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

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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

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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?

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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?

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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

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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

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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