W.S.

A TERM
PAPER
TOPIC: PAY & PERFORRMANCE
LINKAGES

Foundations of Merit Pay-Psychological Linkage

8
Reinforcement theory: people respond to rewards
(reinforcement) –stimulus respon

Expectancy theory –you want what the money will buy

Equity theory –fairness: work hard and you are rewarded
commensurate with level of effort

Successful Merit Programs

Merit Pay not necessarily successful in all organizations –depends on
organization’s readiness

Rewards employees for achieving results (linkage resultsrewards)

Provide rewards commensurate with contributions (equity)
Recognize bottom line considerations –aligned with organization’s ability to
pay (easier to have merit program when budget increases >3%)

Successful merit programs are:

Easily communicated to employees –not a black box, not
confined to HR understanding
Readily understood by employees –pass the “smell” test
Rational, structured and administered in a logical manner

Linking Pay to Performance

1 Determining What to Reward

2 Documenting Performance Standards

3 Establishing a Merit Budget

4 Setting Merit Pay Policy

5 Managing a Merit Pay Plan

6 Evaluating a Merit Pay Plan

Getting Started on a Merit Pay Plan

9 Verify that kep prerequisites are in place:
10 Top-management support (Can’t be viewed as an HR
project)

11 An established performance management system that

is reliable, valid, fair, flexible and credible (might need
to survey employees for perception of fairness)

Conduct research to verify that

merit pay is appropriate and workable for the organization:
(that is, how ready are employees? May
need to conduct focus surveys

Review of prior pay theory and

research

Collection of information on other employers’

experiences with merit pay

Evaluation of the effectiveness of the

merit pay program by establishing a baseline of
employee attitudes and
perceptions about pay

12 Form an employee task force to oversee the

 development of the plan and ensure work-force “buy
in”, with the following functions represented (to make it
more that an HRprogram):
Line management
13 HR professionals
14 Employees representing different “levels” in the
organization
15 Nonexempt employees, if appropriate for the
organization’s culture (careful of Electromation)

Individual Goal AlignmentWhat gets rewarded? Must align

rewards with:
16 Organization’s identity (Mission)
17 n’s
18 Organization’s objectives (how
individuals support strategic plan)
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Common Performance Standards
Standards = Goals, Objectives
Standards may be objective and subjective

Quality
Demonstrates work quality by producing goods or services
that meet or exceed present, measurable standards (e.g.,
less than one defect per thousand items).

Common Performance Standards

Quantity
Meets or exceeds specific production quotas within a given
period of time.

Problem Analysis
Identifies problems, secures relevant information and relates
data from different sources to determine possible causes

of problems .
Documenting Performance/Work Standards
Options

Cooperative effort –managers and employees

Manager driven (top down) –managers determine, then

communicate to employees

Employee driven (bottom up) –employees present goals to

managers

Ensuring Employee Acceptance

Employee buy-in essential

Emphasize results and behavior –nottraits (use objective,
behaviorally-based standards)
Enable employees to participate in setting standards
(supports buy-in)
Make standards flexible (recognize that organizations
change, priorities change throughout the performance cycle)

The Budget Process

20 Determine the size of the budget.
21 Allocate funds to business units within the organization.

Setting Merit Pay Policyi.e., Who gets What

Required conditions:
22 Variations in employee performance must be
measurable and measured. (Must be able to
differentiate performance)
23 Managers must be provided with the necessary tools
to determine the appropriate rewards.

Merit Pay Policy

 24 Key Factors
25 Size of increases
26 Timing of increases
27 Delivery of increases

Motivating Employees How much is necessary to motivate?

Required conditions:
Absolute merit size must make a noticeable difference.
Merit increase must be significant enough that real
differences in performance are recognized.

Fundamental shifts
A good compensation management practice suggests that employee
remuneration is linked to accountability and results and not based on
personal subjective evaluation. It is important to remember that pay
increases to non-performers actually takes away the reward due to a
high performer. Though it is a challenge to overcome human
subjectivity in performance assessment, where ratters find it difficult
Leadership Competency Series to adapt objective assessment, well
defined systems can improve the situation. Successful firms always
ensure to have well thought, flexible and transparent compensation
process with clarity on parameters of pay delivery. Other important
feature of compensation management is communication.
Communication is the key element of rewarding system. Matured
Managers, while providing performance feed back, generally
comment and criticise the performance and not the person. It is
important to provide timely and honest feedback to appraisees

Broad banding
To put it simply, broad banding involves having fewer pay grades in
an organisation. A company that had 25 grades may reduce them to 15
or so (or even 5 or six if they are daring). Positions that were in
different, but reasonably similar grades can be placed in the same pay
grade. When the Broad-banded Salary Structures became all the rage,
there was a huge swing of the pendulum from compensation
programmes featuring a number of narrow pay grades. At the close of
the 90s, a Wyatt survey of 1,300 companies found that less than one
in ten used broad banding. If one removes the larger companies from
the survey (5,000 employees or more), only 6 per cent to 7 per cent
used this approach. Some Companies find that it works for them, but
most are redesigning their structures to allow pay ranges to reflect the
market while the trend is moving to common-sense salary structures.
Here there is plenty of room to compete for talent and continue to
reward stars without busting through a pay grade ceiling.

How To Link Pay And Job Performance

PART 1 THE PROBLEM

Employees want to feel that their good work is appreciated and

appropriately compensated. However, 7 out of 10 do not believe that there
is a clear relationship between their pay and their job performance. Let''s
investigate this further.
1) Although technically impossible, most employees believe that their
performance is above average. Each, therefore, believes that he or she
should be paid above average. But this, of course, is impossible.
2) Most employees feel that they are not adequately paid compared to
those performing similar work in other organizations. They, therefore,
also believe that their pay is below the level of their job performance.
3) Employees often perceive that there are poor performers in their
organization who are earning as much if not more than they earn. They
thus conclude, "If that lazy so-and-so is still here, they must be under-
paying me for my good work."
4) Supervisors don''t have the know-how or guts to differentiate between
poor, average, and above average performers. They take the simple way
out and give everyone the same pay increases each year.
5) Our employee surveys consistently show that employees say that tying
pay to performance is very important to them. We have found this to be
particularly true in unionized organizations where the union has
negotiated contracts that require their employer to tie pay increases to
years of service rather than performance.

PART 2.WHAT MANAGEMENT CAN DO

Successfully tying pay to job performance is possible, but very difficult
to accomplish. Here are a few principles that can help.
1) Make Your Pay-for-Performance Philosophy Clear to Employees
There are plenty of good reasons why you might NOT want to link pay to
performance. For example,
- There are few major differences in how well employees perform their
jobs.
- It is very difficult to measure differences in job performance.
- There is not enough money available to make a big enough difference in
how average and above average performers are paid.
- Linking pay and performance is inconsistent with management''s
philosophy.
Employees, however, typically assume that above average performers will
receive higher pay increases than average performers. Management,
therefore, needs to be up-front with employees about whether or not they
intend to try to link pay to job performance.
2) Use Bonuses Rather than Pay Increases
Pay increases are much more expensive than bonuses because they
commit management to pay the increases every year. One-time bonuses
are a less expensive approach that can achieve the same motivational
impact.
3) Rate Supervisors on How Well they Rate their Subordinates
Supervisors often sabotage the organization''s efforts to improve the pay
of good performers by giving everyone in their work group high ratings.
Management needs to train supervisors how to conduct their performance
ratings. They then need to analyze the ratings of supervisors and base
supervisors'' pay, in part, on the quality of the ratings they give to their
workers.
4) Train Supervisors How to Talk About Pay
Many supervisors undermine their organization''s pay for performance
efforts by saying things like,
"I wish we could pay you more, but all we can do is increase your salary
by 5 percent" instead of,
"I am delighted to tell you that due to your excellent performance this past
year, we are increasing your salary 5 percent."
Supervisors, therefore, need to be taught how to convey the appropriate
message that their good performance is being rewarded.
5) Use Objective Performance Measures
Many jobs require tying pay to the subjective ratings of supervisors.
These ratings are often contaminated by a host of factors including
personal bias, halo, favoritism, central tendency, and leniency. Every
attempt should be made to base pay decisions on objective criteria such as
sales, attendance, complaints, quality, and productivity.
6) Weed out Ineffective Performers
Most organizations do a poor job of managing poor performers. The
presence of poor performers signals to the good performers that how well
they perform doesn''t really matter. Those who are not performing their
job well should be coached, retrained, disciplined, or removed.
In summary, employees typically want to be paid commensurate with the
quality of their job performance. Doing so requires a carefully constructed
pay program, a commitment from supervisors, and well-orchestrated
communications to employees about their pay.

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