P. 1 SESSION 5 - Pay for Performance Performance Appraisals.

SESSION 5 - Pay for Performance

Performance Appraisals

p. 1

Pay for PerformancePay for Performance



p. 2

Employees PerformanceEmployees Performance

Three general factors driving employees performance :

• Skills & ability to perform task

• Knowledge of facts, rules, principles and procedures

• Motivation to perform



p. 3

Principal determinants of job Principal determinants of job performanceperformance

Knowledge& Skills

Role Personality Availableresources

-Financial-Technical-Material-Human-Temporal

Environment WorkOrganization

Job PerformanceBehaviorEffort(Motivation)



p. 4

Motivation TheoriesMotivation Theories

Based on needs• Maslow’s need hierarchy• Herzberg’s two-factor theory

Based on employer/employee’s relationship• Expectancy• Equity• Reinforcement• Goal setting• Agency



p. 5


Maslow’s need hierarchy• Performance-based pay

– Must be set high enough to meet basic living needs

– At-risk program will not be motivating is it restricts employees’ ability to meet basic needs

– Incentive pay is motivating if attached to achievement, recognition, or approval



p. 6


Herzberg’s two-factor theory• Performance based pay

– Pay level is important - must meet minimum requirements to be considered as a motivator

– Performance is obtained through reward :– Security plans will induce minimum performance

– Success sharing plans will be motivating– At-risk plans will be demotivating

– Other conditions in the working relationship influence performance-based pay



p. 7


Expectancy• Performance-based pay

– Larger incentive payments are better than smaller ones

– Employees must believe they can influence performance targets

– People choose the behavior that leads to the greatest reward

– Identification of training and resource needs required to meet target levels are essential



p. 8


Equity• Performance-based pay

– Performance measures must be clearly defined

– Employees must be able to affect them through work behaviors

– Fairness and consistency employees across the organization is important

– Relative pay amongst employees matters



p. 9


Reinforcement• Performance-based pay

– Timing on payouts is very important

– Rewards must be tightly coupled to desired performance objectives



p. 10


Goal setting• Performance-based pay

– Employees must believe they can influence performance targets

– Performance targets should be challenging and specific

– Feedback about performance is important

– The amount of the incentive reward should match the goal difficulty



p. 11


Agency• Performance-based pay

– Is the optimal compensation choice for more complex jobs where monitoring employees’ work is difficult

– Performance target should be tied to organizational goals

– Employees dislike risky pay and will require a higher total cash pay opportunity in exchange for accepting performance-based pay



p. 12

Components of a Total Reward Components of a Total Reward SystemSystem

Compensation Wages, commissions, & short/long-term incentives

Benefits Vacations, health insurance

Social interaction Friendly workspace

Security Stable, consistent position & rewards

Status/recognition Respect, prominence due to work

Work variety Opportunities to experience different things

Workload Right amount of work (not too much nor too little)

Work importance Is work valued by society

Authority/control/autonomy Ability to influence others; control own destiny

Advancement Chance to get ahead

Feedback Receive information helping to improve performance

Work conditions Hazard free

Development opportunities Formal/informal training to learn new KSAs



p. 13

Wage ComponentsWage Components

Compensation components from least risky to most risky for employees :

• Base pay• Salary Increase Plans

– Across the board– Cost-of-living increase– Merit pay– Lump-sum bonus

• Individual incentive• Sharing Plans

– Success-sharing plans– Gain sharing– Profit sharing– Risk sharing



p. 14


Base Pay

• The guaranteed portion of an employee’s wage package

• This is the secure portion of wages

• Viewed as a fixed cost to the employer

– Can be lowered by employers in some countries (i.e. US UK, Switzerland) based on company performance.

– Not possible in most EU countries without harsh union negotiations

– Could be lowered on a voluntary basis (e.g. HP)



p. 15


Salary Increase Plans• Across the board

– Wage increase granted to all employees, regardless of performances

– Low risk even though at discretion of employer• Cost-of-living (COL)

– Same as above but based on local COL indexes

• Merit pay– Salary increase based on individual performance– Size of merit pool at discretion of employer

• Lump-sum bonus– Same as merit pay increase but paid as a one-time payment– Not added to the base salary (i.e base salary level stays untouched)



p. 16


Sign-in bonus• Lump-sum or installment bonuses designed to attract new high performers to join a company or take a new challenging position within the organization

Stay-on bonus• Lump-sum or installment bonuses designed specifically to retain key employees during and after a major restructuration (e.g. Chapter 11 or after a merger & acquisition)



p. 17


Individual Incentives• Are either :

– An add-on to a fixed base pay - lower risk=> Base Salary plus Bonus = Total Cash (TC)

– A variable portion of the overall pay - higher risk but higher earning potential

=> Base Salary plus Incentive = Total Target Cash (TTC)

• Measures of performance are objective (e.g. sales volume)

BasePay

(100%)

BasePay

(100%)

Market value

Bonus(25%)Bonus(25%)

BasePay(75%)

BasePay(75%)

IncentiveOverachievement

(50%)

IncentiveOverachievement

(50%)

Incentive(25%)

Incentive(25%)

Total Cash (TC)

Total Target Cash (TTC)



p. 18


Sharing Plans

• Success-sharing– Tied to group performance– Not penalized for performance below standard

• Gain sharing– Same as above but usually not based on financial performance of organization but on some cost index

• Profit sharing– Add-on linked to group performance relative to exceeding some financial goals

• Risk sharing– Same as above but employees can be penalized during poor performance years. However rewards is typically higher than the other sharing plans

– Employees absorb a “temporary” cut in base pay



p. 19

Does Compensation Motivate Does Compensation Motivate Behavior?Behavior?

Person Characteristics Preferred reward Characteristics

Materialistic Relatively more concerned about pay level

Low self-esteem Want large decentralized organization with little

pay for performance

Risk takers Want more pay-based on performance

Risk averse Want less performance-based pay

Individualists Want pay plans based on individual performance,

not group performance



p. 20

Other MotivatorsOther Motivators

Type of rewards Important

• Work variety and challenge 50%• Development opportunities 38%• Social 40%• Status recognition 23%• Work importance 20%• Benefits 22%



p. 21

Effectiveness of Alternative Effectiveness of Alternative Reward PlansReward Plans

Type of Plan Considered Effective

Log-term executive incentives High

Annual bonus High

Individual incentives High

Employee stock ownership High

Spot awards Medium - High

Gain sharing Medium - High

Lump-sum merit pay Medium

Profit sharing Medium

Suggestion box Medium - Low



p. 22

What is expected from a Reward What is expected from a Reward SystemSystem

Rewards must :

• Help organizations attract and retain employees

• Must make high performance an attractive option for employees

• Must encourage employees to built new skills and gradually foster commitment to the organization



p. 23

PerformancePerformanceManagementManagement



p. 24

Performance Appraisal IssuesPerformance Appraisal Issues

Frustration from employees

• Performance goals are not clearly defined

• They don’t know how their performance is evaluated

• They don’t believe their last performance review guided them on how to improve

• They don’t think the reviews can differentiate among good, average, and poor performer

• They don’t think doing a good job is recognized



p. 25

Performance Appraisal DefinedPerformance Appraisal Defined

Performance Appraisal is the systematic assessment of an individual’s job related strengths and weaknesses.

Employee development : Many personnel professionals consider this to be the most productive aspect of P.A



p. 26

Feedback ObjectivesFeedback Objectives

1.Employees find out where they stand with the supervisor and the organization.

2. Supervisor-Subordinate relationships are strengthened because they encourage mutual agreement on performance expectations.



p. 27

Feedback ObjectivesFeedback Objectives

Training and Development needs are identified.

Provides an opportunity for the supervisor and subordinate to express themselves on a variety of performance related issues.



p. 28

DisciplineDiscipline

Dealing with problem employees is probably one of the most troublesome aspects of a supervisor’s job

P.A. can be used to identify job related problems and through frequent observation and feedback, the employee can be made aware of the problems and what corrections are necessary.

Also P.A. (if reliable and valid) can be used as legal justification for termination.



p. 29

Performance Appraisal IssuesPerformance Appraisal Issues

Perhaps the biggest complaint of all employees (and managers too) is that appraisals are too subjective.

Performance is not easily quantified

Some believe that work situation (not the individual) is the major determinant of performance.

– Not having the necessary information, technology, or control to adequately perform his/her job

Its is critical to understand the influence of the work environment and system in order to assess individual performance

Equally important is to identify the strategies for understanding and measuring job performance better



p. 30

Common Errors in Appraising Common Errors in Appraising PerformancePerformance

Most supervisors dread doing appraisals

Several factors that lead raters to give inaccurate appraisals :

– Guilt

– Embarrassment about giving praise

– Taking things for granted

– Not noticing

– The halo effect

– Dislike of confrontation

– Spending too little time on the preparation of the

appraisal



p. 31

Avoid the following errors in Avoid the following errors in evaluationsevaluations

Ensure that your supervisors not to make the following eight common errors that can distort and even invalidate the evaluation process. Specifically, supervisors should not:

– Base the evaluation on the employee's most recent behavior, instead of reviewing the whole performance period;

– Allow irrelevant or non job-related factors to influence the evaluation, such as physical appearance, social standing, participation in employee assistance programs, or use of leaves of absence;

– Include only favorable remarks on the evaluation, even when negative comments are justified and appropriate;

– Rate all subordinates at about the same point on a ranking scale, usually in the middle;



p. 32

Avoid the following errors in Avoid the following errors in evaluationsevaluations

Specifically, supervisors should not (continued):

– Allow one characteristic of the employee or one aspect of the job performance to distort the rest of the rating process;

– Judge all employees at the extremes, either too leniently or too strictly;

– Allow one very good or very bad rating to affect all the other ratings of the employee (the "halo effect"); or

– Permit personal bias to unduly influence the evaluation process.



p. 33

Four factors to make an effective Four factors to make an effective programprogram

Regular, informal feedback from supervisors.

– Annual evaluations aren't enough. Employees need regular input that focuses on day-to-day performance objectives rather than concentrating on past mistakes or failures

Performance goals set jointly by employees and supervisors

– Goals should be precise and quantifiable where possible, such as the completion of a specific project within a set period of time.

– To help employees meet their goals, supervisors should provide additional training or other necessary support.



p. 34

Four factors to make an effective Four factors to make an effective programprogram

Action plans to address performance or disciplinary problems

– The supervisor should identify and discuss problems with the employee as they occur and develop a plan of action for improvement.

– The employee also should have input and be able to suggest changes to the plan.

– Once agreed upon, the plan should be reviewed regularly to make sure the employee is progressing satisfactorily..

Formal reviews that accurately document the "big picture."

– Ideally, these formal reviews should be done several times a year.

– But, if you regularly conduct informal meetings to discuss performance, a semi-annual or even annual review may be sufficient.

– the purpose of formal meetings is to assess whether goals and action plans have been met and to determine if the employee is on track for career development.



p. 35

Better Understanding Job Better Understanding Job PerformancePerformance

Looking strictly at task performance– How the employees perform the responsibilities of their jobs

– Evaluation based on the negative behaviors of employees (i.e. counterproductive performance)

Jobs becoming more dynamic require employees to adapt and grow on an ongoing basis

– Focuses on individual characteristics or personal competencies

– Consistent with the whole trend toward measuring job competency

Identifying the best appraisal format– Recent attention has focused less on the rating format and more on the raters themselves



p. 36

Better Understanding Job Better Understanding Job PerformancePerformance

Identification of possible groups of raters (supervisor, peers, subordinates, customers, self)

– Examines whether a given group leads to more or less accurate ratings

How raters process information about job performance and translate it into performance ratings

– Impact of irrelevant information on the evaluation of employees.

– May yield strategies for reducing the flaws in the total process

– Raters may be trained to increase the accuracy of their trainings



p. 37

Individual Performance Individual Performance

Evaluation MethodsEvaluation Methods



p. 38

Performance Evaluation methodsPerformance Evaluation methods

Comparison-based methods

Standard-based Methods• The standard rating scale method• The BARS method

Methods based on performance objectives

Methods based on objective indicators



p. 39

Comparison-Based MethodsComparison-Based Methods

The ranking method• Straight ranking

– Based on individual performances

• Alternative ranking– Identifying best against worst performers until all ranked

• Paired comparison method– Allow performance of employees reporting to same manager to

be compared between each others– Performance of employees can be judged equivalent

=>risk of over concentration, i.e. too many employees with same rating…few managers have courage of their convictions.

• The forced distribution– Predetermined distribution (bell curve approach)– Not encouraged is less than 20 employees



p. 40

Three Ranking FormatsThree Ranking Formats



p. 41

Standard-Based MethodsStandard-Based Methods

The standard rating scale method• List of criteria and an evaluation scale

– Either numeric (e.g. 1 to 5)– Or qualitative (e.g. weak to strong)– The most widely used method



p. 42

Methods based on performance Methods based on performance objectivesobjectives

The BARS (Behavioral Anchored Rating Scales) method• Evaluates performance against a set of behavioral aspects or dimensions– Quite complex process involving a number of steps to develop this method, i.e– Identify set of critical incidents– Grouping incidents classified and selected– Set incidents prevalence– Various working group to design such approach



p. 43




p. 44


Designed as a participative management and development tool

Management by objectives (MBO) driven by the job description



p. 45

Methods based on objective Methods based on objective indicatorsindicators

Based on concrete, objective indicators, such as:• Productivity• Profit levels• Absenteeism• Employee turnover rates• Sales volume• Reject rates, etc…

Not applicable to managerial levels



p. 46

Select the Right AssessorsSelect the Right Assessors

More than 80% of the inputs for performance ratings comes from supervisors

– Supervisors assign (or jointly determine) what work employees are to perform

– Supervisor most knowledgeable of the job

– Supervisor ratings also tend to be more reliable than those from other sources

– Supervisors are particularly prone to halo and leniency errors



p. 47

Select the Right AssessorsSelect the Right Assessors

Peer as Raters– They work more closely with the ratee and probably have an undistorted persperctive of typical performance

– Peers have little or no experience in conducting appraisals– Can create group tensions

Self as a Rater– Has the most complete knowledge of the job– More lenient and possibly more unreliable than ratings form other sources

Customer as Rater– Boundaries between organizations and the outside world is fading

Subordinate as Rater– Is appealing since most employees want to be popular with people who report to them

– Can see both their strengths and weaknesses as a leader– Subordinates prefer to give artificially inflated ratings of their supervisors



p. 48

Training Raters to Rate more Training Raters to Rate more AccuratelyAccurately

Straightforward lecturing to ratees about ways to improve the quality of their ratings generally is ineffective

Individualized or small-group discussion sections are more effective

When these session are combined with extensive practice and feedback sessions, rating accuracy significantly improves

The greatest success has come from efforts to reduce the halo errors and improve accuracy



p. 49

Merit PayMerit Pay

Merit Increase Matrix Overall Salary increase budget 2006

Country : SPAIN

Average market increase: 4.0%

Cost-of-living : 1.5% .

Merit increase : 2.5%

Pop.

Distrib. 2005/06 P10 Q1 Q3 P90

P

8% >>>> E A 6.0% - 6.8% 5.2% - 6.0% 4.8% - 6.0% 4.0% - 4.8%

R

F

37% >>>> O B 5.2% - 6.0% 4.8% - 6.0% 4.4% - 4.8% 3.6% - 4.0%

R

M

44% >>>> C 4.4% - 4.8% 4.0% - 4.1% 3.8% - 4.0% 1.1% - 1.5%

L

V

11% >>>> L D 0.8% - 0.9% 0.4% - 0.6% 0.0% - 0.0% 0.0% - 0.0%

Pay positioning

P. 1 SESSION 5 - Pay for Performance Performance Appraisals.

Documents

employees performance

performance based pay

motivator performance

performance targets

difficult performance

desired performance

risky pay

important relative pay