What two factors determine the size and frequency of pay increases on the merit increase grid?

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pay designed to recognize and reward employees' performance that are based on measures of individual or group contributions to the org. success. (aka incentive pay, variable pay, or performance-based pay

key questions in evaluating different pay programs for recognizing contributions

• What is the expected return?
• What are the costs of the program?
• Does the program fit with the org. HR strategy and its overall business strategy?
• What might go wrong with the plan in terms of unintended consequences?

pay plans are typically used to...

energize, direct, or control employee behaviour

emphasizes the importance of an employee's actual experience of a reward, in terms of motivating future actions

motivation is a function of valence, instrumentality, and expectancy; emphasizes expected rewards; focuses on the effects of incentives when they are offered by the org.

a theory focusing on the divergent interests and goals of the org. stakeholders and the ways that employee compensation can be used to align these interests and goals; provides especially relevant implications for compensation design

in agency theory, a person who seeks to direct another person's behaviour

in agency theory, a person who is expected to act on behalf of a principal; 

two factors that cause agency costs

1. principals and agents may have different goals (goal incongruence)
2. principals may have less than perfect info on the degree to which the agent is pursuing and achieving the principal's goals (information asymmetry)

3 examples of agency costs that occur in managerial compensation 

1. mgmt may spend money on things such as perquisites or "empire building"
2. managers and shareholders may differ in their attitudes toward risk
3. decision making horizons may differ

behaviour oriented contracts (merit pay)

• does not transfer risk to the agent and thus do not require a compensating wage differential
• principal must be able to overcome the info asymmetry and monitor with little cost what the agent has done

outcome oriented contracts (share options, profit sharing, commissions, etc.)

• profits high, compensation goes up. profits drop, compensation goes down
• drawback: such contracts increase the agent's risk and because agents are risk averse, the may require higher pay to make up for it
• interests of the company and employees are aligned

factors to determine which contract an org. should use

• risk aversion
• outcome uncertainty
• job programmability
• measurable job outcomes
• ability to pay
• tradition

decisions employees make about whether to join an org. or remain with an org.

annual increases to base pay that are usually linked to performance appraisal ratings; defines and rewards a broad range of performance dimensions; exists in almost all org.

combines an employee's performance rating with the employee's position in a pay range to determine the size and frequency of his pay increases; size and frequency of pay increases are determined by individuals performance rating and the individuals compa ratio

merit-pay program characteristics

• identify individual differences in performance
• the majority of info on individual performance is collected from the immediate supervisor
• there is a policy of linking pay increases to performance appraisal results
• feedback occurs infrequently, often once per year at the formal performance review session
• the flow of feedback tends to be largely unidirectional, from supervisor to subordinate

• discourages teamwork
• unfair and inaccurate
• may not really exist

• reward individual performance but payments are not rolled into base pay and performance is measured as physical output
• relatively rare
• many potential administrative problems
• does not fit well with team approach
• may be inconsistent with the goals of acquiring multiple skills and proactive problem solving
• reward output volume at the expense of quality or customer service

compensation plan in which payments are based on a measure of org. performance (profits) and do not become part of the employees' base salary

advantages of profit sharing

• may encourage employees to think more like owners; increased cooperation and citizenship are expected
• b/c payments do not become part of base pay, labour costs are automatically reduced during difficult economic times, and wealth is shared during good times

disadvantages of profit sharing

• performance motivation is likely to change very little under profit sharing because employees perceive no value to themselves from profit sharing
• employees may react negatively when they learn that there is no pay out during business downturns

• share options
• employee share ownership plan (ESOP)
• positive effects of ownership are larger in cases where employees have greater participation

• may be less motivational the larger the org.
• link between pay and performance is not obvious thus the effect on performance motivation may be limited

form of compensation based on group or plant performance that does not become part of the employee's base salary; offer a means of sharing productivity gains with employees

gainsharing differs from profit sharing in 2 key respects

1. instead of using an org.-level performance measure (profits), gainsharing measures group or plant performance
2. payouts are distributed more frequently and are not deffered

• focus on production
• supports teaming, participation
• acceptable to unions
• self-funding-pays out when org. needs are met

factors that should be in place for gainsharing to succeed

1. mgmt commitment
2. a need to change or a strong commitment to continuous improvement
3. mgmt's acceptance and encouragement of employee input
4. high levels of cooperation and interaction
5. employment security
6. info sharing on productivity and costs
7. goal setting
8. commitment of all involved parties to the process of change and improvement
9. agreement on a performance standard and calculation that is understandable, seen as fair, and closely related to managerial objectives

group incentives and team awards

• group incentives tend to measure performance in terms of physical output, whereas team award plans may use a broader range of performance measures
• competition between individuals may be reduced, but may be replaced by competition between groups or teams
• standard setting process must be developed; these standards must not exclude important dimensions such as quality

Which of the following types of pay increases leads to better performance?

What is the difference between performance bonuses and merit pay?

What is the difference between gainsharing and profit sharing quizlet?

Which type of program considers group or plant performance to determine incentive payouts Unlike profit sharing plans that use organization