CH3

MERIT PAY AND PERFORMANCE APPRAISAL SYSTEM

MERIT PAY

Merit pay assumes that employee’s compensation over time should be determined , at least in parts , by differences in job performance.

Most commonly used in U.S.

Its is due to the fact that merit pay fits well with the U.S cultural ideals to reward individual achievement.

ELEMENTS OF MERIT PAY

Managers use subjective as well as objective indicators to determine whether an employee’s will receive any merit pay.

As a rule , supervisors give merit increases to employees based on subjective appraisal of employees’ performance.

Supervisors periodically review individual employee performance to evaluate how well each worker is accomplishing assigned duties relative to established standards and goals.

CONSIDERATIONS FOR IMPLEMENTING A MERIT PAY SYSTEM

• Merit pay system isn’t appropriate for all companies.

• compensation professionals must consider two factors:

1. Commitment from top management 2. Design of job

CONSIDERATIONS FOR IMPLEMENTING A MERIT PAY SYSTEM

1).Commitment from top management: Top management must be willing to reward

employees’ job performance with meaningful pay differentials that match employee performance differentials.

The amount of merit pay increase must reflect prior performance levels and motivate employees for exemplary performace.

CONSIDERATIONS FOR IMPLEMENTING A MERIT PAY SYSTEM

Just-meaningful pay increase:• The pay raise amount should be meaningful to

employees.

• It refers to the minimum pay increase that employees will see as making a meaningful change in compensation.

• The basic premise of this concept is that a trivial pay increase for average or better employees is not likely to reinforce their performance or motivate enhanced future performance.

CONSIDERATIONS FOR IMPLEMENTING A MERIT PAY SYSTEM

2).Design of job:

• Jobs must be designed to accurately measure employees’ performance.

• Merit programs are most appropriate when employees have control over their performances and conditions outside employees’ control do not substantially effect their performance.

CONSIDERATIONS FOR IMPLEMENTING A MERIT PAY SYSTEM

Example: For sales professional economic recession

generally leads consumers to limit spending on new purchases.

Sales professionals certainly do not create recession nor they can help combat consumers’ fears.

Similarly, for production workers regular equipment breakdown leads to lower output.

Furthermore , there must be explicit performance standards that specify the procedures or outcomes against which employees’ performance can be clearly evaluated.

It includes defining and putting in writing the major duties of a job and specifying written performance standards for each duty.

Refer to books’ example.

PERFORMANCE APPRAISALS

Effective performance appraisal drive effective merit pay programs.

Administering successful merit pay programs depends as much on supervisors’ appraisal approach as it does on professionals skills in designing and implementing such plans.

TYPES OF PERFORMANCE APPRAISAL PLANS

It falls into four broad categories:

1. Trait systems2. Comparison systems 3. Behavioral systems4. Goal-oriented systems

TRAIT SYSTEMS Trait systems ask raters to evaluate each employees’

traits or characteristics . It includes:Quality of work Judgment

Quantity of work Leadership responsibility

Dependability Decision-making ability

Cooperation Creativity

Initiative

o Appraisals are typically scored using descriptors ranging from unsatisfactory to outstanding.

TRAIT-ORIENTED PERFORMANCE APPRAISAL RATING FORM EXAMPLE

Employee’s name: Employee’s position:

Supervisor’s name: Review period:

Instructions: For each trait below, circle the phrase that best represents the employee.

1. Diligencea. Outstanding b. Above average c. Average d. Below average e.

Poor

2. Cooperation with othersa. Outstanding b. Above average c. Average d. Below average e.

Poor

3. Communication skillsa. Outstanding b. Above average c. Average d. Below average e.

Poor

4. Leadershipa. Outstanding b. Above average c. Average d. Below average e. Poor

ADVANTAGES OF TRAIT SYSTEMS

Easy to construct and use Easy to apply Can be used for a wide variety of jobs.

Increasingly employed in in companies that focus on the quality of interactions with customers.

Example: leon leonwood Bean referred to necessity of positive customer service as core business rule.

LIMITATIONS

1. Trait systems are highly subjective as they are based on assumption that every supervisor’s perception of a given trait is the same.

Example: The trait quality of work may be defined by

one supervisor as “the extent to which an employee’s performance is free from errors”.

To another supervisor, it might mean “the extent to which an employees’ performance is thorough”.

LIMITATIONS

2. Another drawback is that system rates individuals on subjective personality traits rather than on objective job performance data.

Trait assessment focuses on employees rather than on job performances.

COMPARISON SYSTEM

Evaluates a given employees performance against that of other employees.

Employees are ranked from best performer to poorest performer.

In simplest form, supervisors rank each employee and establish a performance hierarchy.

Types Forced distribution Paired comparisons

COMPARISON SYSTEM

Forced distribution: Assigns employees to groups that represent

the entire range of performance.

A forced distribution approach rater must place a specific number of employees into each performance group(best performer , average performer , poor performer)

FORCED DISTRIBUTION PERFORMANCE APPRAISAL RATING EXAMPLE

Instructions: You are required to rate the performance for the previous 3 months of the 15 workers employed as animal keepers to conform with the following performance distribution:• 15 percent of the animal keepers will be rated as having exhibited poor performance.• 20 percent of the animal keepers will be rated as having exhibited below-average performance.• 35 percent of the animal keepers will be rated as having exhibited average performance.• 20 percent of the animal keepers will be rated as having exhibited above-average performance.• 10 percent of the animal keepers will be rated as having exhibited superior performance.

Use the following guidelines for rating performance. On the basis of the five duties listed in the job description for animal keeper, the employee’s performance is characterized as:• Poor if the incumbent performs only one of the duties well.• Below average if the incumbent performs only two of the duties well.• Average if the incumbent performs only three of the duties well.• Above average if the incumbent performs only four of the duties well.• Superior if the incumbent performs all five of the duties well.

COMPARISON SYSTEM

Many companies use it to minimize the supervisors tendency to rate most employees as excellent performers.

This tendency arises out of supervisors’ self-promotion motives.

DRAW BACK OF COMPARISON SYSTEM

It can distort ratings because employee performance may not fall into these predetermined distributions.

Lets assume that a supervisor must use the following forced distribution scheme:

15 pc well below average 25 pc below average 40 pc average 15 pc above average 5 pc well above average

DRAW BACK OF COMPARISON SYSTEM

If 35 pc of employees’ performance was either above average or well above average , then the supervisor would be required to underrate the performance of 15 pc employees.

Based on it, supervisor can rate only 20 pc of the employees as having demonstrated well-above average or above average job performance.

COMPARISON SYSTEM

Paired comparisons:

• Supervisors compare each employee to every other employee, identifying the better performer in the pair.

• In example below, Allen Jones is the best performer because he was identified most often as the better performer followed by Bob Brown and Marry Green.

PAIRED COMPARISON PERFORMANCE APPRAISAL RATING FORM EXAMPLE

Instructions: Please indicate by placing an X by which employee of each pair has performed most effectively during the past year.

__X__ Bob Brown __X__ Mary Green

Mary Green Jim Smith

__X__ Bob Brown Mary Green

Jim Smith __X__ Allen Jones

Bob Brown Jim Smith

__X__ Allen Jones __X__ Allen Jones

COMPARISON SYSTEM

Best suited for small groups of employees who perform the same or similar jobs.

Example: it would be difficult to judge a production

worker against a secretarys’ performance as both jobs are substantially different.

LIMITATIONS

Encourage subjective judgments which increases chances of errors and bias.

Small performance differences between employees may be exaggerated by using a method if supervisor feel compelled to distinguish amongst level of employee performnace.

BEHAVIORAL SYSTEMS

Rate employees on the extent to which they display successful job performance behaviors (effective job performance).

Three main types of behavioral systems include:

1).CIT2).BARS3).BOS

BEHAVIORAL SYSTEMS

Critical incident technique: It requires employees and their supervisors

to identify performance incidents that distinguishes successful performances from unsuccessful ones.

Supervisor observes the employees and record their performance on critical job aspects.

A critical incident can be described as one that makes a contribution—either positively or negatively—to an activity or phenomenon.

BEHAVIORAL SYSTEMS(CIT)

 The critical incident method of performance appraisal involves identifying and describing specific events (or incidents) where the employee did something really well or something that needs improvement.

It's a technique based on the description of the event and does not rely on the assignment of ratings or rankings, although it is occasionally coupled with a ratings type system.

The use of critical incidents is more demanding of the manager since it requires more than ticking off things on a form – the manager must actually write things out

BEHAVIORAL SYSTEMS(CIT)

Following table illustrates a CIT form for an animal keeper job.

Two statements represent examples of ineffective job performance (number 2 and 3). Other two represent (1 and 4) examples of effective job performance.

CRITICAL INCIDENTS PERFORMANCE APPRAISAL RATING FORM EXAMPLE

Instructions: For each description of work behavior below, circle the number that best describes how frequently the employee engages in that behavior.

1. The incumbent removes manure and unconsumed food from the animal enclosures.

a. Never b. Almost never c. Sometimes d. Fairly often e. Very often

2. The incumbent haphazardly measures the feed items when placing them in the animal enclosures.

a. Never b. Almost never c. Sometimes d. Fairly often e. Very often

3. The incumbent leaves refuse (garbage) dropped by visitors on and around the public walkways.

a. Never b. Almost never c. Sometimes d. Fairly often e. Very often

4. The incumbent skillfully identifies instances of abnormal behavior among the animals, which represent signs of illness.

a. Never b. Almost never c. Sometimes d. Fairly often e. Very often

ADVANTAGES AND LIMITATIONS

It tends to be useful as procedure requires extensive documentation that identifies successful and unsuccessful job performance behaviors by both employee and supervisor .

CIT’s strength also serves as its weakness.

Implementing CIT requires continuous and close observation of the employee.

Record keeping can be overly burdensome.

ADVANTAGES AND LIMITATIONS

Negative incidents may be more noticeable than positive incidents

It results in very close supervision which may not be liked by the employee. �

BEHAVIORAL SYSTEMS(BARS)

Behaviorally anchored rating scales (BARS):o Behaviorally Anchored Rating Scales (BARS) are

designed to bring the benefits of both qualitative and quantitative data to the employee appraisal process.

o BARS compare an individual’s performance against specific examples of behavior that are anchored to numerical ratings.

o For example, a level four rating for a nurse may require them to show sympathy to patients while a level six rating may require them to show higher levels of empathy and ensure this comes across in all dealings with the patient.

BEHAVIORAL SYSTEMS(BARS)

Based on CIT with one exception. incidents are written in BARS as

expectations to emphasize the fact that the employee doesn’t have to demonstrate the exact behavior that is used as an anchor .

CIT: “incumbent completed the task in a timely fashion”

BARS: “incumbent is expected to complete the task in a timely fashion”

BEHAVIORALLY ANCHORED RATING SCALE EXAMPLE

Instructions: On the scale below, from 7 to 1, circle the number that best describes how frequently the employee engages in that behavior.7 The incumbent could be expected to clean the animal enclosures thoroughly and remove refuse from the public walkways as often as needed.|6|5 The incumbent could be expected to clean the animal enclosures thoroughly and remove refuse from the public walkways twice daily.|4|3 The incumbent could be expected to clean the animal enclosures and remove refuse from the public walkways in a haphazard fashion twice daily.|2|1 The incumbent could be expected rarely to clean the animal enclosures or remove refuse from the public walkways.

LIMITATIONS

Difficulty of developing and maintaining high volume of data .

BARS still involves RATINGS, and ratings still have inherent flaws.

Another problem is that there is a tendency for people to believe that BARS system ratings are objective, and that is definitely not the case.

Ratings cannot, by definition, be objective, because they involved labeling and generalizations.

BEHAVIORAL SYSTEMS(BOS)

Behavioral observation scale (BOS):

Documents positive performance behaviors on job dimensions

Employees rated on exhibited behaviors

Ratings averaged for overall rating

Developed in same way as BARS, except that it only incorporates positive perfromance.

GOAL ORIENTED SYSTEMS (MBO):

A management model that aims to improve performance of an organization by clearly defining objectives that are agreed to by both management and employees.

Employees are appraised on how well have they achieved the goals.

Mainly used for professional and managerial employees.

GOAL ORIENTED SYSTEMS (MBO):

Process of MBO:1. Employees and supervisors together determine

objectives tied to corporate strategies.

2. Employees are expected to attain these objectives during a rating period.

3. At the end of rating period, employees write report explaining his/her progress toward accomplishing objectives.

4. Employees supervisor appraises employees’ performance based on accomplishment of the objectives.

GOAL ORIENTED SYSTEMS (MBO):

Management by objectives can promote effective communication between employees and supervisors.

Despite the importance of managerial employees its often difficult to establish appropriate performance goals as many companies simply do not fully describe the scope of these positions.

GOAL ORIENTED SYSTEMS (MBO):

Limitation:1. On the downside, it requires a constant flow

of information between employees and supervisors hence becomes time consuming.

2. It only focuses on the attainment of particular goals often to the exclusion of other important outcomes. This drawback is called as “result at any cost ‘’ mentality.

GOAL ORIENTED SYSTEMS (MBO):

For example an organization might use number of units produced as the performance measure as it is fairly easy to quantify.

Workers focusing on the quantity may neglect quality and follow-up services as the long term measure of organization's success.