Module 4 Organizational control and reward systems

Why ORG assess employee performance informed HR decisions, employees need to

understand behavioral req., contributions to company goals, where they stand in terms of
performance, motivation to do a good job, decisions on promotions, salary increases,
bonus, and training, clear expectations. Can use performance appraisal as a motivational
tool
Effects of performance appraisal on employee, - need fulfillment, JS, ORG
commitment, job involvement, satisfaction with pay and supervisors,, promotions,
responsibility, career goals, improved self efficacy
Effects of performance appraisal on ORG, - Performance improvements, employee
counseling, goal setting, resource planning, training and dev, product and process
improvement, clarification of job expectations,
Performance appraisal issues and practices must produce results that are fair, timely,
and accurate. Measuring management performance is harder to quantify.
Three major problems deficiency (actual performance overlooked), unreliability
(problems with the evaluator), invalidity
Reliability Constancy and stability
Validity quality of measuring components. Forms of validity Content (related to
actual job behaviors), empirical (statistically related to quantitative measure of output),
construct (derived from a model or theory of performance behavior and motivation),
convergent (multiple measures yields equivalent scores), discriminant (same method
produces diff results)
Consistency 2 or more ways of gathering data produce same results
Stability dependability over time.
Errors in PA: personal bias, halo effect (rating on one trait based on others), recency
error (emphasis on recent performance), central tendency error (assigning average rating
to all employees), strictness or leniency error, similarity (manager looks for the same
qualities in employees as himself), forcing the rating to match other criteria (deciding on
overall rating first and them matching).
Overcoming errors use multiple criteria, emphasize behaviors rather than traits (traits
measures cause problems of interrater reliability), Use several raters, and train the raters
How to improve the design of PA 1. Job analysis, 2. Validity of performance measures
Job analysis focus is on content, Job analysis produces job description, produces a clear
specification of employee characteristics experience qualifications.
PA methods:
Absolute standards judges against a fixed and inflexible set of performance criteria.
Have serious validity problems, yes or no responses.
Graphics Scales rating system most popular in use today. Numerical rating scales of 1
5, highlights the difference in performance of subordinates.
Behavior Anchored Rating Scale (BARS) provides concrete examples of behavior.
Emphasizes work behavior and how it gets done instead of characteristics of employees.
Employees are consulted during design, behaviors are written in the language of
employees who do the job.
How BARS differs - Emphasizes HOW work is performed rather than traits. May require
multiple BARS systems to match other jobs groupings. Quality of feedback may exceed

other systems since emphasis is on job behavior. Negative takes a long time to develop,
work best job behavior is observable, developing BARS for job that require creativity,
innovation, and problem solving is difficult.
Goal setting and MBO goals are the end states which reduce the intensity of needs and
motives. Goals setting systems 1. Increase motivation and job performance, 2. Reduce
stress of conflicting or confusing work expectations. 3. Improve the accuracy and validity
of performance evaluation work in the organization.

MBO (Peter Drucker) is an application of goal-setting theory. Assumption of MBO

employees perform better when they know what is expected. 2. Most employees prefer
self-determination at work. 3. EE can be further motivated by timely feedback. 4. EE
prefers intrinsic and extrinsic rewards consistent with their performance. MBO must be
managed over time. Best ways to ensure quality of MBO system 1. Top management
support, commitment and involvement must precede MBO design. 2. MBO must have
strong relationship with managerial activities and responsibilities 3. MBO must
emphasize ORG and personal goals. 4. Devote part of resources to effective training of
personnel to administer the function under MBO. 5. Must tailor MBO to meet the needs
of the department. 6. Managers must avoid over-emphases on the # of goals and how
quantified they are. 7. Benefits should far exceed the costs. 8. Equal emphasis on
discussion and evaluation. 9. MBO works best when it is flexible.
Steps of MBO -

Rewards and reward systems rewards strongly influence employee effort and
performance. Reward system has heavy influence on perception.
Classifying rewards 2 categories 1. Extrinsic (given by the firm and do not occur as the
work unfolds further broken down as direct, indirect compensation, non financial
rewards), 2. Intrinsic (employee associate with the job itself)
Are Intrinsic more or less important that extrinsic? Intrinsic are more important in
influencing motivation and performance.

Distributing rewards (common reason for direct compensation) Performance, effort,

seniority, equality, power and influence (skills, mental, physical, responsibility, working
conditions).
Employee Perception of Pay Rises executive believe compensation is based on
company profits and potential for profits. Salaried workers believe, cost of living,
company performance, salary surveys are basis for increases. Hourly employees union
and non union believe company performance and financial prospects have little to do
with pay increases.
Components of executive compensation designed to be highly competitive, pay
packages reflect industry practices, and compensation programs of rival firms. Look at
executive pay practices within the industry and amongst industries to make decisions
about exec. Pay. Four basic component of exec pay 1. Base salary, 2. Benefits, 3. Long
term incentives (ISO incentive stock plan), 4. Annual bonus.
Current trends in executive compensation 1. Strengthening the link between
executive compensation and the market value of firms. 2. Executive compensation rises
much faster than employee wages. 3. CEO pay rises much faster than the pay of the
second-in command. 4. Pay gaps between us and British executives narrow. 5. More
emphasis on firms net income.6. Preventing ISO from diluting stock value.
Effects of downsizing and delayering on company wide compensation plans. Reduction in merit increases, pay for performance increases, increase in participation in
the bonus program,
Company pay practices. Cafeteria style fringe benefits (allows employees to select
package of fringe benefits as per individual needs. Also called flexible benefits package)
Lump sum pay systems - allows employees to decide how they receive pay. Weekly pay
to one large in the beg of the year. Skill based compensation (rewards for learning new
skills) Accumulating time off, all salaried team, open salary information (pay grades,
meaning of performance level, range of pay, policies on bonus and fringe benefits.). Most
popular is skill based.
Guideline for creating a pay plan 1. Does it capture the employee attention 2? Do
employees understand it? 3. Does the plan improve communication? 4. Does it make
payment when it should? 5. Is the company performing better as a result?
Other guidelines 1. Tie incentives to reward system as closely as possible to actual
performance. Line-of-sight employees can clearly see the relationship between
performance and rewards. Closely aligned with principle of instrumentality. 2. The
incentive system and benefits program should be adjusted for individual differences
among employees. 3. Should match the type of work performed and the structure of the
firm. 4. consistent with the culture of the firm.5. Incentives should be monitored over
time
Individual and group based reward systems: 2 types of group based.
1. Cost-savings i.e. Scanlon plan- groups are motivated by bonuses which depend
on reducing production costs below established base rate. Promotes improved
group based innovation and problem solving. Promotes better labor management
cooperation. Also called gainsharing because gains are shared between owners
and labor. Gainsharing is a powerful tool for lowering costs and building
innovation at a level where work is done. Work best when a dependable history

of labor costs exists in the firm. Company should have a history of labormanagement co-operation.
2. Profit sharing: - rational is that all employees contribute to the success and all
should share the profits.
Well designed team based reward system can strengthen competitive advantage in 6
ways. 1. Attraction and retention 2. Motivation and performance. 3. Skill development 4.
Organizational culture 5. Reinforcement and definition of structure 6. Cost
Rucker Plan shares base with the scalon plan. Incentive system that works in a selfdirected team environment. measurement of productivity is called value added which is
the difference between sales income from goods produced and the cost of material,
supplies, and outside service consumed in the production and delivery of the output.
Creates a line-of-sight which is a basic feature of any effective team bases system. Needs
to be established in a firm that values its work force and practices empowerment. If a
firm has downsized the following conditions must be met before a rucker or a gainsharing
plan is installed 1. No future wage freezes firm has returned to profitability 2.
Management team is stable. 3. Company is not being sold or spin-off. 4. Outsourcing of
non-essential functions completed. 5. Firm is using service based and market based
measures of customer satisfaction.

Summary Points

Performance appraisal systems monitor progress towards meeting organizational

goals, communicate performance expectations to employees, and create
informed data for making human resource decisions.
Validity and reliability are the two most important properties of a performance
appraisal system. Performance appraisal content and empirical validity are the
two measures which are most important to organizations. Reliability is generally a
function of the number of dimensions in a performance appraisal system, uniform
administration procedures and the level of understanding and training of
managers who use the system. Reliability can be enhanced by using multiple
raters to judge the performance of employees. g
Threats to performance appraisal system reliability include personal bias, halo
effect, recency error, similartome error, forcing the rating, central tendency,
leniency error and strictness.
The system of graphic rating scales is the most popular assessment tool. This
system overcomes some of the limitations of the absolute standard method.
BARS systems are designed with the help of employees, and can generate useful
behavioral data which employees perceive as relevant to successful job
performance. BARS systems are more expensive to design, but they can be
extremely useful for jobs with specific behavioral requirements. As job clusters
multiply, additional BARS systems may have to be built.
Goal setting theory supports MBO. MBO works best when it is participative, when
ample formal and informal feedback is provided to employees, and when
provisions for goal revision are built in to the system. When creating goals for
employees, the SMART principle should prevail. Goals should be specific,
measurable, achievable, resource based and time based.
MBO systems fail without sustained top management support. They must also be
anchored to routine managerial activities, personal development, training, and
departmental needs.
Rewards are classified as extrinsic or intrinsic. Intrinsic rewards occur as the work
unfolds, and employees experience them as challenge, personal growth, work

meaningfulness and work significance. Extrinsic rewards are environmentally

based and they can be further classified as direct, indirect or no financial
compensation. Extrinsic rewards are usually the subject of published
organizational policies.
Extrinsic rewards can be distributed to employees based on their: 1) performance,
2) effort, 3) seniority, or 4) difficulty of replacement. Organizations often adopt
pay policies which reflect concern for equality or the power of certain groups.
Pay systems should be built on the basis of a job analysis which ranks jobs based
on the extent of their value adding factors.
New pay practices include cafeteria-style fringe benefits, lump sum pay, skill
based compensation, accumulating time off, the all salaried team and open salary
information.
Any changes in pay systems should be evaluated in terms of their effects on
employee perceptions of procedural and distributive justice. Procedural justice
refers to pay practices that are fair and subject to review and distributive justice
refers to pay outcomes (in relation to inputs) that are judged as fair and
reasonable by the employees who receive the rewards.
Group based reward systems can improve productivity when labor and
management view themselves in a performance partnership. The Scanlon and
Rucker Plans are cost savings or gainsharing programs and the Lincoln Electric
plan is a profit-sharing plan.
New guidelines for altering pay systems stress: 1) matching the pay system to
the organizations strategic goals so that competitive advantage is created or
extended; 2) adjusting the pay plan to reflect the extent of diversity in the work
force and 3) ensuring that the pay system fits with other firm characteristics that
are strongly related to the companys sources of competitive advantage.
Over time, as companies become less responsive in their mature, low growth or
declining industries, their cost structures rise.
These conditions cause managers to ignore or overlook the revitalizing effects on
strategic competitive advantage of group based incentives. Often times, it is not
until employees have been empowered and self-directed teams are in place that
problems with team motivation crop up. At that point, managers try to use group
based rewards to strengthen competitive advantage.
Delayered firms cannot expect to sustain improvements in service quality nor
keep highly trained personnel unless they adopt group based incentives. As a
basis for excellent service delivery, group based incentives have better lineofsight
than companywide ISO plans. This is true because the performance standards
that support a Rucker or Scanlon Plan for motivation are more strongly related to
employees service improvement efforts and creativity. On the other hand, ISO
plans depend on a rising share price to enrich (motivate) participating employees.
Share price is to a great extent influenced by stock market conditions and the
prevailing economic environment.
The trend to make employees pay dependent on the performance of the
company and their abilities to meet its goals (payatrisk) is being accelerated by
the penetration of ISO plans to lowerlevel employees across companies and their
industries. ISO plans were once only common in undercapitalized startups with
too few employees. Now, large firms have seen the light and they are fueling this
widening trend not only for the proven motivational outcomes in the plans but
also because the plans create sizable tax advantages.
The best way to motivate self-directed teams in a delayered firm is by making
group based rewards contingent on the groups performance. To a considerable
extent, such plans reinforce the payatrisk trend because the bonuses are not
available unless productivity and service are improved by employees in a cost
effective way. From a macroeconomic perspective, group based rewards boost the

disposable income of employees. However, to be earned, employees must first

measurably improve their productivity or add value to the services that they
deliver. Such incentive plans are not inherently inflationary because the firm first
earns rising revenues through a growing market share before it pays out group
based bonuses. The bonuses are not promised nor guaranteed in the future to
employees. Thus, in an economy with many delayered firms we see rising
productivity and rates of increase in sales that exceed the rate of growth in wages
over time. These are exactly the conditions that have prevailed in the United
States since early 1995