15.660 Strategic Human Resource ManagementThe Functions of PayKey Market IdeasWhy Market Model is IncompleteElements of Pay SystemLevel of PayTHE IMPACT OF PAY DISPERSION, BASEBALLBASEBALL (con’t)BASIS FOR PAYComposition of Pay PackageBENEFITSPay for PerformancePay for PerformancePay for PerformancePay for PerformancePAY SCHEMESBONUS/PROFIT SHARINGPAY FOR SKILLGAINSHARINGGAINSHARING (con’t)Case DiscussionThe SAS InstituteThe SAS InstituteSAS versus Other Software HousesThe SAS InstituteAnother impediment?Decisions about Compensation SystemsSome Myths About IncentivesImplications15.660 Strategic Human Resource ManagementProfessor M. Diane BurtonMIT Sloan School of ManagementThe 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 equityKey Market Ideas? Reservation wage? Compensating differentials? Meaning of equilibrium? Elasticity of demand curveWhy Market Model is Incomplete? Adjustment is long and slow? imperfect information? barriers to mobility? social / institutional rigidity? Role of Power? monopoly rents? unions? licensing? DiscriminationElements of Pay System? Level relative to market? Basis for pay? Composition of pay packageLevel of Pay? Expected value over lifetime? Influences ability to recruit and turnover? Firms position selves differently relative to marketTHE IMPACT OF PAY DISPERSION, BASEBALL1644 players, 1985-93measures: batting performance, fielding performance, pitching performance, team performanceexplanatory variables: team pay dispersion, player rank in team pay hierarchy Controls: past performance, age, years in league, measure of team talentSource: Bloom, AMJ, 1999BASEBALL (con’t)1. Greater team dispersion reduces individual performance on averagethose at top of hierarchy performbetter if team pay dispersed, thoseat bottom perform worse2. Overall team performance reduced by greater pay dispersionBASIS FOR PAY? Internal ConsistencyJob Analysis/Point SystemEquity Issues? External Competitiveness Surveys ? Employee CharacteristicsSeniority/Need/PerformanceComposition of Pay Package? Benefits relative to wages? impact upon composition of labor force? impact upon turnover? impact upon commitmentBENEFITSPercent of Compensation, 1997, Private Sector Establishments1-99 employees 24.9%100-499 27.6%500+ 30.8%Source: Bureau of Labor StatisticsPay 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 motivatePay for Performance? How to control for external forces?? tournament model? forced distribution? But? impact on cooperation? impact on fairness moralePay 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 schemesPAY SCHEMES? BONUSES/PROFIT SHARING? PAY FOR SKILL? GAIN-SHARINGBONUS/PROFIT SHARINGGOALS: IMPROVE INCENTIVESAVOID INCREASING BASE (control benefits)ISSUES: ARE INCENTIVES STRONG?FREE-RIDINGFAIRNESS/USE OFDISCRETIONPAY FOR SKILLGOALS: PROVIDE INCENTIVES FORSKILL ACQUISITIONISSUES: TOPPING OUTPAY NOT RELATED TO ORGANIZATIONAL PERFORMANCEGAINSHARINGEXAMPLES: SCANLON, RUCKER, IMPROSHAREPROCEDURE: ESTABLISH A BASELINEFOR A WORKGROUP;REWARD IF EXCEED,REDUCE PAY IF FALLBELOWGAINSHARING (con’t)ISSUES: METRIC USED (e.g. a mixtureof productivity, quality, profits)ROLE OF TECHNICAL CHANGE, LUCKDEGREE OF INFORMATION SHARINGCase DiscussionSAS InstituteThe 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-residenceThe 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 FishmanFast Company,January, 1999SAS 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 tellthem that it’s all right to take chancesand you mean it, [and] they will do theirbest.” David RussoVP of HR, SASWhy 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 mattersSource: Pfeffer, Six Dangerous Myths About PayImplications? 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
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