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Berkeley UGBA 105 - Compensation & Appraisal

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UGBA105: Organizational BehaviorCompensationTheories of extrinsic motivation (What are the managerial implications?)Theories of intrinsic motivation (What are the managerial implications?)Let’s start with the basics: How should employees be paid?Slide 6Slide 7Slide 8Assigning Hay points to jobsSlide 10Costco lowers labor costs by increasing labor ratesSlide 12Slide 13Slide 14Slide 15Lincoln Electric’s compensation system‘s incentive compensation for sales clerksSlide 18Slide 19Employee stock ownership: a disaster at LucentStock options for executivesSlide 22CEO annual compensation in 2005What exactly is motivating about $$$money$$$?The cost of stock optionsExecutive compensation change in response to corporate scandalsDo Americans care about income inequality?Slide 28Performance appraisalWhat should performance appraisal do?Problems in performance ratingEvaluating rating formatsSlide 33Slide 34Example of Behaviorally Anchored Rating Scale360 Degree FeedbackMorgan Stanley 360° CriteriaBenefits of 360 Degree AppraisalSlide 39Slide 40UGBA105: UGBA105: Organizational BehaviorOrganizational BehaviorProfessor Jim LincolnProfessor Jim LincolnWeek 11: Week 11: Motivation II: Compensation & Appraisal Motivation II: Compensation & Appraisal Walter A. Haas School of BusinessUniversity of California, Berkeley2Compensation Pay is the most standardized, measurable, and controllable rewardSends strong signal both inside and outside the organizationLike reorgs and layoffs, shifts in compensation policy are closely monitored by Wall Street and other external constituencies (Pfeffer)3Theories of extrinsic motivation(What are the managerial implications?)•Homo economicus (Taylor, Theory X, principal/agent) M=f(R)–People are rational but selfish, opportunistic, & risk- and effort-averse. They need strong incentives & close monitoring •Expectancy/path-goal (Vroom) M = E(Ri) = (pi)Ri–People are rational and goal-directed. They map paths to the attainment of rewards. Extrinsic rewards motivate only when the perceived probability of attainment is high•Learning theory (Skinner)–People are not rational or goal-directed. Random behavior that is rewarded is reinforced. Behavior that is punished is extinguished •Equity theory: M = f(Rs/Es - Ro/Eo) –People benchmark the value of their extrinsic rewards on those of others. Perceived inequity may be motivating or demotivating4Theories of intrinsic motivation(What are the managerial implications?)•Theory Y (McGregor, Marx)–People find meaning & fulfillment through work (intrinsic rewards)•Motivation/hygiene (Herzberg)–Extrinsic rewards reduce dissatisfaction; intrinsic rewards motivate•Hierarchy of needs (Maslow)–People have needs that both intrinsic and extrinsic rewards fulfill. Intrinsic rewards motivate only after a sufficient level of extrinsic reward is attained •Cognitive dissonance (Festinger)–People as rationalizers: need consistency in cognitions & behavior•Too much extrinsic reward makes work less intrinsically rewarding•Too little extrinsic reward makes work more intrinsically rewarding5Let’s start with the basics:How should employees be paid?Economic theory says pay a person’s marginal product. –But that doesn’t work in practice. Why? –So employers instead:61. Pay for human capital (education, training, skill, experience)•Advantages?•Problems?71a. Seniority pay•Advantages•Problems? 2. Pay according to need •Common outside the U. S. •In-kind transfers in U. S.82. Pay for the job. Pay rates set by:–Job evaluation–Collective bargaining Advantages?Problems?9Assigning Hay points to jobsJob rated on various dimensions:–Type & complexity of knowledge required–Number of employees supervised–Amount of capital overseen–Type & unpleasantness of working conditionsThese measures are combined to form a one-dimensional scale of “value” to the firm103. Pay the market wage (do wage surveys)•Advantages? •Problems?4. Pay “efficiency” wages; i.e., above market•Advantages?11Costco lowers labor costs by increasing labor ratesIn addition to offering some of the best wages and benefits in the retail industry, Costco rewards employees with bonuses and other incentives.It promotes from within, encourages workers to make suggestions and to air grievances and gives managers autonomy to experiment with their departments or stores to boost sales or shave expenses as they see fit. The result: People line up to work there, and once hired, they stay. Annual turnover for full- and part-time hourly workers on the job more than a year is 6 percent, compared with an industry average of 59 percent.It’s the same story for executives. The 13member senior management team has stayed virtually unchanged since its birth in 1983. "What they’re doing is creating a competitive advantage through people," says Fred Martels, president of People Solution Strategies, a St. Louis retail industry consultancy. "It lowers costs and increases productivity."125. Pay for performance –Individual–Group135a. Pay for individual performance•On the increase •Upsides? •Downsides? $$14 Objective metrics–Examples: piece rates, commissions–Advantages? –Problems? •Subjective metrics (for discussion section)–Trait rating–Forced ranking–Behaviorally-anchored rating scales (BARS)–Management by objectives (MBO)–360 degree appraisals Measuring Performance15Should performance pay be in base or bonus?–Base pay advantages?–Base pay problems?–Bonus advantages?–Bonus problems?Most incentive pay systems are a combination–Incentive pay above a target threshold •Advantages?•Problems?16Lincoln Electric’s compensation system•Wages based solely on piecework •Starting pay lower than average and work harder than average•Year-end bonus based on productivity–Individual’s share of bonus pool determined by semiannual merit rating done by foremen•Dependability, quality, output, ideas & cooperation–Could equal or exceed annual regular pay•Alignment issues–Guaranteed employment for all workers•Removed disincentive to increase efficiency–Family culture (privately-held family-owned firm) –Employees guarantee own quality; not paid for defective work until repaired on their own time17 ‘s incentive compensation for sales clerks* Guaranteed base wage $9.45/hour * Target sales per week:– 40 hrs x $140 sales per hour = $5600 *


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