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Human Resource Management

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Human Resource Management (MGT501)
Lesson 30
After studying this chapter, students should be able to understand the following:
A. Explain Pay-for-Performance
B. Describe the Role of Money
This chapter focuses on the effective design and implementation of pay-for-performance systems. First, it
addresses the major challenges and pitfalls facing managers in their attempts to link pay and performance.
Second, the chapter offers a set of general recommendations to deal with pay-for-performance challenges.
Third, it describes and analyzes specific types of pay-for-performance programs. Finally, it discusses unique
pay-for-performance plans.
A. Pay-for-Performance
Pay for performance refers to any compensation method that ties pay to the quantity or quality of work the
person produces. Variable pay plans are pay for performance plans that put a portion of the employee's pay
at risk, in return for the opportunity to earn additional pay. Gainsharing plans are group incentive plans
that engage many or all employees in a common effort to achieve productivity goals. Stock options are
rights to purchase company stock at a discount some time in the future.
A compensation philosophy of higher pays for higher contributions Performance will be calculated on -
corporate performance and personal performance.
I. Challenges of Pay-for-Performance System
a) Pay for Performance: The Challenges
This section covers the attitudes that employees have about pay, the difficulties in measuring performance,
the psychological contract, lack of flexibility, the importance of credibility, job satisfaction, stress, and the
potential reduction of intrinsic drives.
The "Do Only What You Get Paid For" Syndrome: The closer pay is tied to particular
performance indicators, the more employees tend to focus on those indicators and neglect
other important job components
ii. Negative Effects on the Spirit of Cooperation: Employees may withhold information
from a colleague if they believe that it will help the other person get ahead
iii. Lack of Control: Employees often cannot control all of the factors affecting their
iv. Difficulties in Measuring Performance: Assessing employee performance is one of the
thorniest tasks a manager faces, particularly when the assessments are used to dispense
v. Psychological Contracts: Once implemented, a pay-for-performance system creates a
psychological contract between the employee and firm, and it is very resistant to change
vi. The Credibility Gap: Employees often do not believe that pay-for-performance programs
are fair or that they truly reward performance
vii. Job Dissatisfaction and Stress: Pay-for-performance systems may lead to greater
productivity but lower job satisfaction
viii. Potential Reduction of Intrinsic Drives: Pay-for-performance systems may push
employees to the point of doing whatever it takes to get the promised monetary reward
and in the process stifle their talents and creativity
Human Resource Management (MGT501)
II. Meeting the Challenges of Pay for Performance Systems:
Appropriately designed pay-for-performance systems offer managers an excellent opportunity to align
employees' interests with the organizations. Pay for performance programs are not likely to achieve the
desired results unless complementary HRM programs are implemented at the same time.
b) Link Pay and Performance Appropriately: There are few cases in which managers can justify
paying workers according to a pre-established formula or measure.
c) Use Pay for Performance as Part of a Broader HRM System: Pay-for-performance programs
are not likely to achieve the desired results unless complementary HRM programs accompany
d) Build Employee Trust: Even the best conceived pay-for-performance program can fail if
managers have a poor history of labor relations or if the organization has a cutthroat culture
e) Promote the Belief that Performance Makes a Difference: Unless an organization creates an
atmosphere in which performance makes a difference, it may end up with a low-achievement
organizational culture
Use Multiple Layers of Rewards: Because all pay-for-performance systems have positive and
negative features, providing different types of pay incentives for different work situations is likely to
produce better results than relying on a single type of pay incentive
g) Increase Employee Involvement: When employees do not view a compensation program as
legitimate, they will usually do whatever they can to subvert the system
h) Use Motivation and Non-financial Incentives: Some people are more interested in the non-
financial aspects of their work
III. Types of Pay-for-Performance Plans
When a pay-for-performance system has multiple layers, it can increase the motivation of individual
employees and simultaneously improve cooperation. For example, bonuses given to teams or work units
promote cooperation. Bonuses given to individual employees, however, are more motivating because they
allow employees to see how their personal contributions lead to direct rewards. Since all
pay-for-performance systems have positive and negative features, providing different types of pay incentives
for different work situations is likely to produce better results than relying on a single type of pay incentive.
With a multiple-layers-of-rewards system, the organization can realize the benefits of each incentive plan
while minimizing its negative side effects.
Types of pay-for-performance plans vary in design. Some are designed to reward individuals, teams,
business units, the entire organization, or any combination of these.
Individual-Based Plans
Individual-based plans are the most widely used pay-for-performance plans in industry. There are several
plans that can be used: merit pay, bonus programs, and awards. Advantages of individual-based pay-
for-performance plans include rewarded performance is likely to be repeated, financial incentives can shape
an individual's goals, they help the firm achieve individual equity, and they fit in with an individualistic
culture. Disadvantages include they may promote single-mindedness; employees do not believe pay and
performance are linked, they may work against achieving quality goals, and they may promote inflexibility.
b. Team-Based Plans
Team-based plans attempt to support other efforts to increase the flexibility of the work force within a firm.
These plans normally reward all team members equally based on group outcomes. The advantages of team-
based pay-for-performance plans include they foster group cohesiveness and they facilitate performance
Human Resource Management (MGT501)
measurement. Disadvantages include possible lack of fit with individualistic cultural values, the free-riding
effect, social pressures to limit performance, difficulties in identifying meaningful groups, and intergroup
competition leading to a decline in overall performance.
Plant wide Plans
These plans reward all workers in a plant or business unit based on the performance of the entire plant or
unit. Plant wide plans are generally referred to as gain sharing programs because they return a portion of
the company's cost savings to the workers, usually in the form of a lump-sum bonus. There are three major
types of gain sharing programs: Scanlon Plan, Rucker Plan, and the Improshare.
Advantages include
eliciting active employee input, increasing the level of cooperation, fewer measurement difficulties, and
improving quality. Disadvantages include protection of low performers, problems with the criteria used to
trigger rewards, and management-labor conflict.
d. Corporate wide Plans
This is the most macro type of incentive program and is based on the entire corporation's performance.
The most widely used program of this kind is profit sharing which differs from gain sharing in several
important ways: no attempt is made to reward workers for productivity improvements, they are very
mechanistic, and typically they are used to fund retirement programs. Employee stock ownership plans
are another type of corporate wide plan. Advantages of corporate wide plans are financial flexibility for the
firm, increased employee commitment, and tax advantages. Disadvantages include risk for employees,
limited effect on productivity, and long-run financial difficulties.
IV. Designing Pay-For-Performance Plans for Executives and Salespeople
Executives and sales personnel are usually treated very differently than other types of workers in
pay-for-performance plans. A number of plans are used to link executives' pay to a firm's performance, but
there is little agreement on which is best. Sales professionals may be paid in the form of straight salary,
straight commission, or a combination plan. The relative proportion of salary versus incentives varies
widely across firms.
V. Reasons for Pay-For-Performance Failures
Following factors are commonly blamed for the failure of individual-based pay-for-performance systems.
Performance appraisal is inherently subjective, with supervisor's evaluating subordinates according
to their own preconceived biases.
Regardless of the appraisal form used, rating errors are rampant.
Merit systems emphasize individuals rather than group goals and this may lead to dysfunctional
conflict in the organization.
The use of a specified time period (normally one year) for the performance evaluation encourages a
short-term orientation at the expense of long-term goals.
Supervisors and employees seldom agree on the evaluation, leading to interpersonal confrontations.
Increments in financial rewards are spaced in such a way that their reinforcement value for work
behavior is questionable for example becoming twice as productive now has little perceived effect
on pay when the employee must rat a whole year for a performance review.
Individual merit pay systems are not appropriate for the service sector.
Supervisors typically control a rather limited amount of compensation, so merit pay differentials are
normally quite small and therefore of questionable value.
Human Resource Management (MGT501)
A number of bureaucratic factors hat influence the size and frequency of merit pay have little to do
with employee performance.
Performance appraisals are designed for multiple purposes (training and development, selection,
work planning, compensation, and so forth.) When a system is used to accomplish so many
objectives, it is questionable whether it can accomplish any of them well. It is difficult for the
supervisor to play the role of counselor or advisor and evaluator at the same time.
B. The Role of Money
Money can be used as a motivational tool in the organization because it is used as a source to fulfil different
needs. It affects several needs, not just existence needs. Money is used to prove and enhance the identity id
people it influences the self-perceptions.
Improving Reward Effectiveness
Effectiveness of the rewards can be improved by considering the following factors.
Link rewards to performance
Ensure rewards are relevant
Use team rewards for interdependent jobs
Ensure rewards are valued
Beware of unintended consequences
I. Money as a Motivator
According to Maslow and Alderfer, pay should prove especially motivational to people who have strong
lower-level needs. If pay has this capacity to fulfill a variety of needs, then it should have good potential as a
II. Why People Leave Organizations:
Mostly people leave the organizations or organizations have to face high turnover rate due to different
reasons like employees are not satisfied with benefits provided or the recognition is not provided for
extraordinary perfumers these causes should be overcome so that employee loyalty can be increased.
Following ways can be used to avoid the high turnover of employees.
 Use Recognition
Some employees highly value day-to-day recognition from their supervisors, peers and team members
because it is important for their work to be appreciated by others. Recognition helps satisfy the need people
have to achieve and be recognized for their achievement.
 Use Positive Reinforcement
Positive reinforcement programs rely on operant conditioning principles to supply positive reinforcement
and change behavior. Experts claim it is better to focus on improving desirable behaviors rather than on
decreasing undesirable ones. There are a variety of consequences including social consequences (e.g., peer
approval or praise from the boss), intrinsic consequences (e.g., the enjoyment the person gets from
accomplishing challenging tasks), or tangible consequences (e.g., bonuses or merit raises).
 Empower Employees
Empowerment means giving employees the authority, tools, and information they need to do their jobs
with greater autonomy, as well as the self-confidence to perform new jobs effectively. Empowerment
boosts employees' feelings of self-efficacy and enables them to use their potential more fully.
Human Resource Management (MGT501)
I. Rewards and other Employee Behaviors
Rewards can be used to modify the
behaviors of the employees if people in the
Positiv e consequence
organization are not satisfied with the
(reinforced by re ward)
reward system or if they think that the
reward system of the organization is not
fair, than the organizations will be facing
problems  of  low  productivity,  high
absenteeism and high turnover and vice
versa. When ever some one performs up to
specific standards and some times beyond
that , there us always exists demand and
Not repeated
expectations of rewards and recognitions
that will lead to continuous improvement
Negativ e consequence
but  in  the  absence  of  recognition
(no re ward)
performance instead of improvement will
be facing down fall trends which are
definitely harmful for the organizations. Positive consequences (rewards) of actions (performance) are
always tending actions to be repeated but in case any action (performance) is followed with the negative
consequences (no rewards) than the behavior will jot be repeated as shown in fig.
Key Terms
Pay for Performance  Pay for performance refers to any compensation method that ties pay to the
quantity or quality of work the person produces
Empowerment means giving employees the authority, tools, and information they
need to do their jobs with greater autonomy
Table of Contents:
  1. INTRODUCTION TO HRM:Growing Importance of HRM, Road Map of the Course
  2. ESSENTIALS OF MANAGEMENT:Concepts and Essential of Management, Managerís Roles
  3. ORGANIZATION AND COMPONENTS OF ORGANIZATION:Open versus Closed Systems, The Hawthorne Studies
  4. PEOPLE AND THEIR BEHAVIOR:Why to work in organizations?, The Goals of Organizational Behavior
  5. INDIVIDUAL VS. GROUP BEHAVIOR:What Are Roles?, Problem solving Team
  6. PERSONNEL MANAGEMENT TO HUMAN RESOURCE MANAGEMENT:Records and Administration, Competitive Advantage
  7. HRM IN A CHANGING ENVIRONMENT:Productivity, New Trends at Work Place
  8. How organization Cultivate a Diverse Workforce, STEPS TOWARD MANAGEMENT OF DIVERSITY
  9. FUNCTIONS AND ENVIRONMENT OF HRM:Compensation and Benefits, Safety And Health, Interrelationships of HRM Functions
  10. LINE AND STAFF ASPECTS OF HRM:Authority, Line versus Staff Authority, Staff Manager
  11. LEGAL CONTEXT OF HR DECISIONS:Doing the Right Thing, Affirmative Action, Unintended Consequences
  12. HUMAN RESOURCE PLANNING (HRP):Benefits of HR Planning, Forecasting Human Resource Availability
  13. STRATEGIC PLANNING AND HRIS:HRís Strategic Role, Human Resource Information System, Common HRIS Functions
  14. JOB ANALYSIS:Purposes of the job Analysis, Questions Job Analysis Should Answer
  15. JOB ANALYSIS:Methods of Collecting Job Analysis Information, Observation, Source of Data
  16. JOB ANALYSIS (CONTD.):SURPLUS OF EMPLOYEES FORECASTED, Diversity through Recruiting Efforts
  17. SOURCES OF RECRUITMENT:ALTERNATIVES TO RECRUITMENT, Quantity of the Applicants, Quality of the Applicants
  18. SELECTION:Initial Screening, Advantages of Successful Screening
  19. SELECTION TESTS:Characteristics of Properly Designed Selection Tests, Guidelines for Conducting an Interview
  20. SELECTION PROCESSÖ CONTD:Background Investigations, Physical Exam, Selecting Managers
  21. SOCIALIZATION:Compensation and Benefits, Team Membership, Stages in socialization Process, Training and Development Trends
  22. TRAINING AND DEVELOPMENT:Learning, Phases of Training, Why Transfer of Training Fails
  23. MAXIMIZING LEARNING:Following up on Training, Repetition, Feedback, Purposes of T & D
  24. CAREER MANAGEMENT:Individual career planning, Career Planning and Development Methods
  25. PERFORMANCE:Determinants of Job Performance, Why is performance measured?, Performance Management
  28. COMPENSATION SYSTEM:Pay, Job Pricing, Compensation: An Overview, Compensation Surveys
  29. BENEFITS:Total Compensation, Discretionary Benefits (Voluntary), Workplace Flexibility
  30. ROLE OF MONEY IN PERFORMANCE OF EMPLOYEES:Types of Pay-for-Performance Plans, Empower Employees
  31. MOTIVATION:The Motivation Process, Motivational Theories, Challenges of motivating employees
  32. OCCUPATION, HEALTH & SAFETY:Physical Conditions, Accident Investigation, Smoking in The work place
  33. STRESS MANAGEMENT:Symptoms of Stress, Managing Stress,
  34. COMMUNICATION IN ORGANIZATION:Burnout, Social Support at Work & Home, Communication in organization, Meetings
  35. TRADE UNIONS:Collective Bargaining, The HRM Department in a Nonunion Setting, Phases of Labor Relations
  36. CONFLICT AND NEGOTIATION:Transitions in Conflict Thought, Individual Conflict Management Styles
  37. POWER AND POLITICS:Sources of Power, Advantages and Disadvantages of PowerPower and Politics in Context
  38. EMPLOYEE RIGHTS AND DISCIPLINE:Contractual Rights, Management Rights, Disciplining Employees,
  39. DISCIPLINE (CONT...):Factors to Consider when Disciplining, Disciplinary Guidelines, Employee Separations
  40. LEADERSHIP:The Leaderís Behavior, Situational Theories of Leadership, Becoming a Leader
  41. REVISION (LESSON 12-21):Plans, Job Specification, Human resource planning, Selection Process, Corporate Culture
  42. REVISION (LESSON 22-26):Training, Case Study Method, Training, Performance
  43. REVISION (LESSON 27-35):Classification Method, Compensation, Empowerment, Mediation
  44. INTERNATIONAL DIMENSIONS OF HRM:Global Corporation, Type of staff members, Approaches to Global Staffing
  45. CONCLUSION & REVIEW:Strategies for Gaining Competitive Advantage, High-performance Work System