiliating & finger-pointing
have a negative impact on procedural justice)
5. Specificity: it should provide detailed, concrete, clear & actionable guidelines to
employees about what is expected of them and how they can meet their expectations (i.e.
actionable)

Designing performance appraisals

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Performance appraisal= most common critical operational component of performance

management. Ongoing process of evaluating an employee’s performance, often enough for
employees to take action about the feedback that they get. =/steps:

1. Job analysis: bc we want performance management to have a strategic objective=>

analyze organizational mission & objectives
2. Develop standards & measurement methods + communicate: how do we measure the
needed behaviors?
3. Informal PA-Coaching & discipline
4. Prepare for & conduct the formal PA: written evaluation stored for documentation
purposes

In designing a performance appraisal, there are a number of decisions that need to be made.

1. Aim: why do we want to evaluate people? =/objectives (information, decision-making,

development, …)
2. Object: what is it that we are measuring? (traits, behavior, results, skills, potential, …)
3. Appraisers: who is going to be the appraiser? (direct manager, colleagues, peers,
subordinates, clients-> if all these perspectives are taken: 360^ evaluation)
4. Appraisees: whom is going to be evaluated? (all employees, managers, teams, …)
5. Procedures & tools: how/when performance is going to be evaluated? (support,
frequency, target, standards)

Session 5: Rewards & Compensation

P1

Forms of Rewards

Salaries are not the only form of compensation. There are different other forms which
complement each other. We have different categories.

First of all, we distinguish:

o Intrinsic rewards: you do something because it is inertly interesting/enjoyable. It is
described as endogenous bc its causes are internal to the person, they are powerful
motivators that can boost performance by preserving well-being of employee
 Learning
 Job well done
 Competence
 Interest in the job
o Extrinsic rewards: exogenous, individual does something to receive something in
exchange. They are divided in 2 categories
 Non-financial rewards: possibility of getting involved in company’s committee,
receive recognition, …). Particularly effective for workers who are satisfied with
their salary or have been in the position for a long time
 Financial rewards: 2 alternatives

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Direct rewards: money directly paid to employees in exchange for their


labor. (=> wages, bonuses, commissions, tips)
 Indirect rewards: benefits given to employees, having financial value but
not direct monetary payment. Often referred to as “non-cash benefit”, they
can be more valuable to employee than salary and they might be preferred
also bc of tax-related reasons (health insurance, car, transport tickets, …)
 Companies have different options to reward employees!!

Expectancy Theory

Motivation Theory proposed by Vroom in 1964, according to which individuals can be motivated
towards goals if they believe that there is a positive correlation between effort and performance
and that performance will lead to a desirable outcome.

Effort-> Performance-> Outcome =>> Motivation

These relationships depend on 3 key concepts:

1. Expectancy: belief that one’s effort will result in attainment of desired performance
goals. It is usually based on individual’s past experience, self-confidence and perceived
difficulty of performance standard.
2. Instrumentality: believe that a person will receive a reward if performance expectations
are met.
3. Valence: value an individual puts on the rewards of an outcome, which is based on his
needs/goals/values & sources of motivation

 Following expectancy theory, motivation is a product of the individual expectancy that a

certain effort will lead to the intended performance, the instrumentality of this
performance to achieving a certain result and the desirability of this result for the
individual. If all 3 happen, the individual will be motivated to continue putting high effort
into the job.

What to pay for? (exercise)

Typology of reasons leading to =/ in wages of two individuals:

1) Jobs having =/ requirements

o Different job (tasks)
o Different skills
o Different companies
o Different behaviors
o Different education
o Different experience

BUT-> internal consistency= important characteristic of effective compensation systems.

Companies can attempt to achieve it by:

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o Valuing jobs relative to one another (e.g., more complex jobs generally receive a higher
valuation and a higher pay)
o Value & rarity of the role
o Complexity, danger, unsocial hours, shift work
o Part of core business, source of competitive advantage

2) Working for different companies:

o Company’s ability to pay (profitability/liquidity)
o Cost of living
o Industry
o Market
o Profitability
o Size
o Unions
o Supply & demand
o Economic downturn, geographic area, pay policies, …

These are all External competitiveness reasons. Strategically, companies need to be externally
competitive in order to attract talent. Thus, organizations should compare value of the same jobs
in the market. The objective is to not severely overpay jobs relative to other company and waste
money/ undervalue jobs. => companies need to be aware of: market pricing, staffing stocks and
flows. + they need to know to what extent their paying structure has a role in quits and
recruitment.

3) Individual contributions:
o Pay for skills=> reward investment in formal education, experience (tenure), abilities
o Pay for performance=> reward achievements, meeting objectives & going the extra mile

4) Unwise or illegal allocation of rewards (friendships, gender pay gap, …)

 When designing a payment scheme, all 3 categories should be considered to develop an

effective compensation system.

P2

Analysis of Compensation Design

No compensation system is perfect, but the best ones balance 3 qualities:

 Direction: encouraging the behaviors that are critical for the organization’s strategy
 Fairness: recipients believe the process of allocating rewards and final distribution is
impartial, justified and non-discriminatory
 Workability: ease to administer & cost-effectiveness

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 Compensation systems can be analyzed with these 3 parameters. Following we have

some examples of problematic designs:

Judgement-based pay for performance

system: rewards are allocated on the basis of
unclear measures.
 E.g.: collaborating/doing your best
without the necessary investment in
performance management.
In evaluation tools, those statements cannot
be properly measured. Thus, it may be
inexpensive to focus people on certain
behaviors but you will believe that it is fair or
accurate.
Pay for seniority system: these systems are
an inexpensive and easy to administer, BUT,
in absence of s strong culture preventing free-
riding, it can result in a mess. Without some
other mechanisms in place, this behaviors will
be neglected and those who do not participate
in them will tend to feel cheated.

Pay for performance system: designed and

connected to actual performance and
valuation systems. They are usually good at
achieving direction and perceived fairness,
BUT it is easy for them to become difficult to
administer and highly expensive to the point
that their benefits could not be enough to
justify their costs

 No system is perfect! It is all a matter of balance to achieve success & effectiveness of

compensation systems.

Performance Related Pay: key challenges

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Performance related pay is often considered to be the panacea of rewards. Assumption: when
companies pay people specifically for their performance, they will indeed achieve higher
performance. However, this has been highly discussed. 3 key challenges to the design of
performance related pay systems.

1. Reward the correct behavior

 Reward systems are often based on convention, best practice, ease of
administration
 However, in the L-R, w/o innovative behaviors, they will be not so efficient and
often the organizations do not formally reward behavior that they expect
 Managerial takeaway: for variable pay-scheme to be effective, an intensive
analysis has to be done, answering 2 questions:
i. What behaviors does the firm want to incentivize? (in-depth strategic
reflection, nb: ease of administration may not be the best choice)
ii. Can there be any externalities? If I incentivize a behavior, will I
incentivize/discourage some others?
2. Contingency & contiguity
 For rewards to be effective, there needs to be a strong connection between the
behavior they seek to enhance and the reward itself.
 Reward must follow behavior ASAP (to reinforce the behavior), this may be
problematic for what regards L-T objectives
 Managerial takeaways: the employee must perceive a clear link between behavior
& reward: use of performance management & objectives setting is essential

3. Expectations & Fairness

 For rewards to be effective in reinforcing behavior, they need to be at least at the
level of the employee’s expectations (bc reactions depend on expectations)
i. If reward>expectations: increased desired behavior
ii. If reward=expectations: maintain behavior
iii. If reward>expectations: decrease desired behavior
 Equity theory (Adams, 1963): employee compares himself/herself in the previous
job (if I work harder than before but get less=> decrease behavior) & colleagues
(if I perceive that others put less effort than me and receive better rewards=>
motivation will decrease)
 Managerial takeaways:
i. Careful with promises
ii. Fluent communication: explicit, clear expectations and eventual rewards
iii. Transparency

=> these challenges should not be overlooked when designing performance related pay systems.

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