Chapter 9

Pay-for-Performance:
The
Evidence
McGraw-Hill/Irwin

Copyright 2011 by the McGraw-Hill Companies, Inc. All rights reserved.

Chapter Topics
What Behaviors Do Employers Care
About?
What Does It Take to Get These
Behaviors? What Theory and
Practitioners Says
Does Compensation Motivate
Behavior?
Designing a Pay-for-Performance Plan
9-2

What Behaviors Do Employers Care

About?
Employers want employees to perform
in ways that lead to better
organizational performance
Organizational strategy is the guiding
force that determines what kinds of
employee behaviors are needed

9-3

Exhibit 9.1: The Cascading Link between

Organization Strategy and Employee Behavior

9-4

Exhibit 9.2: The Big Picture, or

Compensation Can't Do It Alone!

9-5

What Behaviors Do Employers Care

About? (cont.)
Behaviors that compensation needs to
reinforce:
Compensation should be sufficiently
attractive to make recruiting and hiring
good potential employees possible
(attraction)
Make sure the good employees stay with
the company (retention)
Build further knowledge and skills
9-6

What Behaviors Do Employers Care

About? (cont.)
Find ways to motivate employees to
perform well on their jobsto take their
knowledge and abilities and apply them
in ways that contribute to organizational
performance

Performance must be accurately

measured to tell if compensation
efforts are working
Performance management
9-7

Exhibit 9.3 Performance Measurement

Relates to Compensation Strategy

9-8

What Motivates Employees?

Motivation involves three elements:
What is important to a person?
Offering it in exchange for some
Desired behavior

9-9

Exhibit 9.4: Motivation Theories

9-10

Exhibit 9.4: Motivation Theories

9-11

Exhibit 9.4: Motivation Theories

(cont.)

9-12

Exhibit 9.4: Motivation Theories

(cont.)

9-13

Exhibit 9.4: Motivation Theories

(cont.)

9-14

Exhibit 9.4: Motivation Theories

(cont.)

9-15

Exhibit 9.4: Motivation Theories

(cont)

9-16

Exhibit 9.5: Components of a

Total Reward System

9-17

Exhibit 9.6: Wage Components

9-18

Exhibit 9.6: Wage Components

9-19

Exhibit 9.6: Wage Components

9-20

Exhibit 9.6: Wage Components

9-21

Does Compensation Motivate

Behavior?
Key factors influencing a persons
decision to join a firm
Level of pay
Pay system characteristics

Job candidates look for organizations

with reward systems that fit their
personalities.
Reward systems should be designed to
attract people with desired
Personalities and values
9-22

Do People Stay in a Firm (Or

Leave) Because of Pay?
Factors impacting turnover

Pay based on individual performance

Group incentive plans
Level of employee satisfaction with pay
Changing base pay

9-23

Do People Stay in a Firm (Or Leave)

Because of Pay? (cont.)
Other rewards that influence the
decision to stay

Work variety and challenge

Development opportunity
Social
Status recognition
Work importance
Benefits

9-24

Do Employees More Readily Agree to

Develop Job Skills Because of Pay?
Skill-based pay is intended to pay
employees for learning new skills
Evidence indicates that pay for skill
may not increase productivity, but it
does focus people on believing in the
importance of quality and in turning
out significantly higher quality
products

9-25

Do Employees Perform Better on

Their Jobs Because of Pay?
A well-designed plan linking pay to
behaviors of employees generally
results in better individual and
organizational performance
If the incentive depends on individual
performance, applicants find the
company more attractive

9-26

Do Employees Perform Better on

Their Jobs Because of Pay? (cont.)
Team-based incentives, in contrast,
are less attractive
One view suggests that linking pay to
performance occurs through two
mechanisms, an incentive effect and a
sorting effect

9-27

Designing A Pay-For-Performance
Plan
Efficiency
Strategy
Structure
Standards

Objectives
Measures
Eligibility
Funding

9-28

Designing A Pay-For-Performance
Plan (cont.)
Equity/Fairness
Distributive justice
Procedural justice
Communications

Compliance
Comply with existing laws
Enhance and maintain firms reputation

9-29