Introduction
For the fourth Topic, I am going to present key concepts, theories and models from the chapters 10 & 11: Managing compensation and Rewarding Performance, from the eight edition (2016) of Managing Human Resources by Gómez-Mejía, Balkin and Cardy. I will summarize the key concepts from the chapters, introducing the topics such as Designing a compensation system, Compensation Tools, The legal environment and pay system governance, The challenges in pay-for-performance systems, Types of pay-for performance plans and designing it for Executives, salespersons ans small Firms. Summary also includes different sources including studies about motivation and references to ted talk by Dan Pink. In the end I will shortly present two different articles related to this topic.
Managing Compensation
Total compensation has three main elements, base compensation, the fixed pay received on a regular basis and pay incentives, programs designed to reward employees for good performance and benefits (indirect compensation for example health insurance, vacations, unemployment compensation.)
Compensation is the single most important cost in most firms. (Gómez-Mejía. Balkin & Cardy 2016, 315.)
Designing a compensation system
When a company do an effective compensation plan, it allows them to achieve its strategic objectives and it is comparable to the firm’s typical characteristics as well as to its environment. The pay options managers need to consider in designing a compensation system are:
- Internal versus external equity
- Fixed versus variable pay
- Performance versus membership
- Job versus individual pay
- Egalitarianism versus elitism
- Below market versus above market compensation
- Monetary versus nonmonetary rewards
- Open versus secret pay
- Centralization versus decentralization of pay decisions
In all of these situations the best choices depend on how well they fit with business purposes and the individual organization(Gómez-Mejía. Balkin & Cardy 2016, 316-319).
Compensation Tools
There are two extensive categories of compensation tools:
Job-based approaches
The typical job-based compensation plan has three components: firstly, to achieve internal equity. Company can use job evaluation to assess the relative value of jobs throughout the organization. Second element is to achieve external equity. For example, a Company can use salary data on benchmark or key jobs gained from market surveys to set a certain pay policy. Third component is to achieve individual equity. Firms use a combination of experienced position and performance to create an individual’s position within the pay range for their job.(Gómez-Mejía. Balkin & Cardy 2016, 328 .)
Skill based approaches
Skill- based compensation systems are more expensive and more restrained in use. Skill-based pay rewards employees for developing depth skills, meaning of learning more about certain specialized area. But also developing Horizontal and breadth skills, learning about more areas for example and vertical skills for self-management.(Gómez-Mejía. Balkin & Cardy 2016, 328.)
The Legal Environment and Pay System Governance
The major federal laws governing compensation practices (in US.) are:
The Fair Labor Standards Act, that controls minimum wage and overtime payments and provides guidelines for classifying employees as exempt (excused) or nonexempt.
The Equal Pay Act, which prohibits pay discrimination based on gender.
and The internal revenue code, that specifies how various procedures of employee pay are subject to taxation.
Some countries and municipalities have comparable worth legislation, which calls for comparable pay for jobs that require comparable skills, effort, and responsibility and have comparable working conditions, even if the job content is different.(Gómez-Mejía. Balkin & Cardy 2016, 2340-343.)
Rewarding Performance
Pay-for-Performance: The Challenges
Incentive Pay-for-Performance programs can improve productivity, but managers also need to consider several challenges in their design and implementation. Employees may be tempted to do only what they get paid for, ignoring those intangible aspects of the job that are not explicitly rewarded. Cooperation and teamwork may be damaged if individual merit pay is too strongly emphasized. Individual merit systems assume that the employee is in control of the primary factors affecting their work productivity, which is not always true. (Gómez-Mejía. Balkin & Cardy 2016,353.)
Individual performance is difficult to measure and tying pay to inaccurate performance measures is likely to create problems. Pay incentive systems can be thought as an employee right and can be difficult to adapt to the organization’s changing needs. According to the credibility gap, many employees do not believe that the company rewards of good behavior and performance. Emphasizing merit pay can highly stress employees and lead to frustration for the job. Finally, merit pay can lead to decrease of an employee’s essential motivation.(Gómez-Mejía. Balkin & Cardy 2016,353-355.)
On TED TALK by Dan Pink about motivation in 2009, he referenced to the famous candle problem test by Psychologist Karl Duncker. The test measures measures the career motivation. The proposition was simple. The subject was given three key items: a candle, a book of matches, and a box of thumbtacks. Using these items, the goal was to position the candle in a way that, while lit, no wax would touch the ground. (Igeme, 2012.)
When seeing the final image, the answer seems quite obvious. By removing the tacks and utilize the box to catch the falling wax. A later variant of Duncker’s study conducted by Samuel Glucksberg, concluded that functional fixedness would cause individuals to neglect the use of the box as a possible platform and instead see it as a container for the tacks. However, the real interest in this study was not in the end- solution. The test was intentionally designed to be a performance indicator. (Igeme, 2012.)
Levels of performance became especially interesting as they could provide links into successful businesses. Therefore, in repeated versions of the test, encouragements were introduced as a new variable to better understand the subjects’ performance. This encouragement was commonly money. The common view was that the money as a reward, would increase the performance. However the results were surprisingly contradictory. (Igeme, 2012.)
”That’s right. Those who were offered no incentive whatsoever were figuring out the Candle Problem the fastest. Money was found to actually decrease performance overall”(Igeme 2012).
On the TED TALK Dan Pink arguments that, along this test results and all the other scientific facts shows that the businesses should knowledge this when planning their compensations in a firm. He concluded that science knows that:
– THE REWARD narrows our focus and restricts our possibility
1 . those motivators we think are a natural part of business do work, but only in a surprisingly narrow band of circumstances
2. those if then rewards destroys creativity
3. the result to high performance isn’t rewards and punishments, but that unseen intrinsic drive- the drive to do things for their own sake. (Pink D 2009.)
Meeting the Challenges of Pay-For-Performance Systems
To avoid the problems sometimes associated with pay for performance systems, managers should:
- Link pay and performance appropriately
- Use pay for performance as part of a boarder HRM System
- Build employee trust
- Promote the belief that performance makes a difference
- Use multiple layers of rewards
- Increase employee involvement
- Consider using nonfinancial incentives
If employees can participate in the design of the plan, it can improve its credibility and long-term success.(Gómez-Mejía. Balkin & Cardy 2016, 358-361.)
Types of Pay-for-Performance Plans
There are four different types of motivational programs. At the level of individual employees is a merit pays are most common. Merit pay becomes part of base salary and the bonuses given on a one-time basis, controlled by supervisory appraisals. At the next level, team-based plans reward the performance of groups of employees working together on joint projects or tasks, usually with bonuses and non-cash awards. At the level of the plant or business unit, gain-sharing is the program of choice. Gain-sharing rewards workers based on cost savings, usually in the form of a ”lump-sum bonus”. At the fourth and the highest level of the organization – the entire corporation– profit sharing and employee stock option plans, ESOPs, are used to link the company’s performance with employees’ financial rewards. Both plans are often used to fund retirement programs, for example.(Gómez-Mejía. Balkin & Cardy 2016, 362-371.)
Designing Pay-for-Performance Plans for Executives and Salespeople
Two employee groups, top executives and sales personnel are normally treated quite differently than most other employees in pay-for-performance plans. Short-term annual bonuses, long-term incentives, and perks may be used to motivate executives to make decisions that help the organization reach to its long-term strategic goals. Sales employees are making revenue for the company and their compensation system is normally used to boost productive behavior. A dependence on straight salary for salespeople is most appropriate, when maintaining customer relations and servicing existing accounts are the key targets. A dependence on straight commission is often appropriate if the company is just trying to increase sales. Most of the times, companies use a combination of the two plans. In Today’s globally competitive marketplace, many organizations are also using incentive programs to reward a good customer service.(Gómez-Mejía. Balkin & Cardy 2016, 372-379.)
Designing Pay-for-Performance Plans in Small Firms
Small companys often face specific challenges when designing pay-for-performance systems. Many times they are less likely to have necessary professional support to develop and administer all of the plans. Real or identified mistakes in assigning incentives can have a huge impact on the small companies. Especially nowadays the information travels fast, so there is often a thin line between personal and work life. Also because people are supposed to work together closely, the pay-for-performance plans in these firms are most likely to be successful if there is active employee participation in the development of the plan, incentives are linked to the achievement of organizational goals and informal feedback is provided to employees regularly. When designing these plans, most small companies find it useful to offer generous profit sharing and equity-based pay for employees.(Gómez-Mejía. Balkin & Cardy 2016, 3379-380.)
Research article: How Incentive Pay Affects Employee Engagement, Satisfaction, and Trust
This research article was published by Ogbonnava, C., Daniels, K. and Nielsen, K. March 2017, on Harvard Business Review.
The article explains about how most managers agrees that empowered, efficient workers are crucial to businesses success, regardless of the size of the organisation, industry or business strategy. The problem usually is, how to Motivate them. One common approach is offering performance-based incentive pay to employees, and it usually takes one of two forms: bonuses are offered to individuals based on their performance assessments, or bonuses are offered as organizational incentives, such as profit-related pay or shareholding.(Ogbonnava, Daniels, & Nielsen 2017.)
According to their research analysis, a job intensity results and employee performance compensation will give managers a pause. In certain cases, performance-related compensation can be viewed as a burden that only offers extra pay to employees by work process intensification. This poses fundamental questions as to how individual benefits will affect the health of workers in a sustainable way. (Ogbonnava, Daniels, & Nielsen 2017.)
Article: The Best Ways to Reward Employees
This Article was published on Entrepreneur Europe. In the article the Entrepreneur contributors argue that every company needs a strategic reward system for employees that addresses at least four areas: compensation, benefits, recognition and appreciation. And that often the problems occur in the reward systems when one of these factors are are missing. With some of these questions below, a company can review their strategic reward system(Entrerpreneur.)
Does it address compensation, benefits, recognition and appreciation? Is it aligned with your remaining business strategies? Is it driving the right behaviors for your company, as well as your performance goals? (Entrerpreneur).
Most importantly if the company rewards system needs modification the firm should not wait to fix them. Because at the end it can mean the difference between the business’ success and failure. (Entrerpreneur.)
References
Entrepreneur. The Best Way to Reward Employees. URL: https://www.entrepreneur.com/article/75340 Accessed: 26 February, 2020.
Gomez-Mejia, L.R., Balkin, D.B. and Cardy, R.L. 2016. Managing Human Resources. Global Edition 8/E.
Kruse K. 22 June 2012. Forbes. What is Employee Engagement. URL: https://www.forbes.com/sites/kevinkruse/2012/06/22/employee-engagement-what-and-why/#2f301cc47f37 Accessed: 26 February, 2020.
MacLeod, D., Clarke, R. 2015. Engaging for Success. URL: https://engageforsuccess.org/wp-content/uploads/2015/08/file52215.pdf Accessed: 26 February, 2020.
Ogbonnava, C., Daniels, K., Nielsen, K. 15 March 2017. Harvard Business Review. How Incentive Pay Affects Employee Engagement, Satisfaction, and Trust. URL: https://hbr.org/2017/03/research-how-incentive-pay-affects-employee-engagement-satisfaction-and-trust Accessed: 26 February, 2020.
Pink D. July 2009. Ted Talk. URL: https://www.ted.com/talks/dan_pink_the_puzzle_of_motivation?language=en#t-1099127 Accessed: 26 February, 2020.
Cover photo source URL: https://pxhere.com/en/photo/1453161 26 February, 2020.
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