Milkovich/Newman: Compensation, Ninth Edition

Pay for
Chapter 9
Performance: The
Evidence
FastCat Phase III

McGraw-Hill/Irwin Copyright © 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
 Exhibit 9.2: The Big Picture, or
Compensation Can't Do It Alone!

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 What Behaviors Do Employers Care
About?
 Behaviors that compensation needs to reinforce
– Compensation should be sufficiently attractive to
make recruiting and hiring good potential employees
possible (attraction)
– Need to make sure the good employees stay with the
company (retention)
– Need to find ways to motivate employees to perform
well on their jobs—to take their knowledge and
abilities and apply them in ways that contribute to
organizational performance

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 What Behaviors Do Employers Care
About? (cont.)
 How do we get good employment prospects to
join our company?
 How do we retain these good employees once
they join?
 How do we get employees to develop skills for
current and future jobs?
 How do we get employees to perform well on
their current job?

9-4
 What Motivates Employees?
 In the simplest sense, motivation involves three
elements:
1. What is important to a person?
2. Offering it in exchange for some
3. Desired behavior

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Exhibit 9.4: Motivation Theories

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Exhibit 9.4: Motivation Theories (con’t)

9-7
Exhibit 9.4: Motivation Theories (con’t)

9-8
Exhibit 9.5: Components of a
Total Reward System

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Exhibit 9.6: Wage Components

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Exhibit 9.6: Wage Components (con’t)

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Does Compensation Motivate Behavior?
General Comments
 Organizations with “high-performance work
practices” had annual sales that averaged
$27,000 more per employee.

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Do People Join a Firm Because of Pay?
 Key factors affecting a person’s decision to join a
firm
– Level of pay
– Pay system characteristics
 Job candidates look for organizations that “fit”
their personalities
 Reward systems should be designed to attract
people with desired
– Personalities
– Values

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 Do People Stay in a Firm (Or Leave)
Because of Pay?
Factors impacting turnover
– Pay based on individual performance results in higher
turnover of poor performers
– Group incentive plans may lead to higher turnover of
better performers
– Level of employee satisfaction with pay

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 Do People Stay in a Firm (Or Leave)
Because of Pay? (cont.)
 Other rewards affect the decision to stay
– Work variety and challenge
– Development opportunity
– Social
– Status recognition
– Work importance
– Benefits

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Do Employees More Readily Agree to
Develop Job Skills Because of Pay?
 Evidence is unclear

 Relevance of skill-based pay

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Do Employees Perform Better on Their
Jobs Because of Pay?
 Not clear if performance of individuals can be
increased by tying it to pay
 If the incentive depends on individual performance,
applicants find the company more attractive
 Team-based incentives, in contrast, are less
attractive
 A number of recent studies provide strong evidence
that pay for performance has a direct and, at times,
substantial impact on firm performance
– Evidence indicates, however, that ees don’t notice
incentive payouts unless they are at least 10%, w/ 15-20
% more likely to evoke desired response
– Some research indicates ee satisfaction w/ pay may
depend more on procedures used to determine pay than
level
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 Where’s the Merit Pay Payoff?
 Jeffrey Pfeffer (Stanford) argues that idea that individual pay
for performance will enhance org performance rests on set of
assumptions that do not hold in vast majority of orgs
– “Merit pay is not based on merit”
 Perf appraisals biased
 Pay increases not enough to motivate ees, but are enough to irritate them
 In effect, for vast majority of ees, merit increases are unevenly distributed
cost-of-living and market-adjustment increases couched in language of
performance rewards
 But, high levels of differentiation destroy engagement, breed distrust, and
undermine teamwork
– Higher turnover, lower quality, serious ethical breaches
– “Effective management is a system, not a pay plan. The mistake
is that companies try to solve all their problems with pay.”
– Evidence suggests group bonuses, profit sharing, and gain
sharing are more effective forms of performance-based pay than
merit pay or individual incentives
 Source: Workforce Management, 11/3/08 9-18
Exhibit 9.7: Examples of Group
Incentive Plans

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