Reward Management Introduction

11

Reward Management

TEACHING AND LEARNING UNIT 1Conceptual and Theoretical Frameworks

Professor Brian Main2

Employee Reward

be familiar with the alternative approaches to employee reward

recognise the role of context in relation to employee reward

be able to reflect systematically on the consequences of choices of approach incontext

After engaging with ideas discussed in this course you should:

3 4

5http://www.guardian.co.uk/news/datablog/2011/dec/05/oecd-ineqaulity-report-uk-us

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1. Introduction to course Employee Reward

2. The concept of the effort bargain

3. Systems thinking interacting factors

4. Employer - employee orientations

5. Corporate, national and international contexts for thinking and acting on employee reward

Learning PointsUnit 1.(i)

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What is employee reward?

A reward may be anything tangible or intangible that an organisation provides to its employees either intentionally or unintentionally in exchange for the employees potential or actual work contribution, and to which individuals attach a positive value

reward

remuneration

compensation 8

The effort-and-reward bargain

In its socio-economic relational context Every employment contract consists of two elements:

(1) an agreement on the [reward] rate (either per unit of time or per unit of output);

and (2) an agreement on the work to be done.

Hilde Behrend (1957)University of Edinburgh (1954 1982)

9

Reward systems

Classical labour economics models may be viewed as closed wage-setting systems.

Occupational psychology may equally focus on stimuli internal to the individual organism.

General systems theory (although not without critics) enables the analysis of effort-reward relationship patterns as open systems that interact dynamically and reciprocally with the environment, to understand the way different reward systems operate in practice.

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Reward design

Edward E. Lawler III

The New Pay

its not just what you pay

its how you pay

if you want team work

do not use individual bonus payments

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Nature of reward

Extrinsic

tangible or transactional element for the work

money, health care, company car, pension etc

Intrinsic

something derived from the work

development oriented: job satisfaction, learning (self-actualisation)

environment oriented: pleasant and safe working conditions 12

Unit labour costs

Cost of labour utilised per unit of output

Total labour costs

_______________ Total output

Clearly wish this to be as low as possible

313

Reward versus Labour Cost

Low wages do not guarantee low unit labour costs

low wages attract low quality workers

low output per worker raises labour costs

High wages need not imply high unit labour costs

high wages attract productive workers

high wages encourage high commitment

unit labour costs lowers at high productivity14

Reward Systems

wages are not set in isolation

what other groups getting paid

what were paid last period

what is happening in the economy (inflation, unemployment)

AND you actions may affect these other things

This last point distinguishes OPEN SYSTEMS from CLOSED SYSTEMS

15

Examples of reward issues

Bankers bonuses

Executive pay

Minimum wage

Public sector wage restraint

etc

16

Labour as a factor of production

capital, land, labour

with labour person accompanies factor into production

there is a relationship

employer employeeeconomics + social psychology

17

Exercise in effort-reward bargaining

consider the job of a sales assistant

in a large Department Store (e.g., Harvey Nicholson)

list what the employer wants

list what the employee wants

identify points of tension/disagreement

suggest ways to use reward to resolve these

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Employer orientations towards the workforce

Interpretation Issues Reward agendaEmployees valuable objects but devoid of feelings

How do we get the best and keep them in good shape?Instrumental.

Instrumental relationship;Pay by results;Exploitative?

(i) Employees our greatest asset need to be used effectively

419


Interpretation Issues Reward agenda

Employees as liabilities troublesome responsibilities; need to be policed

How do we minimise problems;Keep under close surveillance?Wary/antagonistic?

Arms length relationship; minimise cost.

(ii) Employees are a liability need to be controlled

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Interpretation Issues Reward agendaEmployees are independent beings with choices based on logic and emotion loyalty contingent.

What do we want as an employee?What can we offer?Employee-centred relationship.

Understand employees preferences.Honesty and transparency.Service orientation.

(iii) Employees are customers need to understand and serve them

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Interpretation Issues Reward agendaEmployees are independent beings with choices based on logic and emotion commitment contingent.

What do we want as an employee?What can we offer?Partner -centred relationship.

Understand employees preferences.Honesty and transparency.Alliance orientation.

(iv) Employees are corporate allies develop a mutual success agenda

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Alternatives; Consequencies; Contexts

e.g.:

reward on time committed

versus

reward on performance

(i) Alternatives:

3 themes present in all discussions

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e.g. of choice of payment by hour:

poor quality output

need to police hours worked

etc.

(ii) Consequencies:

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Managers should try to define given the current limitations of the environment, and the chances of altering them to make elbow room what the best course of action might be.


(iii) Contexts:

Context-free Context-bound

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Employee reward management contexts

Context factors:

industry sector age and scale of enterprise state of economic conditions legislation (eg national minimum wage, disclosure

requirements on executive remuneration) extent of globalisation presence or absence of trade unions skills shortages/tightness of labour market(s)/talent

war pressures technological profile geographical setting

26


Context factors (continued):

local/transnationally mobile workforce corporate governance priorities rate of product/service change duration of value-creation cycles annual employee voluntary turnover workforce demographics ownership/finance capital investment profile carbon footprint

27


Context factors (continued):

management style and values organisational culture mergers and acquisitions planned/pending joint ventures/partnerships

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Summary

Reward defined extrinsic and intrinsic An effort bargain relationship-based Systems thinking interacting factors Employer-employee orientations Corporate, national and international contexts for

thinking and acting on employee reward

http://www.cipd.co.uk/subjects/pay/general/payrewrdovw.htm

for a CIPD factsheet.

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Theorising employee rewardUnit 1.(ii)

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Why theory?

the rules: theories are behind all employee reward ideas.

there are lots of competing theories knowing the rules helps you to understand whats said. knowing the sources and assumptions of ideas about what this or that reward policy/practice is predicted to do is empowering: you evaluate it through understanding,

and you decide if it fits the situation youre in (and why).

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Closed system theory

Classical Labour Market - Economic man: market-based exchange relation assumption that an employee will seek to minimise sacrificed leisure time to work and to maximise the rate of pay. Labour supply and demand regulate the price (wage rates).

Units (hours) of labour

Wage rate

S

D

e

a)

32Labour units

Marginal Value of Labour

()

MVPL

B

C

AWage

Conventional view of labour demand

33Labour units

Marginal Value of Time

()

Supply of Labour

E

F

D

Wage

Conventional view of labour supply

34Labour units

Supply of Labour

E

F

D

Wage

Labour Demand

MVPL

B

C

A

GW *

L *

Conventional view of labour market equilibrium

35Labour units

Supply of Labour

E

F

D

Wage

Labour Demand

MVPL

B

C

A

GW *

L *

Conventional view of labour market equilibrium

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Adam Smith (Wealth of Nations)

The whole of the advantages and disadvantages of different employment of labour and stock must, in the same neighborhood, be either perfectly equal or continually tending to equality. If in the same neighborhood there was any employment either evidently more or less advantageous than the rest, so many people would crowd into it in the one case and so many would desert it in the other, that its advantages would soon return to the level of other employments. This at least would be the case in a society where things were left to follow their rational course, where there was perfect liberty and where everyman was free both to choose what occupation he thought proper, and to change it as often as he thought proper.

Conventional view compensating wage differentials

737

Adam Smith (Wealth of Nations)

The five following are the principal circumstances which, so far as I have been able to observe, make up for a small pecuniary gain in some employments, and counterbalance a great one in others: first, the agreeableness or disagreeableness of the employments themselves; secondly, the easiness and cheapness, or the difficulty and expense of learning them; thirdly, the constancy or inconstancy of employment in them; fourthly, the small or great trust which must be reposed in those who exercise them; and fifthly, the probability or improbability of success in them.

Hay points: skill, responsibility, effort etc.

Conventional view compensating wage differentials

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1. Non-pecuniary aspects of working conditions

2. Human capital: Expense of learning the business

3. Constancy of employment

4. Responsibility or trust reposed

5. Probability of success

Compensating Wage Differentials

Adam Smiths

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Wage

Injury Probability

U1

U2U3

AB

CW2

W1

P1 P2

Example of conventional view

compensating wage differentials

Supply

40

Wage

Injury Probability

U1

U2U3

AB

CW2

W1

P1 P2

PW

Accept increase in probability of injury (P) in return for increase in wage rate (W)



Supply

41

H

Wage

Injury Probability

Production

Technology

F G

W4

W3

P3 P4



Demand

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Wage

Injury Probability

U1

U2U3

HW5

P5

Work for W5Accept risk P5



843

Closed system theory continued

Institutional Theory: factors in environmental and institutional context scale of organisation industry sector trade union presence imperfect information bounded rationality transaction costs imperfect mobility (mill towns)

b)

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Closed system theory continued

Institutional Theory: decisions contingent on context may lead to a shared history common understandings emerge lead to a shared legitimacy of custom and practice

b)

45

Entry Level 1

Entry Level 2

Internal Labour Marketsc)

ports of entry

Administered wages; rent sharing46

Entry Level 1

Entry Level 2

Internal Promotion

Promotion as an incentive device - tournaments

Internal Labour Markets

Promotion as incentive/ reward

Not for fit

ports of entry

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Unexpected termination of employment relationship

Separation as a discipline device !

Career Concerns

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External succession as incentive

Succession as an incentive device !

Career Concerns

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Top prize

CEO job

Tournaments

Relative performance measures

Lazear Rosen

Lazear, Edward and Rosen, Sherwin (1981) Rank-Order Tournaments as Optimum Labor Contracts, Journal of Political Economy, Vol. 89, No 5, October, pp 841-864.

d)

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Promotions as a Tournament

versus

Promotions as a matching process

The Peter Principle

Employees in an organization rise to the level of their own incompetence.

Career Concerns - promotion

ALSO, when output depends on team effort this can lead to free riding Or sabotage - industrial politics influence costs.

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Promotions as a Tournament ?

If it is a tournament (or any payment based on relative performance), there is more than one way to win a footrace

Bad-mouth oppositions Snuggle up to the boss etc

All non-productive activity-Influence activities

-Industrial politics

Career Concerns - promotion

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Wage-gap theorye) Trade union mark-up

Monopoly power in the supply of labour allows trade union to secure a mark-up over the going or market rate

- especially where employer enjoys some monopoly power in the product market rent sharing

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EarningsOr Costs

Age2118

Earnings with no degree

Earnings with degree

Human Capitalf) College decision

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EarningsOr Costs

Age2118

Earnings with no degree

Earnings with degree

B

C

Student funds own education

Human Capital - College

10

55

No Training

Age21 65

Earnings

With Training

Human Capital on-the-job

56Age21 65

Earnings

With Training

No Training

Human Capital on-the-job

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Productivityor Earnings

Age3021

Productivity with no training

Productivity with training

Hold up costs

B

C

Human Capital who pays?Simplifydiagram

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Wage profile of trainee: 125 then 160

ProductivityOr Earnings

Productivity with no extra training

Productivity with extra training

Age3021

125

160

185

100

140

Wage premium = P

Human Capital who pays?

100 = productivity during training; 185 = after training140 = productivity without training;

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Expected net present values:C the cost of trainingB the benefits that will accrue to the employerS the salary that must be paid because of the training

Assume employer pays for training:

B S > C train

The Arithmetic of training

60

Polar cases:

B > C

(i) S = 0 train, employer pays(ii) S = B employee should be willing to pay for training

if can find finance


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Between these two polar cases:

B > C and 0 < S < BTraining should go ahead

Employee will pay up to SEmployer will pay up to (B-S)

Willingness to pay:S + (B - S) = B > C

Surplus to be shared


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Specific Human CapitalProductivity with employer is higher once trainedProductivity no higher with other employerEmployer and employee share costs

General Human CapitalProductivity higher everywhereEmployee pays

Barron and Kreps Chapter 15

Human Capital who pays?

63

The gross value added from the training is affected by:1. Factors that impact on the employees tenure

with the firm, including demographics, local job market conditions, and the firms HR practices.

2. The employees pre-existing skills and how the training in question might complement those skills.

Training

64

3. The impact of the training on employee effort and loyalty, because the training improves the employees bargaining position vis--vis the firm.

4. Spillovers to other employees, both direct (the newly acquired skills are shared with co-workers) and indirect (by signalling to others and by reinforcing the organisations culture).

5. The impact the training programme has on recruitment.

Training

65

The share of this value added that is retained by the firm depends on the general bargaining strengths of employee and employer, including:a) The extent to which the training develops

firm-specific versus more general-purpose human capital

b) Whether a substantial lemons problemexists for other employers who might seek to lure the employee away

c) The degree of employee inertia, particularly loyalty engendered by the training

Firms share of value added

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1. Outstanding training programmes can be leveraged by turning them into general training institutes, which both amortises the cost of the programme and gives the organisation the ability to skim the cream of trainees.

2. Government support can sometimes be enlisted to help defray the costs of training.

3. On-the-job training can sometimes be relatively cheap, and apprentices can sometimes be employed for less than the value they provide the organisation.

Costs of training

12

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1. Cost-benefit calculations concerning human capital investments may be distorted because important benefits are intangible or long-term in nature.

2. Additional benefits of training arise through symbolic effects and impacts on third parties.

3. Systematic experimentation with the design of training programmes, criteria for selecting whom to train, and post-training assignments can help identify and maximise the value-added features of training activities.

Designing training programmes

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Principal-Agent Relationship: Principal (owner) wants hard working employee Employee wants a pleasant life

Supervision - expensive

Pay for PerformanceIncentive alignment mechanism design

Principal-Agent Theoryg)

69

Motivation

Standard economic model utility maximising rational amount of effort?

Income goodEffort bad

Asymmetric information complicates matters:hidden action

moral hazardpost-contractual opportunism hidden

information adverse selection

pre-contractual opportunism70

Principal-agent solution

Two-part approach

1: figure out what agent will do by way of effort when confronted with various incentive (payment by results) contracts

2: use this information to select the scheme that (given the predicted reaction of the agent) produces the greatest profit

Action may not always be effort minimising. E.g. CEO takes pleasure in increased status from running larger organisation and may be led into acquisitions (M&A activity) that are not in the interest of the company.

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Performance

Pay

Firm A

Firm B

Base Pay versus Performance Pay

Incentive compensation

(i) e.g. executive pay

72

Self selection of high ability types

Self selection of entrepreneurial types

Tolerance for risk

Self-belief


Rewards effortPost-contractual:

Pre-contractual:

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73

Years of service

Pay

Firm A

Firm B


Deferred compensation

(ii) e.g.

Deferred payment

74

Motivation and Remuneration

Hidden information adverse selection

Stay for a long time ?- Low pay but great pension.

Hidden action moral hazard

Work hard in the interests of firm?- zero base pay but high bonus

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Principal-agent solution

Two-part approach

1: Figure out what agent will do by way of effort when confronted with various incentive (payment by results) contracts

2: Use this information to select the scheme that (given the predicted reaction of the agent) produces the greatest profit subject to the outcome remaining attractive to the agent

Action may not always be effort minimising. E.g. CEO takes pleasure in increased status from running larger organisation and may be led into acquisitions (M&A activity) that are not in the interest of the company.

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Higher commission rates provide stronger incentives than lower commission rates

A high commission rate above a certain threshold isgenerally better than a low rate on all sales, butthe threshold setting process must have integrity:

Dont change targets easily Never use individual past performance as the new target Avoid caps since high productivity workers are penalized

Some principles of incentive design

We will see that caps are very common in the design of directors remuneration

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Analogy of the fish in the water

Gordon Bethune Continental Airlines (now part of United)

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Signalling:Want high ability peopleEducation signal is cheaper to the more ableThe more able signal their presence by offering

educational credentials

Screening: Employer may use a difficult to alter

characteristics to indicate a difficult-to-measurelabour market characteristics

Can lead to discrimination e.g., gender and career intentions

Signalling and Screeningh)

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Organisations can encourage the right applicants through: Offering premium wages and conditions, thereby

attracting a larger, more able applicant pool Self-selection, which is a powerful tool for

finding applicants who fit Referrals from current employees, which often

have beneficial effects (including on the referrer) but can also reproduce the existing workforce

Judicious use of personnel search organisations

Recruitment

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Psychological drives

regulate the motivation to work (for reward)

motivational drive to obtain extrinsic reward will diminish as basic needs are satisfied

individuals will be motivated to satisfy higher-order (intrinsic) needs self-actualise.

Closed system The managerial role is limited:

just respond to the conditions.

i)

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j) Efficiency Wages

Paying higher wages is CHEAPER:

1. Cheat-threat effect

2. Sample selection effect

3. Turnover effect

4. Gift-exchange/ Morale effect

5. Union deterrence effect

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Wage

Age

Productivity

Waget

A

B C

D

E

F

Alternative view - Bondingk)

83


Wage

Age

Productivity

Waget

A

B C

D

E

F

Alternative view - Bonding

84

OBEF = OACDEF in present value terms

Allows reduced supervision costs more efficient

Wage

Age

Productivity

Waget

A

B C

D

E

F

Alternative view - Bonding

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85

Employment Contracts:

1. Spot contract for future service

2. Contingent claims contract

3. Wait for future then spot contract

4. Contract now for authority relationship

Possible modes of employer-employee relationship:l)

86

All beset by transactional details:

1. First-mover advantage

2. Problems of opportunism

3. Bounded rationality

4. Information impactedness

Problem is to elicit consummate performance (not just perfunctory performance)

87

Transaction cost economics interpretation of internal labour markets suggests solution is:

Governance structure

Problem is to elicit consummate performance (not just perfunctory performance)

88

In many employment situations, employees and employer are increasingly bound to one another as they develop relation-specific assets, which dulls the discipline of market forces. This can subject either side to the threat of

exploitation or a hold-up, leading to inefficient contractual guarantees, refuse to invest in the relation, or simply refuse to contribute to the common good, fearing that any such contributions will go unreciprocated

Asset specificity

89

Example:

Your company has just paid for you to go on theEdinburgh Business School MSc in HRM.

It is now time to return to your company and you are getting very attractive offers from alternative employers.

What to do?

Asking for a big raise hold up cost90

But the threat of hold-up say, of the employee by the employer can be defeated by at least three means other than by law or contractual provision: Goodwill on the part of the employer, or an

ethical aversion to exploiting employees A balance of power, arising from the credible

threat by the employee to retaliate (to the extent possible) if s/he is exploited

The desire of the employer to maintain a reputation generally among employees (and prospective employees) for not being exploitative

Avoiding hold-up costs

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91

Governance in employment is efficient if decision-making authority vests in a party that:

(a) has access to and ability to use information to make efficient decisions;

and (b) can be trusted by the other side because, say, she has an adequate reputation stake.

reputation and trust

92

Several qualifications to the balance-of-power and reputation stories must be given.1. Efficiency is a product of well-designed

governance and cooperative expectations. Neither alone is sufficient

2. Expectations are formed only through time, based on experience, which can make it difficult to change HR practices and policies

3. Trust is destroyed when a party with decision-making authority can take enormous immediate advantage of the other side

qualifications

93

4. Reputation faces a free-rider problem that is not always easily solved. Employees are most likely to solve the free-rider problem and sanction an exploitative employer when they are interdependent and/or proximate, socially homogenous, subject to peer pressure, or organisationally bonded (eg through common language, titles, or socialisation experiences)

5. In both the balance-of-power and reputation stories, the contract between parties must be clear, giving a rationale for the sort of consistency discussed in Chapter 3

qualifications

94

In the balance-of-power and reputation stories, the exact terms of trade are not fixed by economic factors alone, but depend on bargaining ability, expectations, social custom, and the like.

This economic framework is silent in two important ways (dealt with in Chapter 5): It highlights the crucial importance of the

parties expectations but offers little insight into where those expectations come from

It is silent on the formation of things like employer and employee goodwill

non-market influences

95

Psychological drives (continued)m)

Herzbergs two-factor theory

(motivation-hygiene theory)

Extrinsic versus intrinsic factors

certain motivator factors in the workplace cause job satisfaction,

Pay may be an extrinsic hygiene factor

achievement, competency, status, personal worth, and self-realization

other separate set of hygiene factors (or absence of) cause dissatisfaction

supervision, technical problems, salary, interpersonal relations on the job, and working conditions

96

Psychological drives (continued)Maslows hierarchy of needs

Physiological needs

Safety needs

Belonging

Esteem

Self-actualization

Financial security, Health,Safety

water,

food

Friendship

Family

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97

Goal setting/ Expectancy Theory

Value of reward

Reward Probability given effort

effort

abilities

role

perceptions

Performance

98

Goal setting/ Expectancy Theory

Value of reward


effort

abilities

role

perceptions

Performance

extrinsic reward

intrinsic reward

Satisf-action

99

Value of reward


effort

abilities

role

perceptions

Performance

extrinsic reward

intrinsic reward

Satisf-action

100

Expectancy(will performance lead to result)

Instrumentality(will result turn into reward)

Valence(assessment of likely satisfaction of reward)

101

Organisational

Culture;

Experience;

Expectations;

Alternatives

Fairness;

Trust;

Delivery

of the deal

Citizenship;

Commitment;

Motivation;

Satisfaction

Psychological contract:

Causes: Content: Consequencies:

A fair days work for a fair days pay.

We pretend to work and they pretend to pay us.102

Employment as a Social Relation

Employment relations are shaped by economics and by social and psychological forces.

Process and symbolism are at least as important to effective HRM as are the content and economic values of HR practices.

n)

18

103

Key cognitive and social-psychological processes

A number of cognitive and social-psychological processes are key to employment relationships:

1. Anchoring on available and salient cognitive anchors for example, the level of performance expected by superiors often anchors the level of performance that is provided

104

2.Attributions about attitudes, motivations, and behaviours, based on inferences from observing our own conduct:2.1 Intrinsic motivation to do a task

can be muted by calling conspicuous attention to extrinsic rationales for doing the task. When extrinsic rationales are absent, individuals tend to attribute effort they expend to their liking of the task or some other higher purpose, thereby enhancing commitment.

105

2.2 Commitment so derived escalates the longer the individual performs the task without attributing motivation to external influences.

2.3 Intrinsic motivation is probably more prevalent than you think and represents a powerful motivational device in situations where extrinsic incentives are hard to get right.

Making monetary rewards (e.g., bonuses) too salient can be counterproductive 106

3. Individuals evaluate their position relative to others, in a process of social comparison:3.1 Social comparisons sometimes occur

upward and downward, but in work settings the most common comparisons are horizontal, vis--vis others who are similar demographically, in terms of status, etc.

3.2 Formal organisational categoriesshape the social comparisons individuals make. So organisations use categorisation processes (job levels etc.) strategically to affect outcomes and behaviour.

107

4. Individuals attend not only to the absolute rewards they receive, but how they fair relative to others (distributive justice) and the processes by which outcomes are determined (procedural justice):4.1 Distributive justice can be assessed

based on ideas of equality, meeting needs, or (more prevalent in work settings) the equity principle that rewards should go to those who contribute the most.

108

4.2 Perceptions of procedural justice tend to rise when procedures: are based on valid criteria; are applied consistently and explained clearly by competent individuals; reinforce organisational values and culture; do not denigrate the individual; and involve participation and a right of appeal.

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109

5. Reciprocity and gift exchange the desire to reciprocate gifts in kind can be a powerful force for eliciting consummate effort from employees. The nature of the gift and the situations of the gift giver and receiver all affect the extent to which a gift is perceived as such.

110

6. Status inconsistency occupying discrepant positions on multiple organisational and/or social hierarchies can have negative effect. Unnecessary status conflicts should be avoided; where they are necessary or unavoidable, artificial means for reinforcing the desired status hierarchy can help (e.g., low badge numbers denoting long-tenure at Apple).

Pay, authority level, and technical expertise should balance where possible

111

7. An important source of organisational inertia is a need for legitimacy in organisational practices (building trust through consistency). Constant change de-legitimises practices.

This organisational inertia can be regarded as a legitimation cost.

112

113

1. labour rates are the same as labour costs.

2. cutting labour rates will lower labour costs.

3. labour costs represent a large portion of a company's total costs.

4. keeping labour costs low creates a potent and sustainable competitive edge.

5. individual incentive pay improves performance.

6. people work primarily for the money.

Jeffrey Pfeffer: Six Dangerous Myths About Pay (HBR May/June 1998)

114


Closed system The managerial role is limited:

just respond to the conditions.

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115

Criticisms of closed system theory

Fails to explain observed variations to similar groups across system all other things equal is ambiguous in day-

to-day practice - becomes messy. Most people dont behave this way because of bounded knowledge need to earn an income for living costs.

People read signals conveyed by extrinsic reward regarding what an organisation regards as

important and may use wage to reinforce higher-order senses such as self-esteem.

116

Open systems perspective

Pay rate

Supply

Demand

Competition in labour market

117


Pay rate

Supply

Demand


Education

Training

decisions

Behavioural expectations

Household work-life constraints

118


Pay rate

Supply

Demand


Education

Training

decisions



Institutional:

legal + social norms

trade unions etc..

119


Pay rate

Supply

Demand


Education

Training

decisions



Institutional:

legal + social norms

trade unions etc..

Management input

Efficiency wages

Principal-agent incentives etc. 120

Benefits Complementary skills and experiences Greater flexibility Social benefits -- fun and commitment Less resistant to change

Costs Coordination costs Personal discomfort and conflict Diffusion of responsibility, free riders Increased risk seeking

Costs/ Benefits of Teams

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121

Principal-Agent Relationship: Principal (owner) wants hard working employeeEmployee wants a pleasant life

Supervision

Pay for PerformanceIncentive alignment

About Teams

122

Free-Rider Problem in teams: Team of 10 Share productive effort My effort in the next hour costs me 50 My effort in the next hour creates 100 value My slacking has opportunity costs = 10 Incentive to slack as become free rider

About Teams

123

Note on last example: If I slack and no one else does

I get 90 for an hour of slacking If everyone else slacks and I work

I get 10 for an hour of work and that hour cost me 50So I net -40 on the experience

If everyone else slacks and I slack I get zero

About Teams

124

Prisoners Dilemma:

Others Work

Others Slack

I work (50,50) (-40,10)

I slack (90,40) ( 0, 0)

(My net pay-off, net pay-off of representative other team member)

About Teams

125

So why work in teams?! The whole is greater than the sum of the parts (lifting) Specialization (Adam Smith) Knowledge Transfer (hold-up costs and opportunism)Appropriate measurements Widespread information sharing Individual and group rewards

About Teams

126

Necessary expenditure on employee reward

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127

Issue Theory Source Comment

Wage Market clearingNeo-classical economics Closed system

Attraction of skilled labour Human capital

Institutional economics

Premium to skills / experience

Control and retention

Exchange theory,Efficiency wages

Institutional economics, Bargaining to limit

instrumental behaviour

StabilityInternal labour market;Rent sharing

Institutional economics,Industrial relations

Large private firms or public sector

Incentives Tournaments Managerial economics Premium on talent128

Management influence on work attitudes and behaviour that arises form employee reward

129


Employee discretion Role Sociology Vague

Managerial control Agency

Labour Economics Alignment of interests

Employee satisfaction Drive theories

Managerial psychology Job enrichment versus

reward

Learning/ training

Reinforcement theory

Managerial psychology Danger of damaging implicit

contract

Incentive for future oriented effort

Expectancy theory

Managerial psychology

Signals as credible information

Informational signals

Cognitive evaluation theory


Continuous effort-reward bargaining is ongoing 130

Fair returns to investment in human capital with employer

131


Perceptions of organisational justice

Distributive/Procedural/InterpersonalJustice

Political science,Sociology

Attention to process as much as to substance of employee reward

Trust in employer to honour implicit expectations

Psychological contract theory


Need to avoid damaging employees implicit expectations

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Report in People Management (June 2008) accessed by following the Internet hyperlink: http://www.peoplemanagement.co.uk/pm/articles/2008/06/long-term-pay-deals-a-safe-choice-in-uncertain-times.htm

prompts consideration of the way employers and employees may be theorising the implications of pay-rate-setting over the short versus medium term, when concerns exist related to economic uncertainty.

Exercise:

Reflect on the apparent indications that people in the public and private sectors are adopting alternative employee reward determination theories.

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Summary

A rationale for practical theory on employee reward

Closed system theory and its critics Interactive open perspectives on reward

setting Theories on level of reward to be set Theories on managerial influence through

reward Theories on principles of organisational

justice and the balance between explicit and implicit contracts

Reward Management Introduction

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