Lecture Human resource management: Gaining a competitive advantage (9/e) – Chapter 12: Recognizing employee contributions with pay

Chapter 12

Recognizing Employee
Contributions with Pay

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Introduction
 Organizations have discretion in deciding how to pay.
 Each employee’s pay is based upon individual performance,
profits, seniority, or other factors.

 Regardless of cost differences, different pay programs can
have different consequences for productivity and return on
investment.

 Pay plans used to energize, direct, or control employee
behavior.

 Three theories that help to explain compensation’s effects are
the reinforcement theory, expectancy theory and the
agency theory; behavior–reward contingencies shape
behaviors.
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Programs Recognizing Contributions
 Programs differ by payment method, payout

frequency and ways of measuring performance.

 Potential consequences include employees’

performance motivation and attraction, culture and
costs.

 Management style and type of work influence
whether a pay program fits the situation.

Gain
Sharing
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Merit Pay
 Merit pay programs link performance-appraisal
ratings to annual pay increases.

 A merit increase grid combines an employee’s

performance rating with employee’s position in a pay
range to determine size and frequency of his or her pay
increases.

Merit Bonus - Merit pay paid in the form of a bonus,
instead of a salary increase.

Some organizations provide guidelines regarding
percentage of employees who should fall into each
performance category.

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Profit Sharing
Under profit sharing, payments are based
on a measure of organization performance
(profits), and payments do not become a part
of base pay.
 Advantages profit sharing may encourage employees to think
more like owners.
 labor costs are automatically reduced during
difficult economic times, and wealth is shared
during good times.
 Disadvantage-workers may perceive their
performance has less to do with profit than top
management decisions over which they have little

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Ownership
Ownership encourages employees to focus on
organization’s success, but may be less
motivational the larger the organization.

Stock options - plan that give employees the
opportunity to buy company stock at a
previously fixed price.

Employee stock ownership plans (ESOPs)

give employers certain tax and financial
advantages when stock is granted to
employees.
ESOPs can carry significant risk for

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Gainsharing
Gainsharing – form of compensation based on
group or plant performance rather than
organizationwide profits that does not become
part of the employee’s base salary.
offers a means of sharing productivity gains with
employees.

Improves performance

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Group Incentives and Team Awards
 Group incentives measure performace in physical output.
 Team award plans may use a broader range of performance
measures.

 Individual competition may be replaced by competition
between groups or teams.

 Individual incentives reward individual performance but

payments are not rolled into base pay. Performance is
measured as physical output rather than by subjective ratings.

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Managerial and Executive Pay
 Top managers and executives are a strategically
important group whose compensation warrants
special attention.

 Some companies' rewards for executives are high
regardless of profitability or stock market
performance.

 Executive pay can be linked to organizational
performance (agency theory).

 Increased pressure from regulators and

shareholders to better link pay and performance.

 Securities and Exchange Commission (SEC)

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Process and Context Issues
3 issues represent areas of company discretion and pose
opportunities to compete effectively:

Employee Participation
in Decision Making

Pay & Process:
Intertwined Effects

Communication

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Summary
 Programs vary as to whether they link pay to individual, group, or
organization performance. Often, it is a choice between different
combinations of programs that seek to balance individual, group,
and organization objectives.

 Wages, bonuses, and other types of pay influence an employee’s
standard of living. Pay can be a powerful motivator.

 An effective pay strategy promotes an organization’s success;
conversely, a poorly conceived pay strategy can have detrimental
effects.

 4 categories of a balanced scorecard include financial, customer
internal and learning and growth.

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