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Unit 4, Lecture 4: Performance Management PERFORMANCE

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Unit 4, Lecture 4: Performance Management PERFORMANCE MANAGEMENT CONCEPTS Prof. John Kammeyer-Mueller MGT 4301 Unit 4, Lecture 4: Performance Management Unit 4 ... – PowerPoint PPT presentation

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Title: Unit 4, Lecture 4: Performance Management PERFORMANCE


1
Performance Management Concepts
  • Prof. John Kammeyer-Mueller
  • MGT 4301

2
Plan
  • Where we are
  • Understand how companies establish pay policies
    for jobs
  • Understand how companies provide benefits for
    employees
  • Where we want to be
  • Understand how pay can be modified to fit the
    individual
  • How we know how were doing
  • What do each of the following theories say about
    incentive compensation plans?
  • Expectancy
  • Agency
  • Goal setting
  • Cognitive evaluation
  • Risk aversion

3
Consider the Case of an Interdependent Team
  • Restaurant shift
  • What is the organizations measure of success for
    this team?
  • Can all individual contributions to this success
    be measured easily?
  • What are the impacts of individual performance
    rewards provided to servers on the basis of tips,
    to bus staff on the basis of server sharing of
    tips, and cooks on the basis of speed and
    accuracy of prep?
  • Research and development team at Apple
  • What is the organizations measure of success for
    this team?
  • Can all individual contributions to this success
    be measured easily?
  • What are the impacts of individual performance
    rewards provided independently to software,
    hardware, and marketing employees?

4
Individual versus group based pay for performance
  • Organizational performance
  • Stock price
  • Revenue

Increasing individual control
Increasing group cooperation
  • Group performance
  • Factory or shift output
  • Sales per shift
  • Team project completion
  • Individual performance
  • Units per hour
  • Individual sales
  • Specific behaviors at work

5
Comparing Levels of Measurement to Our Incentive
Theories
  • Which provides better motivation in terms of
    expectancy?
  • Which better resolves agency problems?
  • Which fits more with goal setting?
  • Which is more consistent with cognitive
    evaluation theory and maintaining intrinsic
    motivation?
  • Which provides greater protection from risk?

6
Individual versus group based pay for performance
  • Equity theory and group rewards
  • Situation rewards divided evenly among a group
    of students, even though some worked much harder
    than others
  • Reactions
  • Those who are lazy are quite satisfied
  • Those who work hardest are upset

7
Individual versus group based pay for performance
  • 1/n problem
  • Returns to my effort are a diminishing function
    of group size
  • The larger the group, the less of an impact I can
    have
  • Consequence minimize group size

8
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9
Can you tell me more about group problems?
  • Free riders
  • Non-members reap the benefits without the costs
  • Less likely to have people participate in the
    company
  • This is an instance of a classic economic problem
  • Prisoners dilemma
  • Tragedy of the commons

10
Game Theory and Team Cooperation
  • As in agency theory, the dominant strategy for
    both is to shirk
  • How would a real team be different?
  • (its also worth noting that experiments
    involving Prisoners Dillemas show about half of
    participants behave cooperatively even when it
    isnt in their best interest)

11
Individual versus group based pay for performance
  • Mutual monitoring
  • Why do military commanders punish everyone for an
    individuals failures?
  • Why do I make you do some of your work in project
    groups?
  • Those most interested in the outcome ensure
    others contribute as well

12
Group Pay and Organizational Interests
  • Measurement issues
  • Work may not be easily separated into individual
    effort levels (think of two people lifting a
    boxhow do you reward them for their individual
    efforts?)
  • Rating individual performance is time consuming
    and expensive
  • Measuring the outcomes of larger groups is
    usually not only simpler, but also more relevant
    to the organizations bottom line

13
Group Pay and Organizational Interests
  • Perverse incentive schemes
  • Individual incentives motivate competition among
    members of a team
  • Concentrating on individual goals decreases
    coordination and can lead to outcomes that are
    detrimental to the employer
  • Classic case study Best Buys use of
    commissions, which has been phased out and
    replaced with team rewards

14
Consulting Firms or Small Offices
  • Pay based on business brought in
  • Pay based on percentage of new business
  • Additional reward for completing projects
  • Motivation implications?
  • How could we fix this system?

15
Group Incentives
  • Commissions or tips on a team basis
  • Entire sales group receives a portion of the
    group outcome
  • Tips are shared among all staff on a restaurant
    shift
  • Motivation implications?
  • How could we fix this system?

16
Group Incentives
  • Group bonuses/team awards
  • e.g., development team concludes product testing,
    performance exceeds expectations
  • All members of the team receive a reward
  • Motivation implications?
  • How could we fix this system?

17
Group Incentives
  • Gainsharing
  • Use current productivity as a target
  • Rewards for exceeding productivity goals
  • Motivation implications?
  • How could we fix this system?

18
Organization-based Incentives
  • Profit sharing
  • Some proportion of the companys profits are made
    available to employees
  • Motivation implications?
  • How could we fix this system?

19
Organization-based Incentives
  • ESOP/stock options
  • Employees can own stock
  • Long-term value is (theoretically) emphasized
    over quarterly profits
  • Give options to buy stock at a future price
  • Motivation implications?
  • How could we fix this system?

20
Organizational Incentives in the News
  • 2007-2008 meltdown in the financial industry
  • Crisis in home loan market
  • Spread to affect many aspects of organizations
    that traded in real estate, reselling loans, or
    other lending
  • Bear Stearns and Lehman Brothers collapsed
  • Employees had been paid up to 50 of their salary
    in stock
  • Many lost education funds, retirement savings,
    homes, etc.
  • We feel like we have been controlled by events
    and havent controlled them, said one
    rank-and-file employee. And it has just been the
    most punitive market. Is there frustration with
    the management team? Of course.
  • These negative attitudes among remaining
    employees are especially damaging as companies
    try to get back on track

21
When Options Go Underwater
  • Underwater options
  • Options are a promise to sell a stock in the
    future at the current price
  • Options are of no value if they are set at a
    price above the current value of the stock
  • Reduces risk to the company, but increases risk
    to the employee
  • At the point of this article, 10 of companies
    had more than 50 of their options underwater,
    and 40 had at least some of their options
    underwater
  • Many employees consider turnover
  • Can get options at competitors that are indexed
    to current (lower) prices, so theyll be worth
    more even if all else was equal
  • Also an emotional componentemployees
    disappointed at poor corporate performance and
    feeling cheated
  • What can be done?
  • Reprice options
  • Offer restricted stock (which cannot be bought or
    sold until certain conditions are met)
  • Source Some Firms Options Drowning as Stock
    Drops Pound Fortune 500, Workforce.com, Aug. 25,
    2008

22
Executive Stock Options
  • Change in the way I.B.M. Pays its senior
    executives.
  • Stock awards only become valuable if the
    companys shares rise by 10 percent or more.
  • I.B.M. Is the first large American company to
    adopt a program in which its senior management
    team is granted stock options at a price higher
    than what shares are selling for at the time they
    are issued.
  • Reason-
  • I.B.M.S public shareholders add at least some to
    their wealth before executives can begin to cash
    in their stock options.
  • Link incentives of corporate management more
    closely with performance.
  • Executives act in the long-term interest of
    shareholders.
  • Restrictions-
  • Executives can acquire a limited number of stock
    options pegged to the market price.
  • But only if they buy shares with their own money
    and hold them for 3 years.
  • Why?
  • Now executives cant cash in their options, gain
    money, and run.
  • I.B.M. to Alter How It Pays Options to Officials
    NY Times, Feb. 25, 2004

23
So To Summarize
  • Good incentive plans do the following
  • Link employee effort to pay
  • Ensure that effort is directed towards goals of
    the organization
  • Establish concrete goals with sufficient feedback
  • Dont make employees feel coerced
  • Shield employees from unnecessary risk

24
Wrap Up
  • Where we are
  • Understand how companies establish pay policies
    for jobs
  • Understand how companies provide benefits for
    employees
  • Where we want to be
  • Understand how pay can be modified to fit the
    individual
  • How we know how were doing
  • What do each of the following theories say about
    incentive compensation plans?
  • Expectancy
  • Agency
  • Goal setting
  • Cognitive evaluation
  • Risk aversion
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