15 660 Strategic Human Resource Management Professor M Diane Burton MIT Sloan School of Management The Functions of Pay External allocate across firms and occupations Internal attract and maintain labor forces allocate across occupations motivate and align behavior provide status provide sense of equity Key Market Ideas Reservation wage Compensating differentials Meaning of equilibrium Elasticity of demand curve Why Market Model is Incomplete Adjustment is long and slow Role of Power imperfect information barriers to mobility social institutional rigidity monopoly rents unions licensing Discrimination Elements of Pay System Level relative to market Basis for pay Composition of pay package Level of Pay Expected value over lifetime Influences ability to recruit and turnover Firms position selves differently relative to market THE IMPACT OF PAY DISPERSION BASEBALL 1644 players 1985 93 measures batting performance fielding performance pitching performance team performance explanatory variables team pay dispersion player rank in team pay hierarchy Controls past performance age years in league measure of team talent Source Bloom AMJ 1999 BASEBALL con t 1 Greater team dispersion reduces individual performance on average those at top of hierarchy perform better if team pay dispersed those at bottom perform worse 2 Overall team performance reduced by greater pay dispersion BASIS FOR PAY Internal Consistency Job Analysis Point System Equity Issues External Competitiveness Surveys Employee Characteristics Seniority Need Performance Composition of Pay Package Benefits relative to wages impact upon composition of labor force impact upon turnover impact upon commitment BENEFITS Percent of Compensation 1997 Private Sector Establishments 1 99 employees 100 499 500 24 9 27 6 30 8 Source Bureau of Labor Statistics Pay for Performance To what unit is it applied where the link between action and performance is closest individual but leads to non cooperation group but problems of free riding organization free riding plus impact of my actions are hard to see Pay for Performance Long run or short run measures short run creates perverse incentives run from your mistakes actions such as skimping R D long run may be too far out to motivate Pay for Performance How to control for external forces tournament model forced distribution But impact on cooperation impact on fairness morale Pay for Performance How much dispersion do you permit As risk rises need to compensate by increasing level Need to be prepared to share information on which performance is judged Proper mixes of different schemes PAY SCHEMES BONUSES PROFIT SHARING PAY FOR SKILL GAIN SHARING BONUS PROFIT SHARING GOALS IMPROVE INCENTIVES AVOID INCREASING BASE control benefits ISSUES ARE INCENTIVES STRONG FREE RIDING FAIRNESS USE OF DISCRETION PAY FOR SKILL GOALS PROVIDE INCENTIVES FOR SKILL ACQUISITION ISSUES TOPPING OUT PAY NOT RELATED TO ORGANIZATIONAL PERFORMANCE GAINSHARING EXAMPLES SCANLON RUCKER IMPROSHARE PROCEDURE ESTABLISH A BASELINE FOR A WORKGROUP REWARD IF EXCEED REDUCE PAY IF FALL BELOW GAINSHARING con t ISSUES METRIC USED e g a mixture of productivity quality profits ROLE OF TECHNICAL CHANGE LUCK DEGREE OF INFORMATION SHARING Case Discussion SAS Institute The SAS Institute Founded in 1976 SAS Institute is now the 9th largest independent software company in the world with revenues of 1 1 billion and 8 500 employees It has achieved this with No long term planning No formal product strategy No stock options No performance appraisal Free on site health care An artist in residence The SAS Institute In an era of relentless pressure this place is an oasis of calm In an age of frenetic competition this place is methodical and clearheaded In a world of free agency signing bonuses and stock options this is a place where loyalty matters more than money Charles Fishman Fast Company January 1999 SAS versus Other Software Houses Based on your experience what s different about how SAS manages people and projects compared to other software firms What differences in assumptions does this reflect The SAS Institute If you re hiring creative people you give them their head you tell them that it s all right to take chances and you mean it and they will do their best David Russo VP of HR SAS Why doesn t this lead to chaos Another impediment You may not share Goodnight s values and assumptions If you don t believe this can work you can t fake it Decisions about Compensation Systems How much emphasis to place on pay Level of base pay What s included in the pay package benefits promotion ownership Degree of pay dispersion Across levels Across departments Across individuals within departments and levels Basis for pay Individual group organization Basis for measurement tenure skills outcomes etc Some Myths About Incentives People work primarily for financial rewards Other people are more motivated by incentives than I am Individual monetary incentives are critical to motivate hard work and attract the right folks The financial and legal aspects of ownership are what align interests and motivate Labor rates labor costs It s not what you pay but what you get that matters Source Pfeffer Six Dangerous Myths About Pay Implications Be careful and thoughtful about the attributions you make regarding other people s motivations Assuming that agents are driven by pay and need to be controlled can become a self fulfilling prophecy It s very hard to fake it so be clear about your own motivational assumptions before you begin designing control systems