Chapter 12 MGT Notes PDF

Preview

Summary

Download Chapter 12 MGT Notes PDF

Description

Chapter 12 Recognizing Employee Contributions with Pay LO 12-01 Discuss how pay influences individual employees, and describe three theories that explain the effect of compensation on individuals How Does Pay Influence Individual Employees? Incentive Effect: The effect a pay plan has on the behaviours of current employees Three additional theories that help explain the compensation’s effects are reinforcement, expectancy, ad agency theories

1. Reinforcement Theory ● Theory emphasizes the importance of a person’s actual experience of a reward ● E.L. Thorndike’s Law of Effect states that a response followed by a reward is more likely to recur in the future

2. Expectancy Theory ● Expectancy Theory: The theory that says motivation is a function of valence, instrumentality, and expectancy ● Focuses on the effects of incentives and expected rather than experienced rewards ● Extrinsic Motivation depends on rewards such as pay or benefits controlled by an external source ● Intrinsic Motivation depends on rewards that flow naturally from work itself like performing interesting work ● Extrinsic incentives may not have an adverse effect on intrinsic motivation in the work place is the sorting process in the labor market, which matches people, over time, to jobs that fit their preferences, including reward preferences ● Incentive pay has significant positive effects on performance, which is a function of both intrinsic and extrinsic motivation

3. Agency Theory ● Focuses on the divergent interests and goals of the organizations stakeholders and the ways that employee compensation can be used to align these interests and goals ● Principal: In agency theory, a person who seeks to direct another person’s behaviour ● Agent: In agency theory, a person (manager) who is expected to act on behalf of a principal (an owner) ● Agency costs can arise from 2 factors: principals and agents may have different goals, and principals may have less than perfect information on the degree to which the agent is pursuing and achieving the principals goals ● Agency costs can be minimized by choosing a contracting scheme that helps align the interests of the agent with the principal’s own interests (either behaviour-oriented like merit-pay or outcome-oriented like stock options, profit sharing, etc)

Pay Sorting Effects Influencing Labor

●

Sorting Effect: The effect a pay plan has on the composition of the current workforce (the types of employees attracted and retained

Pay for Performance Programs 1. Differentiation in Pay based on Performance 2. Differentiation Strength/Incentive Intensity: Promise/Peril

LO 12-02 Describe the fundamental pay programs for recognizing employees’ contributions to the organization’s success The programs for types of pay for performance differ according to 3 features 1. Payment method 2. Frequency of payout 3. Ways of measuring performance

The potential for consequences of these programs include: 1. 2. 3. 4.

Performance motivation of employees Organization culture Attraction of employees Costs

Two contingencies that may influence whether each pay program fits the situation are: 1. Management Style 2. Type of Work

LO 12-03 List the advantages and disadvantages of pay programs

Merit Pay

Incentive Pay

Profit Sharing

Ownershi p

Gain Sharing

Skill-Based

Payment Method

Changes in base pay

Bonus

Bonus

Equity Changes

Bonus

Change in Base pay

Frequency of payout

Annually

Weekly

Semiannual When ly or stock is annually sold

Monthly of quarterly

When skill or competency acquired

Design Features

Performance Measures

Supervisors appraisal of individual performance

Individual output, productivity, sales

Company profit

Company stock returns

Production or controllable costs of standalone work unit

Skill or competency acquisition of individuals

Performance motivation

Relationship between pay and performance varies

Clear Stronger in performance smaller reward firms connection

Attraction

Over time pays better performers more

Pays higher performers more

Culture

Individual competition

Individual Knowledge Competition of business and cooperation

Sense of ownership and cooperatio n

Supports cooperation, problem solving

Learning and flexible organization

Costs

Requires well-developed performance appraisal system

Setting and maintaining acceptable standards

Relates Costs to ability to pay

Relates costs to ability to pay

Setting and maintaining acceptable standards

Training and certification

Management Style

Some participation desirable

Control

Fits Participatio n

Fits Fits Participatio Participation n

Fits Participation

Type of Work

Individual unless group appraisals done

Stable, individual, easily measurable

All Types

All Types

Significant skill depth or breadth

Consequences Stronger in Stronger in smaller smaller firms firms

Helps with Can help Helps with all all lock in employees if employees employees plan pays out if plan pays out

Encourages learning

Attracts learning oriented employees

Contingencies

1. ● ● ●

All Types

Merit Pay Merit Pay: Traditional form of pay in which base pay is increased permanently Merit Bonuses: Merit pay paid in the form of a bonus, instead of a salary increase Merit Increase Grid: A grid that combines an employee’s performance rating with the employees position in a pay range to determine the size and frequency of his or her pay increases Incentive Pay

2. Incentive Pay ● Individual incentives reward individual performance but payments are not rolled into base pay as they must be continuously earned and re earned, also performance is usually measured as physical output rather than subjective ratings ● Relatively rare and negative because they do not fit well with a team approach, some incentive plans reward output volume at the expense of quality or customer service, and they may be inconsistent with the goals of acquiring multiple skills and proactive problem solving

3. Profit Sharing ● Profit Sharing: A compensation plan in which payments are based on a measure of organization performance (profits) and do not come part of the employees’ base salary ● Two possible advantages include encouraging employees to think more like owners by taking a broader view of what needs to be done to make the organization more effective and the second one is that because payments do not become a part of base pay, but instead are variable pay, labor costs are automatically reduced during difficult economic times and wealth is shared during good times

4. Ownership ● Similar to profit sharing ● One way of achieving ownership is through stock options —> An employee ownership plan that gives employees the opportunity to buy the company’s stock at a previously fixed price ● Employee stock ownership plans (ESOPs), under which employers give employees stock in the company, are the most common form of employee ownership —>tax and financial advantages

5. Gain Sharing ● Gain Sharing: A from of compensation based on group or plant performance (rather than organization wide profits) that does not become part of the employee’s base salary ie the Scanlon Plan ● It differs because instead of using an organization level performance measure, the programs measure group or plant performance, which is likely to be seen more controllable by employees, and also payouts are distributed more frequently and not deferred ● Often plant wide

6. Skill-Based Pay ● Based on skills of employees ● Most often used for manufacturing jobs...