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Dr. Richard W. Scholl
36 Upper College Road
Kingston, RI 02881

p. 401.874.4347
f. 401.874.2954

rscholl@uri.edu

Pay represents one of the most interesting and misunderstood aspects of organizational life. Many believe that pay is the single most important motivator of both organizational membership and performance. However, when surveyed or asked the majority of the people working in organizations claim that they are not motivated by pay and their pay system has little influence over the way they behave on a daily basis. Pay has become such an important aspect of human resource management that we have invented a new word to use in developing pay systems. That word is “incentivize.” Managers are urged to incentivize a particular process as a way to increase employee motivation. In this module will examine the way which compensation and evaluation systems affect the attitudes, motivation, and behavior of organizational members.

What is a compensation system? What are the various dimensions of a compensation system?

A compensation system is a system that is designed to determine amount of pay given the many individuals in an organization. On its simplest level, a manager simply makes his or her best guess as to what an individual should be paid and what he or she will accept. In its most complex form, a compensation system contains many different decision rules, guidelines, and processes for determining pay level and pay structure.Here are the various components of a compensation system.

Pay Structure- The relative pay differential among various jobs within the organization and how this is determined.
Pay Level- The relative amount of pay assigned to each job compared to the job market
Pay Form- The makeup of the pay this individual receives. The relative amount of guaranteed vs. at risk pay.
Basis for pay increases-
How pay changes from year to year is an important aspect of a compensations system. The various bases for change are:

    1. Seniority and longevity
    2. Cost of living
    3. Performance/merit
    4. Changes in job scope
    5. Increases in individual qualifications such as a new degree or certification.

    6. Changes in market for job and/or individual- A special form of this type of increase is to match a competing job offer.

Goals of a Compensations System
  1. Attract high-quality employees
  2. Retain these high-quality employees
  3. Insure adequate role behavior is exhibited among employees
  4. Motivation extra role behavior in employees

Every inducement system can be evaluated from the perspective of two behavioral constructs: Satisfaction and Motivation. Satisfaction with an inducement system has to do with the degree to which this inducement system meets and individuals expectations and validates his or her identity. Motivation refers to the degree to which this inducement system is capable of eliciting extra role behavior from the employee.

Pay Satisfaction

What are the consequences of pay satisfaction and pay dissatisfaction? Pay satisfaction is an important determinant of organizational membership (attraction and retention). Assuming individuals are relatively satisfied with other inducement systems, individuals who are satisfied with their pay tend to remain with the organization and exhibit at least adequate role behavior. Pay satisfaction alone does not motivate an individual to exhibit extra role behavior. On the other hand, dissatisfaction is a major cause of turnover, absenteeism, and reduction of willingness to exhibit extra role behavior which was previously motivated by other inducement systems.

What are the determinants of pay satisfaction? There are two major determinants of pay satisfaction:

Equity theory

Equity Theory is an important theory of satisfaction and motivation that is the fundamental basis of the design of most modern compensation systems. It is based on the premise that employees evaluate the level of their pay by comparing their contributions (inputs) and rewards (outcomes) to the contributions and rewards of comparison others, or referents. While rewards can conceivably consist of pay, fringe benefits, status, opportunities for advancement, job security, or anything else that the employee values, we will concentrate on Equity Theory's applicability to pay. Equity Theory's major premise is that individuals seek to achieve a balance between the ratio of their contributions to rewards to the ratio of contributions and rewards of others. Equity exists, from perspective of individual, when this ratio balance is achieved.

Equity

It is very important to note that equity is not necessarily an objective determination, but rather it is perceptual and subjective in nature. It is an individual's perceptions of his or her contributions and rewards and the contributions and rewards of the referent that is important in determining whether the individual perceives equity or inequity. There are a number of types of comparisons to yield an inequity perception (The following designations will be used below: HS/LS means High contributions for self and low rewards for self; HR/HR means High Contributions and High Rewards for referent. Self will be on left and referent other on right)

Individual assessment of contributions and rewards- What goes into individual's calculation of contributions are rewards? There are many things that individuals may consider contributions in making their equity assessments. Contributions fall into one of three categories:

Job Contributions- These are contributions and requirements of the job itself. These contributions differentiate one job from another in that company. They are what makes a marketing executive more highly compensated than a sales clerk. job evaluation, these job contributions are called compensable factors. Types of job contributions include:

  1. Responsibility required by the job- Includes responsibility for people, equipment, organizational success, etc.
  2. Effort required by the job- Mental and physical demands of the job
  3. Skills and competencies required by the job- Measured by education required, certificates required
  4. Working conditions

Performance Contributions - These contributions refer to the type and level of extra role behavior exhibited by an individual. Individuals generally feel that if they continuously exhibit extra role behavior, they should be paid more that individuals performing at the minimum required performance level (adequate role behavior).

  1. Quantity of work relative to others
  2. Quality of work relative to others
  3. Amount of effort expended relative to others- While most managers tend to reward results rather than effort, many employees (and students) feel that they should be rewarded for effort. This is one of the reasons why equity is a subjective concept rather than an objective one.

Personal Contributions- Equity theory holds that there are a large number potential contributions that individuals make that may not have a direct impact on job performance, but which these individuals feel should be rewarded. Personal contributions are attributes of individuals that they bring to the job or acquire while on the job.Personal contributions include:

  1. Seniority- For example, all other thing being equal, most people on the job for 5 years think that they should be paid more than newcomers.
  2. Education beyond minimum job requirements. For example, an individual with an MBA when the position requires a BS often believes she should be paid more.
  3. Self-improvement efforts. For example, taking extra courses.
  4. Skills and competencies beyond those required. For example having computer skills that are not required by the job, but very helpful to the company.

There is not always a perfect fit between what companies want to reward and what individuals consider in determining pay equity. For example, some companies do not reward extra education, but reward increased performance and feel that the extra degree should give the individual an advantage in performance. Likewise, some organizations prefer to reward performance over seniority. This often leads to inequity perceptions among senior employees. Similarly, a company that rewards seniority and not performance often encounters inequity perceptions among junior employees who feel that they are working harder and performing better than their high paid senior colleagues.

Distribution Rules. Distribution rules are attitudes (cognitions) defining the expected relationship between contributions and rewards. For example, one individual might believe that pay should be based on seniority, while another one might believe that pay should be based on job performance. The distribution rules in which an individual believes has a great influence on what contributions they will use in making equity comparisons. There is not "correct" set of distribution rule in which an individual should believe. There are a couple of this contributing to the formation of an individual's set of distribution rules. One important influence is culture. Different cultures have different rules, therefore an individual's culture background has a strong influence on his or her distribution rules beliefs. Another important influence is an individual personal situation. For example, young/junior employees are likely to believe that pay should be based on performance, while senior employee are more likely to believe that pay should be more seniority based.

Comparions. To whom do individuals compare in evaluating their pay? Who are these referents or comparison others? Are they your neighbors, college friends, family, immediate coworkers, NBA players? Well they can be all of the above. Individuals can and do make multiple comparisons at multiple times. One important thing about equity theory is that individuals make comparisons when confronted with relevant information. For example, you might hear a co-worker might boast about his raise, or read an article in the paper about pay levels of IT professionals in California. There are many ways in which you may encounter information about the pay of others. When you receive this information, you often make a comparison. If the comparison yields a balance, you perceive the equity and move on. If you perceive in equity, you are likely to respond in one of the characteristic ways cited in the next section. Let's look at the various types of comparisons individuals tend to make.

  1. Job Comparisons- Individuals most often compare themselves to other people occupying the same job in the same company. Example: Nurse at Women & Infant's Hospital comparing themselves to Nurse's at Roger Williams Hospital. When the comparison yields a balance, the result is Job Equity.
  2. Company Comparisons- Employees compare themselves to people in other jobs in the same organization. Example: the Women & Infant's Nurses comparing themselves to Pharmacists and orderlies at the same hospital. When the comparison yields a balance, the result is Company Equity.
  3. Market Comparisons- When we look at the pay earned by others doing the same job as us in other companies, we are making market comparison. Example: Welders at Electric Boat comparing themselves to welders at Brown & Sharpe. When the comparison yields a balance, the result is Occupational Equity.
  4. Cohort Comparisons- We also make more generalized comparison to others. In doing so, we often restrict our comparisons to individuals or our age and educational background. Example: You are likely to compare yourself on your first job to people that you know who are about 22 years old with a Bachelor's degree.
  5. Self Comparisons- An interesting type of comparison is the self comparison. In this case you compare your present pay level with the amount you received at another point in time or on another job. Example: You just were required to take responsibility for two additional departments with no additional pay. You compare your present situation with your recent past situation and perceive inequity

Consequences of perceived pay inequity. Inequity generally creates cognitive dissonance and an accompanying negative affective state while Equity creates a Positive Affective State Therefore, Equity reinforces present behavioral patterns and the individual is motivated to maintain his or her current situation.< Inequity creates affective motivation to change. The individual will either make behavioral changes to restore the balance or perceptional changes to do so.

Developing equitable pay structures

The basis for all effective compensation systems is an equitable pay structure. The purpose of developing such a pay systems is to attempt to maximize Pay Satisfaction. An equitable pay structure is a system to determine the relative pay given to individuals occupying the various positions with an organization. While equity perceptions are very subjective, and no one system will be viewed as equitable by everyone, and an equitable pay structure is one that is designed in such a way that the majority of employees perceive their pay as equitable. This means when they make internal (job and company) and external (market) comparisons there's a high probability that they will perceive equity. There are generally three steps in developing a compensation structure. In each step, a number of compensation tools are used to help ensure equity. The three steps are as follows:

Step 1: Determine the relative pay among the various jobs. For example, in a bank this would mean determining the relative pay of a branch manager, loan officer, teller, guard, etc. The step requires assessing the relevant job contributions of each job within the company. Job contributions refer to how much responsibility, skills, effort, and working conditions are required by the job. These are called compensable factors. The compensation tool that is used to perform this analysis is called job evaluation. Most companies use a job evaluation system to determine how many points a job (not a particular individual occupying a job) should be awarded on each of the four compensable factors. The Factor Evaluation System, or FES , is one system of job evaluation. To see this system Click HERE.
Step 2: Determine the pay level of jobs within the company. The relative pay refers to how the company positions its pay structure relative to its competitors. Does the company compensate its employees at, above, or below market averages? This depends on the other factors used to attract and retain employees. In order to determine market averages, most companies rely on wage and salary surveys as a tool.
Step 3: Determine individual pay rates within job pay ranges. In most companies, every individual performing the same job does not earn the exact same amount to pay. In order to accommodate for differences in personal and performance contributions, these companies develop a salary range for each job. In Step 3, the company must develop a system to place each individual within this salary range. The two main strategies for doing this are to place individuals in the range based on either (1) performance, or (2) seniority. When initial placement and movement within the range is based on performance, the company must develop a system of performance evaluation for this purpose (see Perform
ance Appraisal below).

Motivation with Pay

Once the pay structure has been developed, the company can decide whether or not it wishes to attempt to use pay as a source of motivating extra role behavior among its employees. This is often a difficult task that often creates more problems that it solves. In many cases, companies attempting to develop a system of pay motivation often create high levels of perceived inequity, which defeats the purposes of the pay system and counteracts any positive value achieved.

What are the requirements for a pay system to have the potential to motivate extra role behavior (Expectancy Theory)?

  1. The relative pay received is higher for high performers than low performers. Pay distribution is contingent on high-performance (instrumentality).
  2. The differential between low performance pay and high performance pay is significant to the individual (valence).
  3. Good performance is clearly defined and under the influence/control of the individual (expectancy).

Pay systems that have the potential to motivate extra role behavior- There a many ways that pay can be used to motivate ERB. Below is a list of the most common methods

Merit Pay Systems

One of the most common forms of performance-based pay is merit pay. A merit pay system is a pay system that uses some form of performance evaluation (generally annual) as a basis for determining the relative size of an individual's annual raise.

Motivational Potential: Merit pay plans motivate individuals to perform extra role behavior when they desire increased pay, they believe that the relative size of pay raises is contingent on good performance, and they believe they are capable of good performance.

Conditions for success:

  1. Individuals must value increased pay more and be willing to work harder or spend more time meeting performance goals (Valance).
  2. The differential in raises for high performance should be substantially higher than that awarded average or low performing individuals (Valance). When the differential is low (e.g., 3% for average; 4% for high), many individuals do not feel the small differential warrants increased effort.
  3. The criteria for good performance should be clear and communicated to employees (Expectancy; Role Expectations). When performance standards are not clear, employees are always guessing what they need to do or what they need to accomplish to get good performance reviews.
  4. Employees must trust managers. There must be trust in the evaluation system so that employee do not perceive favoritism (Expectancy) and trust in the allocation system, that is, they must believe that if they do meet performance standards the organization will come through with a higher raise (Instrumentality).
  5. It is very helpful if the allocation is non-zero sum, that is everyone who meets high performance expectations receives a high increase. When systems are zero sum (only the best employees receive the highest raise, like a curve), most middle and low ranked employee loose instrumental motivation because even if they improve their performance, they do not believe they will be rated higher than the "stars."
Potential Problems/Issues:

  1. Zero sum versus non zero sum systems- Many companies feel compelled to make their systems zero sum in nature. >They do this by allocating a fixed dollar amount for raises to each department or manager. For example, a manager may be able to give each employee a 3% raise. For every 5% she awards, she has to give someone a 1% raise. If her employees do fit a normal distribution in performance this might work out, but in most cases, managers take the easy way out and give everyone a 3% raise, turning the merit plan into a cost of living plan in the eyes of employees.
  2. Inequity- When the manager's evaluation of employee performance does not match the employee's evaluations, inequity is certain to follow. One of the most often cited problems in merit pay plans is inequity perceptions. When inequity is widespread, the merit plan often created more performance demotivation than performance motivation.
  3. Jealousy- Closely related to inequity is the problem of employee jealousy which is rooted in weak self concept In many cases those receiving low raises, develop atomicity towards those receiving the highest raises. This leads to interpersonal conflict and difficult in getting work done that requires some degree of cooperation among members of a work group.
  4. Breakdown in group cohesiveness & cooperation- High performance work teams are cohesive work units, focused on team based goals. They work together and share in work, responsibilities, and accomplishment. When a few members are singled out to receive higher raise than remaining team members, the cohesiveness of this work often declines.
  5. Timing- In most merit plans, raises are awarded annually. It is often difficult to focus on this source of motivation over the entire year. Also, since many managers do not assess performance across the entire year, they rely on their observations of performance in the few weeks preceding the performance review (recency effect). When employees realize this, their performance becomes uneven, spiking just before reviews.
  6. Low motivation to perform non-measured behaviors or performance outcomes. In many cases, the performance evaluation system does not measure all important work behaviors or outcomes. Given the choice, many employees tend to focus on the behaviors that are most likely to earn them a raise, often ignoring other aspects of performance. For example, as students you might find yourself not reading chapters that will not be covered on the test, or not attending class if attendance is not considered in the final grade determination.
  7. Decrease in intrinsic motivation- According to a theory called the "Insufficient Justification Theory," in many cases a task that is intrinsically motivating (Type II or Type III Motivation) often looses this intrinsic motivation once it is rewarded with an extrinsic reward such as pay. If the extrinsic motivator (pay) is removed, the individual feels there is no longer sufficient justification to continue performing the task. Put another way, when high performance is rewarded with pay, it changes the individual's source of motivation to instrumental.

Commissions

Most of you are familiar with commission based pay for sales positions. Commissions may be the entire basis of an individual's pay, or commissions may be combined with a base salary. Commissions can be based on the dollar value of sales, the profitability of items sold, or a number of other interesting formulae.

Motivational Potential: Individuals are motivated to make extra sales calls, work harder to close sales, and “push” certain products because of the expectation of higher compensation.

Conditions for success:

  1. Individuals must value extra compensation (Valance). In cases where they have discretion over work time, they must value extra pay over “free time.” If more sales, and therefore more pay, means more hours at work or evening hours, some people choose not to pursue more pay.
  2. Individuals must believe that they have some control over the sale (Expectancy). When increased company sales are perceived to be a function of pricing, location, product design, advertising, or other factors over which the employee has little control, motivation is reduced.
  3. Individuals must process requisite sales skills (Expectancy). Individuals without these skills often feel frustrated and resort to undesirable behaviors in order to increase sales. The commission schedules should remain relative stable (Instrumentality). When commission schedules change too frequently, employees lose trust that they will receive increased pay that they feel that they deserve. From the salesperson's viewpoint, these changes create confusion in the performance - reward connection in the feeling that the organization is cutting the rate.
  4. Over-complexity should be avoided. Many sales incentive plans are so complex that the salesperson becomes confused as to what will happen if he or she takes certain actions. So some actions are avoided because the salesperson does not know what the consequences of taking the action will be.
  5. If sales territories exist, they should be balanced. When employees believe that some territories are more lucrative or more pleasurable than others, inequity perceptions often emerge.

Potential Problems:

  1. Employees often focus on sales only and ignore other important performance dimensions such as customer service, providing product and customer feedback to the marketing department for use in product improvement.
  2. Depending on the structure of the commission schedule, employees might focus only on new sales rather than building and retaining relationships or visa versa.
  3. Inequity between sales employees and sales managers. When managers are paid on a salary basis and sales associates are paid on a commission basis, the more successful employees often begin to earn more than managers. This creates inequity from the perspective of sales managers and makes it difficult for the company to move sales associates into management positions.
  4. When sales are affected by business and economic cycles, the income of commission sales employees varies too much. They find it difficult to meet their financial obligations during periods of economic downturn.
  5. In some cases, commission sales employees earn so much money, that they are no longer willing to put in extra effort or trade off leisure time to earn more. This is especially true when they can earn enough pay from residuals without having to generate new customers.
Incentive Plans

These systems based in individuals pay directly on his or her measured productivity.

Piece rate- Individuals are compensated for the number of units produced
Standard hour plans- A standard amount of time is computed for various operations (e.g., installing a new starter in a Lexus). Employees are paid their hourly rate for the standard hour for each operation performed, regardless of how long it actually takes. For example, if the standard for installing a starter in a Lexus is 1.5 hours and the mechanic is paid at the rate of $40/hour, he or she will receive $60 for each starter installed, whether it actually takes 1 hour or 3 hours.

Motivational Potential: Individuals believe that working harder or faster to produce more units will result in higher pay.

Conditions for success:

  1. Employees must desire increased pay and perceived that the increased pay increment is worth the additional effort (Valence).

  2. Employees must have some control over work output and the number of units they can produce. When production process is to regulated or employee is too dependent on other employees, motivation is reduced.
  3. Employees must believe that the rates will not change when they produce high output.

Potential Problems:

  1. Restriction output- employees often be strict output out of fear that the rate per unit will be reduced.
  2. Emphasis on speed rather than quality. In many cases, quality suffers as employees attempt to produce the highest number of units per hour.
  3. When work requires corporate effort, individual incentive plans often impedes high levels of cooperation among employees.
  4. The administrative costs of running an incentive plan are generally high. These costs include determining standards, measuring output and extensive record keeping.
Bonuses

Bonuses are generally lump sum payments awarded for the accomplishment of a specific objective, such as finishing a project on time. Unlike merit pay, bonuses do not become part of an individual's base pay. Three types of bonuses are:

  1. Individual
  2. Team/group/department
  3. Organizational

Motivational Potential: Provides an incentive to accomplish specific goals in targets by making the bonus contingent upon successful performance

Conditions for success:

  1. Individuals must desire amount allocated to the bonus and believe that the bonus is commensurate with the extra effort required to earn the bonus (Valance).
  2. Individuals must believe that they have the ability to meet the performance goals required to earn the bonus (Expectancy).
  3. ndividuals must believe that they have some control over the performance goals (Expectancy). When performance goals are two highly dependent upon the actions of others, the economy, or other factors not in the control of individual, bonuses lose their motivational potential.
  4. Employees must trust managers to award bonuses if and when performance goals are met (Instrumentality).

    When performance goals are not meant, bonuses should be withheld (Instrumentality). When employees believe they will earn the bonus whether they achieve goals are not, bonuses lose their motivational potential.

Potential Problems:

  1. Over-focus on performance dimensions directly related to bonus. When bonuses are offered employees often neglected other aspects of their job in order to focus on variables that will most directly impact the achievement of performance goals rewarded by bonus.
  2. Inequity created when certain individuals have an opportunity to earn a bonus, but other employees do not.
Profit Sharing

Profit-sharing is a system whereby individuals receive an annual bonus based on the overall profitability of the company

Motivational Potential: Individuals believe that working harder, more efficiently, or more creatively will increase the profitability of the company, thus increasing the profit pool distributed to employees.

Conditions for success:

  1. Individuals must desire the extra income potential of the profit sharing plan and believe that this extra effort is commensurate with the potential increase gain (Valance).
  2. Individuals must believe they have some control over company profit or more specifically either overall sales/revenue or costs (Expectancy). This condition is rarely satisfied except for very high level employees.
  3. Individuals must believe that revenues and cause are known highly affected by business cycles and economic conditions (Expectancy).

  4. Individuals must trust managers to fairly calculate to present profit figures (Instrumentality).
  5. Individuals must believe that managers will allocate profits to employees if they are earned (Instrumentality).

    Individuals must believe that profit based bonuses will not be allocated when the company does not earn a profit (Instrumentality).

Potential Problems:

  1. While profit-sharing plans are often good membership motivators, they rarely motivate extra role behavior among the average employee. The link between individual behavior and company profits is generally believed too nebulous. Most individuals, except for high-level executives, believe that profitability is more highly influenced by company strategy, economic conditions, competition, and other factors beyond their control.
  2. When profits are increasing, employees often are highly satisfied and begin to feel that their efforts are being rewarded. However, when profits fall (often through no fault of the employees in that they are continuing to exhibit extra role behavior) and bonuses are reduced, employees often feel cheated and morale plummets.
Gainsharing

Gainsharing bases monthly, quarterly, or annual bonuses on employee productivity generally measured by a formula comparing labor costs to value of products produced. As employees become more productive, the labor costs decrease for a given product output. The saving incurred to split between the employees and the company.

Motivational Potential: Individuals see a relationship between their efforts to work more efficiently, reduce costs, and reduced overtime and the size of their bonuses.

Conditions for success:

  1. Individuals must desire the extra income potential of the gainsharing plan and believe that this extra effort is commensurate with the potential increase gain (Valance).
  2. Individuals must believe they have some control over the specific ratio using calculating gainsharing payouts (Expectancy). This condition is more often satisfied than in profit-sharing plans, because the measures or more closely related to employee behavior and generally not adversely affected by sales and economic conditions.
  3. Individuals must trust managers to fairly calculate to ratios (Instrumentality).
  4. Individuals must believe that managers will allocate savings to employees if they are earned (Instrumentality).

  5. In most cases the incentive value of simply working harder and faster is limited. The major improvements in productivity generally come from employee suggestions for improved work methods.

Potential Problems:

  1. When the output required to meet sales demand is increasing, labor cost can be reduced proportionally without reductions in force or layoffs. However, when productivity demands are declining, the only way to reduce overall labor costs is to reduction in the number of employees. This often causes resistance on the part of employees and their unions.

Stock Options

Employees are given the option to purchase shares of the company at a specified predetermined price. If the stock increases in value, they can purchase the stock at the lower value and realize an immediate gain.

Motivational Potential: Individuals believe that working harder, more efficiently, or more creatively will increase the profitability of the company, thus increasing the value of the company's stock.

Conditions for success:  See Profit Sharing

Potential Problems: Same as profit sharing except the relationship between employee effort and stock price is even more tenuous that between employee behavior and profit. Stock price is affected by many variables other than company profitability, so in many cases even when profitability increase, the stock price drops

Performance Appraisal and Review Systems

It is widely acknowledged that the performance appraisal system is the backbone of most human resource strategies. Most companies depend on their performance appraisal systems as a means of monitoring and controlling the performance of their employees. In this section, I will start with a review (from Module 1) of the individual performance variable. From there, I will discuss the purposes of performance appraisal systems and the major types of performance appraisal systems used by companies today.

Individual Performance. We touched on the variable of individual performance in discussing the difference between Adequate Role Behavior (ARB) and Extra Role Behavior (ERB). There are a number of other important points to consider with respect to employee performance. Here's a summary of these important points. For a more complete discussion see: Employee Performance Model.

In most cases, performance is not one-dimensional, that is, performance cannot be measured a long a simple continuum from low performance to high performance. Most jobs have multiple performance dimensions. For example, my job (as a professor) has three major performance dimensions: Teaching, research, and service. While one might be able to measure performance on any one of these dimensions using a single continuum, total performance is a combination of performance in each of these three areas. Furthermore, in most cases all performance dimensions are not of equal weight in the eyes of your superiors. To complicate the issue even further, different stakeholders most likely place different importance (weight) on each of these performance dimensions. For example, my dean might place the greatest weight on the research dimension, students in my classes are likely to view the teaching dimension as the most important, while community members might think of performance to the community (service) as the most important performance dimension.

There is another issue that adds complexity to the conceptualization and measurement of employee performance. Within performance dimensions there are often multiple outcomes desired. These outcomes are often expressed in terms of evaluative criteria. For example, returning to my job, what is more important: High quality research publications or a large number of research publications; High levels of student satisfaction measured in terms of SET scores or high levels of student learning? Is it more important that a sales clerk be accurate, fast, or friendly? Is your grade on essay questions based more on length or content; Your ability to regurgitate theories from the textbook or to demonstrate your analytical skills to apply these theories? Now I can hear you saying that all these things are important. Sales clerks should be fast, accurate, and friendly. Professors should have highly satisfied students that meet all the learning objectives. However, in many cases, employees are faced with trade-offs and it is often the case that individuals cannot achieve perfection on all performance dimensions and/or evaluative criteria.
Ultimately, the choice of which performance dimension should carry the greatest weight, or which evaluative criteria should be viewed as the most important should be made on the basis of the competitive strategy of the company. However, people (as you will see throughout this course) do not always make their decisions in the best interests of their company or its customers and clients, but rather can be driven by social, ego, and political factors. This is what makes the study of organizational behavior interesting.

Performance can be measured in terms of processes/behaviors or goals/outcomes. When measuring performance in terms of processes/behaviors, role expectations are presented in terms of procedures to be followed, methods to be used, and plans of how to get work done. Individuals are not held accountable for results as long as they follow standard operating procedures. When performance is measured in terms of goals/outcomes, the methods and procedures to be used are left up to the employees, but the employees are held accountable for meeting expected timetables, sales quotas, budget targets, or student learning objectives.

There are four fundamental independent variables affecting the level of employee performance. Another way to look at this is that there are four variables affecting your performance in this class. They are:

Effort (Motivation)- All other things being equal, the more effort one puts into his or her job (or this class), the higher the level of performance.

Ability, Skills, & Competencies- The next important ingredient to achieving high performance is the acquisition of appropriate skills. Even though individuals might exert a lot of effort into a task, they will not be successful in attaining desired goals if they don't have the skills necessary to perform these tasks. Likewise, your effort in this class is unlikely to yield high performance (measured in terms of high grades on the various assignments) if you don't have the requisite set of computer, analytical, writing, and conceptual skills required to complete the assignments successfully.

Role Perception- In order to meet someone else's (e.g., your boss, your professor) performance expectations, you have to have a clear idea of what these expectations are. All the effort and ability in the world that is applied in the wrong direction will not yield high performance.

Resources- The final ingredient to high performance is access to the tools, information, equipment, and people necessary to get the job done correctly. For example, those of you that are highly motivated, have the requisite skills, and have a clear idea of what is expected, still will not perform well if you do not have access to a an adequate computer.

Functions of a Performance Appraisal system

Performance appraisal systems perform for major functions as part of the company's overall human resource strategy. The systems can be integrated into the compensation, selection, training, and development strategies of a company. In some cases, a company uses a multifaceted elaborate system, while in other cases, a simple checklist is used. In the first case, the performance appraisal system is integral in developing a competitive advantage based on employee performance. In the latter cases, a performance review form is simply filed in the personal folders of employees and never used again. Here are the four major functions performed by performance appraisal systems:

  1. Individual performance improvement and employee development- For individuals to improve their performance, there has been some indication that their performance is not entirely meeting the expectations of the organization. In Module 2, both Control Theory and the Transtheoretical Model of Change argue that individuals must receive some feedback about the results of their behavior in order to make a change. While some employees are capable of self-monitoring their performance, and have the necessary task feedback available, many employees rely on feedback from supervisors, peers, and customers to provide feedback necessary for change and improvement.
    Conditions for success:

    1. There must be some source of motivation motivating the individual to improve. While performance feedback may provide information regarding a performance or behavioral gap, the appraisal system alone does not provide the motivation to eliminate this gap. The motivation may be instrumental, self-concept based, or based on identification with the performance goal.

    2. The information in the performance review must be presented in a way that does not evoke defensiveness on the part of the individual. When employees feel that they are being attacked (invalidation), they often respond by defending their actions, denying the validity of the feedback or arguing that the standards are set too high.

    3. It is helpful that the appraisal system used for performance improvement the independent of the system used to allocate pay in a merit pay situation. When individuals receive information that is supposed to be used for performance improvement, but is also used to determine their pay level, internal conflict and mixed motivations are often evoked. While an individual might want accurate feedback by which to make improvements, he or she might also want a high-level positive feedback in order to get a desired raise. This often happens to students who want accurate feedback about the performance in order to improve, but they also want feedback that will earn them an “A” in the course.

    4. The individual must be provided with information that gives him or her the ability to make a change. This information should be given in the form of specific goals or targets, for specific behaviors. Simply telling people to do better or do their best often leads to disappointing results.

    5. The employees must have the ability to make changes. Outcomes and goals must be under the control of the employees.

    6. The systems should focus more on future performance rather than on past behavior.

  2. Compensation system decision-making (allocating merit pay)- Some companies attempt to develop a system to motivate extra role behavior (see merit pay discussion above). Whenever a company decides to allocate annual pay increases on the basis of performance, it must develop some type of performance appraisal to use in these allocation decisions. The major purpose of thee systems is to motivate ERB.
    Conditions for success:
    1. The system must be able to differentiate the relative performance among employees.
    2. Standards for performance evaluation must be communicated before the performance review period. Employees must know what they have to do in order to turn a high performance review (Expectancy).
    3. Employees must believe that the system is a valid measure of their performance in the performance of others. This is not true, the system generally leads to a high level of inequity perceptions.
    4. Employees must have the ability to change the measures used in the appraisal system (Expectancy).
  3. Training and development needs assessment- Companies spend millions of dollars a year on training and development. This includes basic skill training, technical training, and leadership development. Given the large amount of money spent on training, these companies are interested in determining whether or not the training has been effective. One way to do this is to measure the performance of employees before and after the training. If the training has been effective, performance evaluations should improve.
    Conditions for success:
    1. The performance appraisal system must be sensitive enough to measure small changes in performance.
    2. The system was measure the behaviors and results the training program is attempting to improve
  4. Evaluation and validation of human resource strategies and systems- Many organizations have detailed and complex selection processes. The use multiple methods of assessing and selecting among applicants such as interviews, work samples and assessment centers, application and resume review, letters of reference, and background checks. How do they know if these methods are effective in selecting the most qualified candidates? One method of validating these methods is to use the performance appraisal system as a means of determining the relationship between an applicant's data and his or her job performance. While this can only be used on those that have been selected (it cannot determine if the company is experiencing Type I errors, which means not selecting highly qualified candidates), it can determine whether or not the selection process is choosing individuals who turn out to be relatively poor performers. More importantly, it can determine which particular selection tools of the most accurate in predicting future job performance.
    Conditions for success:
    1. The system must be able to measure the relative performance of new employees accurately.
Appaisal Approaches
Performance outcome based approaches

  1. Objectives measures of results
  2. Assessment of goal accomplishment

  3. Management by Objectives (MBO)- The role of Goal Setting in employee motivation and appraisal

Process/behavioral approaches

  1. Behaviorally anchored rating scales
  2. Behavioral observation scales (BOS)

Trait based approaches

Which type should be used? Here are the situations where a process approach should be used and where and outcome approach should be used.

Process/Behavioral Approach

  1. Stable environment, where one best way exists and is known.
  2. Situations where we cannot afford an unfavorable outcome.
  3. Decision makers lack expertise or information necessary.
  4. Situations where consistency among decision makers is important
  5. Situations where a defining clear, measurable objective is difficult

Output/Goal Approach

  1. A clear, measurable objective exists
  2. There are multiple effective means of achieving the objective.
  3. The proper process depends on factors that must be determined at time of the decision.
  4. Decision makers (those being evaluated) have expertise and access to information necessary.

  5. The decision makers have access to knowledge of results which provide feedback necessary to modify future processes
Who appraises employee performance?
  1. Supervisors Peers
  2. Subordinates
  3. Customers/clients
  4. 360 degree appraisal systems- Performance is evaluated by supervisors, peers, subordinates and customers

 
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