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CHAPTER 11 Rewarding Performance

CHALLENGES

After reading this chapter, you should be able to deal more effectively with the following challenges:

1 Grasp the major challenges in pay for performance systems.
2 Develop competence in dealing with potential problems with pay for performance systems.
3 Have familiarity with various types of pay for performance plans and their advantages/disadvantages.
4 Develop competence in designing pay for performance plans for executives and sales people.
5 Learn about how to reward excellence in customer service.
6 Become aware of special concerns with pay for performance programs in small firms.

Century Telephone Company bases its employees’ annual pay raises on how well employees perform their job duties. For the past 10 years, these “merit raises” have averaged 3.5 percent of base pay. About two years ago the HR department conducted an employee attitude survey. One of its most striking findings: More than 75 percent of employees felt that pay raises and performance were unrelated. In response, top managers asked the HR staff to determine whether pay raises were indeed based on performance (as required by policy) or on some other unrelated factors. Surprisingly, the data showed that employees were right: Supervisors rated more than 80 percent of their workers as “excellent,” and there was only minimal differentiation in the percentage raises received by individual employees.

Top management concluded that supervisors were equalizing performance ratings and raises, sidestepping their responsibility to reward employees on the basis of performance.

To remedy the situation, Century instituted a new procedure a year ago. Under this new system, supervisors must distribute employee performance ratings as follows: excellent (top 15%), very good (next 20%), good (next 20%), satisfactory (next 35%), marginal or unsatisfactory (lowest 10%). Pay raises are pegged to these performance classifications, with employees at the top receiving a 10 percent raise and those at the bottom receiving nothing.

Shortly after the system was put in place, it became obvious that something had gone wrong. A large number of employees could not understand how or why their performance had “dropped” compared to the previous year. Many believed that favoritism played a big role in who received pay increases. Irate employees hounded their supervisors, who in turn complained that increased tension was poisoning interpersonal relationships and interfering with performance.

Source:Pressmaster/Shutterstock.

The Managerial Perspective

Attempting to motivate employees with pay incentives can backfire, as the experience at Century Telephone (a real company given a fictitious name) shows. Nonetheless, the use of pay incentives is increasing. In 1988, the number of U.S. companies offering pay for performance (chiefly in the form of bonuses) to all salaried employees was 47 percent. By 2014, experts estimated that close to 95 percent of U.S. companies do so, and this practice is spreading rapidly around the world. A more dramatic change is observed at the top executive ranks, where stock-related pay increased from approximately 1 percent of total compensation in the 1970s to over 70 percent at the present time.1

What these numbers do not tell us about is the flourishing of creative incentive plans that are being implemented. For instance, almost all of the publicly traded “Best Companies” in Fortune’s list are experimenting with all kinds of monetary and nonmonetary incentives for employees. JM Family Enterprises in Florida offers top performers free haircuts, manicures, and day trips to the Bahamas on the company yacht. When Jim Moran, the company’s founder, died in 2007, he left his stock in a trust to continue funding these “employee-friendly” policies. Kingston Technology Co., Inc., besides buying free monthly lunches, offers quarterly performance-based bonuses that sometimes exceed the typical employee’s full year’s salary.2

At Men’s Wearhouse, a clothing company with almost 10,000 employees, executives gave away 113 trips to Hawaii for top performers. After five years, outstanding employees are also eligible for a three-week paid sabbatical.3

In this chapter, we discuss the design and implementation of pay-for-performance (incentive) systems. First, we address the major challenges facing managers in their attempts to link pay and performance. Second, we offer a set of general recommendations to deal with these challenges. Third, we describe specific types of pay-for-performance programs and the advantages and disadvantages of each. We conclude with a discussion of unique pay-for-performance plans for two important employee groups, executives and sales personnel.

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Table of Contents for CHAPTER 11 Rewarding Performance

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Table of Contents for
CHAPTER 11 Rewarding Performance