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PM, Chapter 01.ppt

This document discusses performance management and reward systems. It defines performance management as a continuous process of identifying, measuring, and developing employee performance to align with organizational goals. Performance management goes beyond annual performance appraisals by providing ongoing feedback to help employees improve. An ideal performance management system contributes to employee development, manager insight, and organizational effectiveness. It also integrates with other human resource functions like training, recruitment, and compensation.

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PERFORMANCE MANAGEMENT Herman Aguinis Herman Aguinis, University of Colorado at Denver PERFORMANCE MANAGEMENT Herman Aguinis
Herman Aguinis, University of Colorado at Denver Performance management and rewards system in context • Dr. Ghulam Dastgeer • 0333-5111469 • hellodastgeer@gmail.com
Herman Aguinis, University of Colorado at Denver Performance Management in Context: Overview  Definition of Performance Management (PM)  The Performance Management Contribution  Disadvantages/Dangers of Poorly-implemented PM systems  Definition of Reward Systems  Aims and role of PM Systems  Characteristics of an Ideal PM system  Integration with Other Human Resources and Development Activities
Herman Aguinis, University of Colorado at Denver Performance Management: Definition • Performance management is a continuous process of identifying, measuring, and developing the performance of individuals and teams and aligning performance with the strategic goals of the organization. Continuous Process of  Identifying performance of individuals and teams  Measuring performance of individuals and teams  Developing performance of individuals and teams and  Aligning performance with the strategic goals of the organization
Herman Aguinis, University of Colorado at Denver Performance Management Vs Performance Appraisal • Performance Appraisal: – Performance appraisal is the system that involves employees evaluations once a year without an ongoing efforts to provide feedback and coaching so that performance can be improved. – Performance appraisal is the systematic description of an employee’s strengths and weakness. – So performance appraisal is an important component of performance management
Herman Aguinis, University of Colorado at Denver PM is NOT performance appraisal • PM – Strategic business considerations – Ongoing feedback – So employee can improve performance – Driven by line manager • Performance appraisal – Assesses employee • Strengths & • Weaknesses – Once a year – Lacks ongoing feedback – Driven by HR
Herman Aguinis, University of Colorado at Denver Contributions of PM For Employees The definitions of job and success are clarified Motivation to perform is increased Self-esteem is increased Self-insight and development and enhanced
Herman Aguinis, University of Colorado at Denver Contributions of PM For Managers Supervisors’ views of performance are communicated more clearly Managers gain insight about subordinates There is better and more timely differentiation between good and poor performers Employees become more competent
Herman Aguinis, University of Colorado at Denver Contributions of PM For Organization/HR Function Organizational goals are made clear Organizational change is facilitated Administrative actions are more fair and appropriate There is better protection from lawsuits
Herman Aguinis, University of Colorado at Denver Integration with other Human Resources and Development activities PM provides information for: Development of training to meet organizational needs Workforce planning Recruitment and hiring decisions Development of compensation systems
Herman Aguinis, University of Colorado at Denver Prentice Hall, Inc. © 2006 2–11 Performance Management Process: Overview Prerequisites Performance Planning Performance Execution Performance Assessment Performance Review Performance Renewal and Recontracting
Herman Aguinis, University of Colorado at Denver Prentice Hall, Inc. © 2006 2–12 Performance Management Process Performance Review Performance Renewal and Recontracting Performance Assessment Performance Execution Performance Planning Prerequisites
Herman Aguinis, University of Colorado at Denver Prentice Hall, Inc. © 2006 2–13 Prerequisites A. Knowledge of the organization’s mission and strategic goals B. Knowledge of the job in question
Herman Aguinis, University of Colorado at Denver Prentice Hall, Inc. © 2006 2–14 First prerequisite: Knowledge of mission and strategic goals Knowledge of the organization's mission and strategic goals is a result of strategic planning. • Strategic planning allows an organization to clearly define: – Purpose or reason for organization’s existence – Where organization is going – Where it wants to be in future – The goals it wants to achieve – Strategies for attaining goals
Herman Aguinis, University of Colorado at Denver Prentice Hall, Inc. © 2006 2–15 Mission and Goals Cascade effect throughout organization Organization Unit Employee (Recall: An important objective of any performance management system is to enhance each employee’s contribution to the goals of the organization)
Herman Aguinis, University of Colorado at Denver Prentice Hall, Inc. © 2006 2–16 Second Prerequisite : Knowledge of the job • Knowledge of the job (understand the job in question) is done through job analysis • Job analysis: – A process of determining the key components of a particular job, including activities, tasks, products, services, and process. – If there is no J.A, then???
Herman Aguinis, University of Colorado at Denver • As a result of job analysis, we obtain information regarding – Knowledge: having the information needed to perform the work, but not necessarily having done it. – Skills: required attributes that are usually acquired by having done the work in the past. – Abilities: having the physical, emotional, intelectual, and psychological aptitude to perform the work but neither having done it nor haing been trained to do the work is required. required to perform a job… Prentice Hall, Inc. © 2006 2–17
Herman Aguinis, University of Colorado at Denver Prentice Hall, Inc. © 2006 2–18 Performance Planning Performance Planning includes: Results Behavior Development Plan
Herman Aguinis, University of Colorado at Denver Prentice Hall, Inc. © 2006 2–19 Performance Planning: Results Results refer to what needs to be done or the outcomes an employee must produce. A consideration of results needs to include:  Key accountabilities: Broad areas of a job for which the employee is responsible for producing results .  Specific objectives:  Statements of outcomes  Important  Measurable  Performance standards: • “Yardstick” to evaluate how well employees have achieved each objective • Information on acceptable and unacceptable performance, such as  Quality, quantity, cost, time Example: Job of university professor
Herman Aguinis, University of Colorado at Denver Prentice Hall, Inc. © 2006 2–20 Performance Planning: Behaviors Behavior in this context means: How a job is done • A consideration of behavior includes discussing competencies: – Measurable clusters of KSAs – Critical in determining how results will be achieved Example: a sales manager working in a specific sales territory.
Herman Aguinis, University of Colorado at Denver Prentice Hall, Inc. © 2006 2–21 Performance Assessment • Both the employee and the manager are responsible for evaluating the extent to which the desired behaviors have been displayed, and whether the desired results have been achieved. • This also includes an evaluation of the extent to which the goals stated in the development plan have been achieved.
Herman Aguinis, University of Colorado at Denver • Supervisors assessment • Peers assessment • Subordinates assessment • Self-assessment • Customers assessment Prentice Hall, Inc. © 2006 2–22
Herman Aguinis, University of Colorado at Denver Prentice Hall, Inc. © 2006 2–23 Performance Review Overview of Appraisal Meeting The performance review stage involves the meeting between the employee and the manager to review their assessments. This meeting is usually called the appraisal meeting or discussion.
Herman Aguinis, University of Colorado at Denver • Appraisal meeting provides for formal setting in which the employee receives feedback on his/her performance. • Many managers are uncomfortable providing performance feedback, particularly when performance is deficient. Prentice Hall, Inc. © 2006 2–24
Herman Aguinis, University of Colorado at Denver Appraisal meeting is seen as a review of the • Past – What has been done (results) and how (behaviors). • Present – What new compensation employee may be receiving as a result of his/her performance. • Future – Goals to be attained before the upcoming review session. Prentice Hall, Inc. © 2006 2–25
Herman Aguinis, University of Colorado at Denver Prentice Hall, Inc. © 2006 2–26 Performance Renewal and Recontracting • Same as/different from Performance Planning – Uses insights and information from previous phases – Cycle begins again
Rewards Financial Compensation Dr. Ghulam Dastgeer
Herman Aguinis, University of Colorado at Denver Reward Systems: Definition • A reward system is the set of mechanisms for distributing both tangible and intangible returns as part of an employment relationships.
Herman Aguinis, University of Colorado at Denver Tangible returns Cash compensation Base pay Cost-of-Living & Contingent Pay Incentives (short- and long-term) Benefits, such as Income Protection Allowances Work/life focus
Herman Aguinis, University of Colorado at Denver Intangible returns  Relational returns, such as Recognition and status Employment security Challenging work Learning opportunities
Herman Aguinis, University of Colorado at Denver Types of Return • 1. Base Pay – Base pay is given to employees in exchange of work performed – The base pay, which usually include a range of values, focuses on the position and duties performed rather than an individual contribution. – Base pay is usually the same for all employees performing similar duties and ignores differences across employees.
Herman Aguinis, University of Colorado at Denver • 2. Cost of living adjustments and contingent pay – Cost of living adjustments are given to combat the effects of inflation in an attempt to preserve the employee’s buying power. – Contingent pay, sometimes refer to as merit pay, is given as an addition to the base pay based on past performance
Herman Aguinis, University of Colorado at Denver • 3. Short term incentives – Allocated based on past performance – These incentives are not added to the base pay and are only temporary pay adjustments based on the review period (e.g, quarterly or annual) – Incentives are one time payments and also called variable pay
Herman Aguinis, University of Colorado at Denver • 4. Long term incentives – Long term incentives attempts to influence future performance over a longer period of time. – Involves stock ownership, options to buy stocks at a pre-established and profitable price.
Herman Aguinis, University of Colorado at Denver • 5. Income Protection – Serves as a backup to employees’ salaries in the event that an employee is sick, disabled, or no longer able to work. – Some countries mandate income protection programs by law. – Also include medical insurance, pension plans, saving plans etc.
Herman Aguinis, University of Colorado at Denver • 6. Work/life focus – Help employees achieve a better balance between work and non-work activities • Time away from work (vacation time), service to meet specific needs (e.g., counseling, financial planning, on- site fitness programs) and flexible work schedules (telecommuting, nonpaid time off).
Herman Aguinis, University of Colorado at Denver • 7. Allowances: – Include allowances covering housing and transportation. – Typical for expatriate, personnel and are also popular for high level managers throughout the world
Herman Aguinis, University of Colorado at Denver • 8. Relational returns: – Intangible in nature. – Include recognition and status, employment security, challenging work, opportunities to learn and opportunities to form personal relationships at work (like friendship).
Herman Aguinis, University of Colorado at Denver Returns and Their Degree of Dependency on the Performance Management System Return  Cost of Living Adjustment  Income Protection  Work/life Focus  Allowances  Relational Returns  Base Pay  Contingent Pay  Short-term Incentives  Long-term Incentives Degree of Dependency • Low • Low • Moderate • Moderate • Moderate • Moderate • High • High • High
Herman Aguinis, University of Colorado at Denver Compensation • Compensation is the total of all rewards provided employees in return for their services. • The overall purpose of providing compensation are to attract, retain and motivate employees.
Herman Aguinis, University of Colorado at Denver 3 types of compensation • 1. Direct financial compensation: consists of the pay that a person receives in the form of wages, salaries, commissions. • 2. Indirect financial compensation: (called benefits) consists of all financial rewards that are not included in direct financial compensation (i.e medical and hospital costs). • 3. Non financial compensation: Consists of the satisfaction that a person receives from the job itself or from the psychological and/or physical environment in which the person works. • With total rewards, the idea of a three-legged stool is used to balance workforce compensation. These legs are direct financial compensation, indirect financial compensation and non financial compensation.
Herman Aguinis, University of Colorado at Denver Equity in financial compensation • The equity theory is the motivation theory that people assess their performance and attitudes by comparing both their contribution to work and the benefits they derive from it to contributions and benefits of comparison others whom they select and who in reality may or may not be like them. • Equity theory further states that a person is motivated in proportion to the perceived fairness of the rewards received for a certain amount of efforts as compared to what others receive.
Herman Aguinis, University of Colorado at Denver • Financial equity: means a perception of fair pay treatment for employees. • External equity: exists when a firm’s employees receive pay comparable to workers who perform similar jobs in other firms. • Internal equity: exists when employees receive pay according to the relative value of their jobs within the same organization. Job evaluation is a primary means for determining internal equity. • Employee equity: exists when individual performing similar jobs for the same firm receive pay according to factors unique to the employees, such as performance level or seniority. • Team Equity: is achieved when teams are rewarded based on their group’s productivity.
Herman Aguinis, University of Colorado at Denver • Why understanding equity theory is very important as it pertains to compensations? • How inequity in any category can results in morale problems?
Herman Aguinis, University of Colorado at Denver Determinants of direct financial compensation • 1. Organization as a determinants of direct financial compensation • 2. Labor market determinants of direct financial compensation • 3. Job as a determinants of direct financial compensation • 4. Employee as a determinants of direct financial compensation
Herman Aguinis, University of Colorado at Denver Organization as a determinants of direct financial compensation • Q: Do managers view financial compensation as an expense or an asset? • Compensation programs have top management’s attestation because they have the potential to influence employees work attitudes and behaviors that lead to improved organizational performance and implementation of the firm’s strategic plan. • 1. Compensation policy: – A compensation policy provides general guidelines for making compensation decisions. – An organization often establishes compensation policies that determine it will be a pay leader, a pay follower, or strive for an average position in the labor market.
Herman Aguinis, University of Colorado at Denver • Pay leader: are organizations that pay higher wages and salaries than competing firms. • Market rate: is the average pay that most employers provide for a similar job in a particular area or industry. • Pay Followers: companies that choose to pay blow the market rate because of poor financial conditions or a belief that they do not require highly capable employees are pay followers.
Herman Aguinis, University of Colorado at Denver • 2. Ability of organization to pay – An organization’s assessment of its ability to pay is also an important factor on determining pay levels. Financially successful firms tend to provide higher than average compensation.
Herman Aguinis, University of Colorado at Denver 2. Labor market determinants of direct financial compensation • Managerial and professional employees are often recruited from a wide geographic area. For more and more business firms, the world has become the labor market. • The market rate is an important guide in determining pay. Many employees view it as the standard for judging the fairness of their firm’s compensation practices.
Herman Aguinis, University of Colorado at Denver • 1. Compensation survey – A compensation survey is a mean of obtaining data regarding what other firms are paying for specific jobs within a given labor market. – Of all the wage criteria, market rates remain the most important standard for determining pay. • 2. Cost of living – The logic for using cost of living as a pay determinant is both simple and sound. When prices rise over time and pay does not, real pay is actually lowered. A pay increases must be roughly equivalent to the increased cost of living if a person is to maintain his or her previous level of real wages. – As some firms index pay increases to the inflation rate. – Inflation is not the only factor affecting cost of living; location also comes into play.
Herman Aguinis, University of Colorado at Denver • 3. Labor union – Unions normally prefer to determine compensation through the process of collective bargaining. • 4. Economy – Economy definitely affects financial compensation decisions, for example, a depressed economy generally increase the labor supply and this serves to lower the market rate.
Herman Aguinis, University of Colorado at Denver 3. employee as a determinants of direct financial compensation • 1. Job performance –performance-based Pay – A compensation feature generally controllable by employees is their job performance. – The objective of performance based pay is to improve productivity. – An effective performance appraisal program is a prerequisite for any pay system tied to performance. – A. Merit pay: is a pay increase added to employee’s base pay based on their level of performance. – B. Variable pay (bonus): a one time annual financial award, based on productivity, that is not added to base pay. – C. Piecework: is an incentive pay plan where employees are paid for each unit they produce.
Herman Aguinis, University of Colorado at Denver • 2. Skills---skills based pay: – Is a system that compensates employees for their hob-related skills and knowledge, not for their job title. – The system assumes that employees who know more are more valuable to the firm and, therefore, they deserve a reward for their efforts in acquiring new skills. – When employees obtain additional job relevant skills, both individuals and the department they serve benefits.
Herman Aguinis, University of Colorado at Denver • 3. Competencies--- competency based pay – Is a compensation plan that rewards employees for the capabilities they attain. – Competencies include skills, but also involve other factors such as motivation, values, attitudes, and self-concepts that can be linked to better performance.
Herman Aguinis, University of Colorado at Denver • 4. Seniority – Is the length of time an employee has been associated with the company, division, department, or job. • 5. Experience: – Regardless of the nature of the task, experience has the potential for enhancing a person’s ability to perform. However, this possibility materializes only if the experience acquired is positive.
Herman Aguinis, University of Colorado at Denver • 6. Organizational membership: – Employees receive some compensation components because they are members of the organization, – For example, an average performer occupying a job in pay grade 1 may receive the same number of vacation days, the same amount of group life insurance, and the same reimbursement for educational expenses as a supervisor employee working in a job classified in pay grade 10. • 7. Potential: – Many young employees are paid well, perhaps not because of their ability to make an immediate contribution, but because they have the potential to add value to the firm as a professional, first-line supervisor, manager of compensation, VP of marketing or Chief executive officer.
Herman Aguinis, University of Colorado at Denver • 8. Political Influence: – It may be natural for a manager to favor a friend or relative in granting a pay increase or promotion.
Benefits, Nonfinancial Compensation, and other compensation issues
Herman Aguinis, University of Colorado at Denver Benefits (Indirect financial compensation) • Benefits: includes all financial rewards not included in direct financial compensation • A distinct advantage “it is generally nontaxable to the employee”
Herman Aguinis, University of Colorado at Denver Types of indirect compensation • 1. In direct financial compensation (Benefits) 1. Legally required 1. Social security 2. Unemployment compensation 3. Worker’s compensation 4. Family medical leave 2. Voluntary benefits 1. Payment for time not worked 2. Health care 3. Life insurance 4. Retirement plans 5. Disability protection 6. Employee stock option plans 7. Premium pay
Herman Aguinis, University of Colorado at Denver • 2. non financial compensation 1. The job 1. Skill verity 2. Task identity 3. Task significance 4. Autonomy 5. Feedback 2. Job environment 1. Sound policies 2. Capable manager 3. Competent employees 4. Suitable status symbols 5. Working condition
Herman Aguinis, University of Colorado at Denver – 3. Workplace Flexibility 1. Flextime 2. Compressed workweek 3. Job sharing 4. Telecommuting 5. Part-time work

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PM, Chapter 01.ppt

  • 1.
    PERFORMANCE MANAGEMENT Herman Aguinis Herman Aguinis,University of Colorado at Denver PERFORMANCE MANAGEMENT Herman Aguinis
  • 2.
    Herman Aguinis, Universityof Colorado at Denver Performance management and rewards system in context • Dr. Ghulam Dastgeer • 0333-5111469 • hellodastgeer@gmail.com
  • 3.
    Herman Aguinis, Universityof Colorado at Denver Performance Management in Context: Overview  Definition of Performance Management (PM)  The Performance Management Contribution  Disadvantages/Dangers of Poorly-implemented PM systems  Definition of Reward Systems  Aims and role of PM Systems  Characteristics of an Ideal PM system  Integration with Other Human Resources and Development Activities
  • 4.
    Herman Aguinis, Universityof Colorado at Denver Performance Management: Definition • Performance management is a continuous process of identifying, measuring, and developing the performance of individuals and teams and aligning performance with the strategic goals of the organization. Continuous Process of  Identifying performance of individuals and teams  Measuring performance of individuals and teams  Developing performance of individuals and teams and  Aligning performance with the strategic goals of the organization
  • 5.
    Herman Aguinis, Universityof Colorado at Denver Performance Management Vs Performance Appraisal • Performance Appraisal: – Performance appraisal is the system that involves employees evaluations once a year without an ongoing efforts to provide feedback and coaching so that performance can be improved. – Performance appraisal is the systematic description of an employee’s strengths and weakness. – So performance appraisal is an important component of performance management
  • 6.
    Herman Aguinis, Universityof Colorado at Denver PM is NOT performance appraisal • PM – Strategic business considerations – Ongoing feedback – So employee can improve performance – Driven by line manager • Performance appraisal – Assesses employee • Strengths & • Weaknesses – Once a year – Lacks ongoing feedback – Driven by HR
  • 7.
    Herman Aguinis, Universityof Colorado at Denver Contributions of PM For Employees The definitions of job and success are clarified Motivation to perform is increased Self-esteem is increased Self-insight and development and enhanced
  • 8.
    Herman Aguinis, Universityof Colorado at Denver Contributions of PM For Managers Supervisors’ views of performance are communicated more clearly Managers gain insight about subordinates There is better and more timely differentiation between good and poor performers Employees become more competent
  • 9.
    Herman Aguinis, Universityof Colorado at Denver Contributions of PM For Organization/HR Function Organizational goals are made clear Organizational change is facilitated Administrative actions are more fair and appropriate There is better protection from lawsuits
  • 10.
    Herman Aguinis, Universityof Colorado at Denver Integration with other Human Resources and Development activities PM provides information for: Development of training to meet organizational needs Workforce planning Recruitment and hiring decisions Development of compensation systems
  • 11.
    Herman Aguinis, Universityof Colorado at Denver Prentice Hall, Inc. © 2006 2–11 Performance Management Process: Overview Prerequisites Performance Planning Performance Execution Performance Assessment Performance Review Performance Renewal and Recontracting
  • 12.
    Herman Aguinis, Universityof Colorado at Denver Prentice Hall, Inc. © 2006 2–12 Performance Management Process Performance Review Performance Renewal and Recontracting Performance Assessment Performance Execution Performance Planning Prerequisites
  • 13.
    Herman Aguinis, Universityof Colorado at Denver Prentice Hall, Inc. © 2006 2–13 Prerequisites A. Knowledge of the organization’s mission and strategic goals B. Knowledge of the job in question
  • 14.
    Herman Aguinis, Universityof Colorado at Denver Prentice Hall, Inc. © 2006 2–14 First prerequisite: Knowledge of mission and strategic goals Knowledge of the organization's mission and strategic goals is a result of strategic planning. • Strategic planning allows an organization to clearly define: – Purpose or reason for organization’s existence – Where organization is going – Where it wants to be in future – The goals it wants to achieve – Strategies for attaining goals
  • 15.
    Herman Aguinis, Universityof Colorado at Denver Prentice Hall, Inc. © 2006 2–15 Mission and Goals Cascade effect throughout organization Organization Unit Employee (Recall: An important objective of any performance management system is to enhance each employee’s contribution to the goals of the organization)
  • 16.
    Herman Aguinis, Universityof Colorado at Denver Prentice Hall, Inc. © 2006 2–16 Second Prerequisite : Knowledge of the job • Knowledge of the job (understand the job in question) is done through job analysis • Job analysis: – A process of determining the key components of a particular job, including activities, tasks, products, services, and process. – If there is no J.A, then???
  • 17.
    Herman Aguinis, Universityof Colorado at Denver • As a result of job analysis, we obtain information regarding – Knowledge: having the information needed to perform the work, but not necessarily having done it. – Skills: required attributes that are usually acquired by having done the work in the past. – Abilities: having the physical, emotional, intelectual, and psychological aptitude to perform the work but neither having done it nor haing been trained to do the work is required. required to perform a job… Prentice Hall, Inc. © 2006 2–17
  • 18.
    Herman Aguinis, Universityof Colorado at Denver Prentice Hall, Inc. © 2006 2–18 Performance Planning Performance Planning includes: Results Behavior Development Plan
  • 19.
    Herman Aguinis, Universityof Colorado at Denver Prentice Hall, Inc. © 2006 2–19 Performance Planning: Results Results refer to what needs to be done or the outcomes an employee must produce. A consideration of results needs to include:  Key accountabilities: Broad areas of a job for which the employee is responsible for producing results .  Specific objectives:  Statements of outcomes  Important  Measurable  Performance standards: • “Yardstick” to evaluate how well employees have achieved each objective • Information on acceptable and unacceptable performance, such as  Quality, quantity, cost, time Example: Job of university professor
  • 20.
    Herman Aguinis, Universityof Colorado at Denver Prentice Hall, Inc. © 2006 2–20 Performance Planning: Behaviors Behavior in this context means: How a job is done • A consideration of behavior includes discussing competencies: – Measurable clusters of KSAs – Critical in determining how results will be achieved Example: a sales manager working in a specific sales territory.
  • 21.
    Herman Aguinis, Universityof Colorado at Denver Prentice Hall, Inc. © 2006 2–21 Performance Assessment • Both the employee and the manager are responsible for evaluating the extent to which the desired behaviors have been displayed, and whether the desired results have been achieved. • This also includes an evaluation of the extent to which the goals stated in the development plan have been achieved.
  • 22.
    Herman Aguinis, Universityof Colorado at Denver • Supervisors assessment • Peers assessment • Subordinates assessment • Self-assessment • Customers assessment Prentice Hall, Inc. © 2006 2–22
  • 23.
    Herman Aguinis, Universityof Colorado at Denver Prentice Hall, Inc. © 2006 2–23 Performance Review Overview of Appraisal Meeting The performance review stage involves the meeting between the employee and the manager to review their assessments. This meeting is usually called the appraisal meeting or discussion.
  • 24.
    Herman Aguinis, Universityof Colorado at Denver • Appraisal meeting provides for formal setting in which the employee receives feedback on his/her performance. • Many managers are uncomfortable providing performance feedback, particularly when performance is deficient. Prentice Hall, Inc. © 2006 2–24
  • 25.
    Herman Aguinis, Universityof Colorado at Denver Appraisal meeting is seen as a review of the • Past – What has been done (results) and how (behaviors). • Present – What new compensation employee may be receiving as a result of his/her performance. • Future – Goals to be attained before the upcoming review session. Prentice Hall, Inc. © 2006 2–25
  • 26.
    Herman Aguinis, Universityof Colorado at Denver Prentice Hall, Inc. © 2006 2–26 Performance Renewal and Recontracting • Same as/different from Performance Planning – Uses insights and information from previous phases – Cycle begins again
  • 27.
  • 28.
    Herman Aguinis, Universityof Colorado at Denver Reward Systems: Definition • A reward system is the set of mechanisms for distributing both tangible and intangible returns as part of an employment relationships.
  • 29.
    Herman Aguinis, Universityof Colorado at Denver Tangible returns Cash compensation Base pay Cost-of-Living & Contingent Pay Incentives (short- and long-term) Benefits, such as Income Protection Allowances Work/life focus
  • 30.
    Herman Aguinis, Universityof Colorado at Denver Intangible returns  Relational returns, such as Recognition and status Employment security Challenging work Learning opportunities
  • 31.
    Herman Aguinis, Universityof Colorado at Denver Types of Return • 1. Base Pay – Base pay is given to employees in exchange of work performed – The base pay, which usually include a range of values, focuses on the position and duties performed rather than an individual contribution. – Base pay is usually the same for all employees performing similar duties and ignores differences across employees.
  • 32.
    Herman Aguinis, Universityof Colorado at Denver • 2. Cost of living adjustments and contingent pay – Cost of living adjustments are given to combat the effects of inflation in an attempt to preserve the employee’s buying power. – Contingent pay, sometimes refer to as merit pay, is given as an addition to the base pay based on past performance
  • 33.
    Herman Aguinis, Universityof Colorado at Denver • 3. Short term incentives – Allocated based on past performance – These incentives are not added to the base pay and are only temporary pay adjustments based on the review period (e.g, quarterly or annual) – Incentives are one time payments and also called variable pay
  • 34.
    Herman Aguinis, Universityof Colorado at Denver • 4. Long term incentives – Long term incentives attempts to influence future performance over a longer period of time. – Involves stock ownership, options to buy stocks at a pre-established and profitable price.
  • 35.
    Herman Aguinis, Universityof Colorado at Denver • 5. Income Protection – Serves as a backup to employees’ salaries in the event that an employee is sick, disabled, or no longer able to work. – Some countries mandate income protection programs by law. – Also include medical insurance, pension plans, saving plans etc.
  • 36.
    Herman Aguinis, Universityof Colorado at Denver • 6. Work/life focus – Help employees achieve a better balance between work and non-work activities • Time away from work (vacation time), service to meet specific needs (e.g., counseling, financial planning, on- site fitness programs) and flexible work schedules (telecommuting, nonpaid time off).
  • 37.
    Herman Aguinis, Universityof Colorado at Denver • 7. Allowances: – Include allowances covering housing and transportation. – Typical for expatriate, personnel and are also popular for high level managers throughout the world
  • 38.
    Herman Aguinis, Universityof Colorado at Denver • 8. Relational returns: – Intangible in nature. – Include recognition and status, employment security, challenging work, opportunities to learn and opportunities to form personal relationships at work (like friendship).
  • 39.
    Herman Aguinis, Universityof Colorado at Denver Returns and Their Degree of Dependency on the Performance Management System Return  Cost of Living Adjustment  Income Protection  Work/life Focus  Allowances  Relational Returns  Base Pay  Contingent Pay  Short-term Incentives  Long-term Incentives Degree of Dependency • Low • Low • Moderate • Moderate • Moderate • Moderate • High • High • High
  • 40.
    Herman Aguinis, Universityof Colorado at Denver Compensation • Compensation is the total of all rewards provided employees in return for their services. • The overall purpose of providing compensation are to attract, retain and motivate employees.
  • 41.
    Herman Aguinis, Universityof Colorado at Denver 3 types of compensation • 1. Direct financial compensation: consists of the pay that a person receives in the form of wages, salaries, commissions. • 2. Indirect financial compensation: (called benefits) consists of all financial rewards that are not included in direct financial compensation (i.e medical and hospital costs). • 3. Non financial compensation: Consists of the satisfaction that a person receives from the job itself or from the psychological and/or physical environment in which the person works. • With total rewards, the idea of a three-legged stool is used to balance workforce compensation. These legs are direct financial compensation, indirect financial compensation and non financial compensation.
  • 42.
    Herman Aguinis, Universityof Colorado at Denver Equity in financial compensation • The equity theory is the motivation theory that people assess their performance and attitudes by comparing both their contribution to work and the benefits they derive from it to contributions and benefits of comparison others whom they select and who in reality may or may not be like them. • Equity theory further states that a person is motivated in proportion to the perceived fairness of the rewards received for a certain amount of efforts as compared to what others receive.
  • 43.
    Herman Aguinis, Universityof Colorado at Denver • Financial equity: means a perception of fair pay treatment for employees. • External equity: exists when a firm’s employees receive pay comparable to workers who perform similar jobs in other firms. • Internal equity: exists when employees receive pay according to the relative value of their jobs within the same organization. Job evaluation is a primary means for determining internal equity. • Employee equity: exists when individual performing similar jobs for the same firm receive pay according to factors unique to the employees, such as performance level or seniority. • Team Equity: is achieved when teams are rewarded based on their group’s productivity.
  • 44.
    Herman Aguinis, Universityof Colorado at Denver • Why understanding equity theory is very important as it pertains to compensations? • How inequity in any category can results in morale problems?
  • 45.
    Herman Aguinis, Universityof Colorado at Denver Determinants of direct financial compensation • 1. Organization as a determinants of direct financial compensation • 2. Labor market determinants of direct financial compensation • 3. Job as a determinants of direct financial compensation • 4. Employee as a determinants of direct financial compensation
  • 46.
    Herman Aguinis, Universityof Colorado at Denver Organization as a determinants of direct financial compensation • Q: Do managers view financial compensation as an expense or an asset? • Compensation programs have top management’s attestation because they have the potential to influence employees work attitudes and behaviors that lead to improved organizational performance and implementation of the firm’s strategic plan. • 1. Compensation policy: – A compensation policy provides general guidelines for making compensation decisions. – An organization often establishes compensation policies that determine it will be a pay leader, a pay follower, or strive for an average position in the labor market.
  • 47.
    Herman Aguinis, Universityof Colorado at Denver • Pay leader: are organizations that pay higher wages and salaries than competing firms. • Market rate: is the average pay that most employers provide for a similar job in a particular area or industry. • Pay Followers: companies that choose to pay blow the market rate because of poor financial conditions or a belief that they do not require highly capable employees are pay followers.
  • 48.
    Herman Aguinis, Universityof Colorado at Denver • 2. Ability of organization to pay – An organization’s assessment of its ability to pay is also an important factor on determining pay levels. Financially successful firms tend to provide higher than average compensation.
  • 49.
    Herman Aguinis, Universityof Colorado at Denver 2. Labor market determinants of direct financial compensation • Managerial and professional employees are often recruited from a wide geographic area. For more and more business firms, the world has become the labor market. • The market rate is an important guide in determining pay. Many employees view it as the standard for judging the fairness of their firm’s compensation practices.
  • 50.
    Herman Aguinis, Universityof Colorado at Denver • 1. Compensation survey – A compensation survey is a mean of obtaining data regarding what other firms are paying for specific jobs within a given labor market. – Of all the wage criteria, market rates remain the most important standard for determining pay. • 2. Cost of living – The logic for using cost of living as a pay determinant is both simple and sound. When prices rise over time and pay does not, real pay is actually lowered. A pay increases must be roughly equivalent to the increased cost of living if a person is to maintain his or her previous level of real wages. – As some firms index pay increases to the inflation rate. – Inflation is not the only factor affecting cost of living; location also comes into play.
  • 51.
    Herman Aguinis, Universityof Colorado at Denver • 3. Labor union – Unions normally prefer to determine compensation through the process of collective bargaining. • 4. Economy – Economy definitely affects financial compensation decisions, for example, a depressed economy generally increase the labor supply and this serves to lower the market rate.
  • 52.
    Herman Aguinis, Universityof Colorado at Denver 3. employee as a determinants of direct financial compensation • 1. Job performance –performance-based Pay – A compensation feature generally controllable by employees is their job performance. – The objective of performance based pay is to improve productivity. – An effective performance appraisal program is a prerequisite for any pay system tied to performance. – A. Merit pay: is a pay increase added to employee’s base pay based on their level of performance. – B. Variable pay (bonus): a one time annual financial award, based on productivity, that is not added to base pay. – C. Piecework: is an incentive pay plan where employees are paid for each unit they produce.
  • 53.
    Herman Aguinis, Universityof Colorado at Denver • 2. Skills---skills based pay: – Is a system that compensates employees for their hob-related skills and knowledge, not for their job title. – The system assumes that employees who know more are more valuable to the firm and, therefore, they deserve a reward for their efforts in acquiring new skills. – When employees obtain additional job relevant skills, both individuals and the department they serve benefits.
  • 54.
    Herman Aguinis, Universityof Colorado at Denver • 3. Competencies--- competency based pay – Is a compensation plan that rewards employees for the capabilities they attain. – Competencies include skills, but also involve other factors such as motivation, values, attitudes, and self-concepts that can be linked to better performance.
  • 55.
    Herman Aguinis, Universityof Colorado at Denver • 4. Seniority – Is the length of time an employee has been associated with the company, division, department, or job. • 5. Experience: – Regardless of the nature of the task, experience has the potential for enhancing a person’s ability to perform. However, this possibility materializes only if the experience acquired is positive.
  • 56.
    Herman Aguinis, Universityof Colorado at Denver • 6. Organizational membership: – Employees receive some compensation components because they are members of the organization, – For example, an average performer occupying a job in pay grade 1 may receive the same number of vacation days, the same amount of group life insurance, and the same reimbursement for educational expenses as a supervisor employee working in a job classified in pay grade 10. • 7. Potential: – Many young employees are paid well, perhaps not because of their ability to make an immediate contribution, but because they have the potential to add value to the firm as a professional, first-line supervisor, manager of compensation, VP of marketing or Chief executive officer.
  • 57.
    Herman Aguinis, Universityof Colorado at Denver • 8. Political Influence: – It may be natural for a manager to favor a friend or relative in granting a pay increase or promotion.
  • 58.
  • 59.
    Herman Aguinis, Universityof Colorado at Denver Benefits (Indirect financial compensation) • Benefits: includes all financial rewards not included in direct financial compensation • A distinct advantage “it is generally nontaxable to the employee”
  • 60.
    Herman Aguinis, Universityof Colorado at Denver Types of indirect compensation • 1. In direct financial compensation (Benefits) 1. Legally required 1. Social security 2. Unemployment compensation 3. Worker’s compensation 4. Family medical leave 2. Voluntary benefits 1. Payment for time not worked 2. Health care 3. Life insurance 4. Retirement plans 5. Disability protection 6. Employee stock option plans 7. Premium pay
  • 61.
    Herman Aguinis, Universityof Colorado at Denver • 2. non financial compensation 1. The job 1. Skill verity 2. Task identity 3. Task significance 4. Autonomy 5. Feedback 2. Job environment 1. Sound policies 2. Capable manager 3. Competent employees 4. Suitable status symbols 5. Working condition
  • 62.
    Herman Aguinis, Universityof Colorado at Denver – 3. Workplace Flexibility 1. Flextime 2. Compressed workweek 3. Job sharing 4. Telecommuting 5. Part-time work