UGBA105: Organizational BehaviorReadings for this weekThis week:CompensationTheories 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 8Slide 9Slide 10Assigning Hay points to jobsSlide 12Costco lowers labor costs by increasing labor ratesSlide 14Slide 15Slide 16Slide 17Lincoln Electric’s compensation system‘s incentive compensation for sales clerksSlide 20Slide 21Employee stock ownership: a disaster at LucentStock options for executivesSlide 24CEO 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 30Performance appraisalWhat should performance appraisal do?Problems in rating performanceEvaluating rating formatsSlide 35Slide 36BARS: Behaviorally anchored rating scale360 Degree FeedbackMorgan Stanley 360° CriteriaBenefits of 360 Degree AppraisalSlide 41Slide 42UGBA105: UGBA105: Organizational BehaviorOrganizational BehaviorProfessor Jim LincolnProfessor Jim LincolnWeek 11: Motivation II Week 11: Motivation II Compensation & Appraisal Compensation & Appraisal Walter A. Haas School of BusinessUniversity of California, Berkeley2Readings for this weekReadings for this week•Lecture: –Pfeffer: “Six dangerous myths about pay”–“Low loyalty, high turnover is the norm in some industries”•Discussion: –“Brainard, Bennis, and Ferrell”3This week: This week: •Today –Ways of paying employees •Upside and downside consequences•Lincoln Electric video•Wednesday –Given its history, culture, structure, and competitive strategy, how should Brainard appraise the performance of its lawyers and compensate them?4Compensation Compensation •Pay is the most standardized, measurable, and controllable reward–Sends a strong signal both inside and outside the organization•Like reorgs and layoffs, shifts in compensation policy are closely monitored by Wall Street and other external constituencies (Pfeffer)5Theories of extrinsic motivationTheories of extrinsic motivation(What are the managerial implications?)(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 demotivating6Theories of intrinsic motivationTheories of intrinsic motivation(What are the managerial implications?)(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 rewarding7Let’s start with the basics:Let’s start with the basics:How should employees be How should employees be paid?paid?Economic theory says pay a person’s marginal product. –But that doesn’t work in practice. Why? –So employers instead:81. Pay for human capital (education, 1. Pay for human capital (education, training, skill, experience) training, skill, experience) •Upsides?•More measurable than performance•May be better signal of long-term value-added•Downsides?•Ability  performance •Change: skills may erode91a. Seniority pay1a. Seniority pay•Upsides?–Long term commitment/motivation effect–(For firm) Underpay in early career–(For employee) Security of rising income•Downsides? –Weak performance incentive/reward–Inequity –(For firm) Overpay in late career2. Pay according to need 2. Pay according to need •Common outside the U. S. •In-kind transfers in U. S.102. 2. Pay for the jobPay for the job.. Set pay rates by: Set pay rates by:–Job evaluation–Collective bargaining Upsides?Fit better people to higher value jobsDownsides?–Screening costs–Selection errors–Change in person’s fitness for job–Rigidity and complexity of job classifications –May proxy age/seniority–“Peter Principle”•Solution: skill/experience grading independent of job content11Assigning Assigning HayHay points to jobs 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 firm123. Pay the market wage (do wage surveys)3. Pay the market wage (do wage surveys)•Upsides? •Measure the market price•Equity•Downsides?•Determining the appropriate labor market•Upsides of pricing above or below market 4. Pay “efficiency” wages; i.e., above market4. Pay “efficiency” wages; i.e., above market•Upsides? •Economize on screening and attract better workers•Gain in motivation, retention, & productivity•Low wages = high turnover, low productivity, low quality–SFO airport security $6/hr →100% turnover every six weeks13Costco lowers labor Costco lowers labor costscosts by by increasing labor increasing labor ratesratesIn 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