© 2010 McGraw Hill Ryerson 10-1 COMPENSATION Third Canadian Edition Milkovich, Newman, Cole

© 2010 McGraw Hill Ryerson

10-1

COMPENSATIONThird Canadian Edition

Milkovich, Newman, Cole


10-2

STRATEGICPOLICIES

TECHNIQUES STRATEGICOBJECTIVES

EFFICIENCY

Performance

Quality

Customers

Stockholders Costs

FAIRNESS

COMPLIANCE

ALIGNMENTALIGNMENT

COMPETITIVENESSCOMPETITIVENESS

CONTRIBUTORSCONTRIBUTORS

MANAGEMENTMANAGEMENT

INTERNAL STRUCTURE

PAY

STRUCTURE

INCENTIVE

PROGRAMS

EVALUATION

THE PAY MODEL


10-3

Employee Performance

Employee performance = f (S,K,M) where:

S = Skill and ability to perform task

K = Knowledge of facts, rules, principles, and procedures

M = Motivation to perform


10-4

Performance Measurement Relates to Compensation Strategy

Variability in Organizational Performance

Low Variability: few swings in overall corporate performance

High Variability: regular and large swings in overall corporate performance.

Cell A – provide wide range of rewards beyond just money. Include significant incentive component.

Cell B – provide wide range of rewards beyond just money. Emphasize base pay with low incentive portion.

Cell C – emphasize monetary rewards with large incentive component.

Cell D – emphasize monetary rewards. Large base pay with low incentive portion.

Stable and easily measured

Unstable, unclear, and changing objectives

Variability and ease of measurement in individual performance


10-5

What Behaviours Do Employers Care About?

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?


10-6

What Motivates Employees?

In the simplest sense, motivation involves three elements:

1. what is important to a person, and

2. offering it in exchange for some

3. desired behaviour


10-7

What Motivation Theories Say

Content Theories (what is important to a person)Maslow’s Need HierarchyHerzberg’s 2-Factor Theory

Process Theories (the nature of the exchange)Expectancy TheoryEquity TheoryAgency Theory

Reinforcement Theories (desired behaviour)Goal SettingReinforcement


10-8

Does Compensation Motivate Behaviour?

Do people join a firm because of pay? Do people stay in a firm (or leave)

because of pay? Do employees more readily agree to

develop job skills because of pay? Do employees perform better on their

jobs because of pay?


10-9

Process of evaluating or appraising an employee’s performance on the job

Often plagued by errors

Performance Appraisal


10-10

Common Errors in the Appraisal Process

halo error negative halo error first impression error recency error leniency error strictness error central tendency error similar-to-me error spillover error


Strategies to Better Understand and Measure Job Performance

(and reduce errors)

Improve appraisal formatsSelect the right ratersUnderstand how raters process

informationTrain raters to rate more accurately

10-11


10-12

Performance Appraisal Formats

Comparative ranking alternation ranking paired comparison

Attribute graphic rating scales

Behavioural BARS

Results/outcomes MBO


10-13

An Evaluation of Performance Appraisal Formats

Format AdministrationHR

Research Cost Validity

Ranking

StandardRating Scale

BARS

MBO

poor

average

good

excellent

average

poor average

average

good good

poor poor

good

good

poor

average good

average

average

excellent

EmployeeDevelopment

CRITERIA


10-14

Select the Right Raters

supervisors peers self customers subordinates 360-degree feedback (may include all five of the above raters)


10-15

Errors in observation (attention)

Errors in storage and recall

Errors in actual evaluation

Information Processing

Errors

Errors in rating process

Information Processing Errors


10-16

Training Raters to Rate More Accurately

rater-error training to reduce psychometric errors

performance dimension training reviews dimensions to be used in rating

performance-standard training provides frame of reference


10-17

Effective Performance Evaluation Process

1. Performance dimensions should be relevant to the organization’s strategy

2. Involve employees at every stage

3. Raters need to be trained

4. Raters must be motivated to rate accurately

5. Raters should maintain a diary of employee performance

6. Raters should diagnose in advance whether problems are due to motivation, skill deficiency, or external environment


10-18

Designing a Pay-For-Performance Plan

EfficiencyStrategyStructureStandards

-Objectives

-Measures

-Eligibility

-Funding

Equity or FairnessDistributive justiceProcedural justice

ComplianceComply with

existing lawsEnhance and

maintain firm’s reputation


10-19

Linking Pay with Performance

Merit pay grids combine 3 variables:

1.Level of performance

2.Distribution of employees within pay ranges

3.Merit budget increase percentage


Merit Pay Grid

10-20

Performance

Position in Salary Range

Unsatisfactory Satisfactory Very good Excellent

4th quartile 0% 1% 2% 3%

3rd quartile 0% 2% 3% 4%

2nd quartile 0% 3% 4% 5%

1st quartile 0% 4% 5% 6%


10-21

Conclusion

employee performance depends on skill, knowledge, and motivation

process of performance appraisal can be time-consuming and stressful

training supervisors in performance appraisal can improve the quality of appraisals

designing a pay-for-performance plan involves efficiency in setting clear standards that support strategic objectives; fairness; and legislative compliance

merit guidelines and promotional increases are forms of pay for performance

Documents

© 2010 McGraw Hill Ryerson 10-1 COMPENSATION Third Canadian Edition Milkovich, Newman, Cole