Compensation and Rewards

1
Compensation and Rewards

• Business 158
• Spring Semester 2007
• Tim Brown

Session 13
2
Agenda

• Guest Speaker (HR Mgr Perspective)
• BREAK
• SOTE Administration
• QUIZ (Take, Grade, Discuss)
• Lecture Performance Appraisal and Merit Increase
  Delivery

3
Topics (Chapter 11)

• Role of Performance Appraisals in Pay Decisions
• Common Errors in Appraising Performance
• Better Understanding and Measuring Performance
• Performance Evaluation Process
• EEO and Performance Evaluation
• Tying Pay to Subjectively Appraised Performance
• Merit Increase Delivery Tool Merit Matrix Grid
• Promotions as a Pay-for-Performance Tool

4
Nature of Performance Appraisals
You cant manage what you dont
understand. You dont understand what you dont
measure. What gets measured gets done. What gets
measured gets rewarded.
5
Role of Performance Appraisal

• Control mechanism for feedback
• Allows employee progress to be assessed
• Ensures strategy-consistent behavior
• Reinforces values of organization
• Ensures alignment of individual performance and
  behavior to organization and work systems

6
Purposes of Performance Appraisal

• Evaluation
• Performance measurement
• Compensation decision-basis
• Motivation
• EMPHASIS Past

• Development
• Management development
• Identification of Potential
• General feedback
• Human resource planning
• Communication vehicle
• Performance improvement
• EMPHASIS Future

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Common Errors in Appraisal Process
Halo error
Leniency error
Horn error
Severity error
First impression error
Central tendency error
Clone error
Recency error
Spillover error
Which is worst?
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Factors Related to Inaccurate Appraisal
1
Guilt
2
Embarrassment about giving praise
3
Taking things for granted
4
Not noticing
5
Halo effect
6
Dislike of confrontation
7
Spending too little time on preparation of
appraisal
9
Strategies to Better Understandand Measure Job
Performance
10
Strategy to Better Understandand Measure Job
Performance
Improve Appraisal Formats
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Categories of Appraisal Formats
Ranking - Rater compares employees against each
other
Categories
Rating - Rater evaluates employees on some
absolute standard (measured on a continuum scale)
Essay - Rater answers open-ended questions in
essay form describing employee performance
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Ranking Formats

• Straight ranking
• Alternation ranking
• Paired-comparison ranking

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Rating Formats

• Two common elements
• Raters evaluate employees on against standard
• Each standard is measured on a scale -performance
  variation is described along a continuum
• Types of descriptors
• Behaviors (competencies)
• Outcomes (results)

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Strategy to Better Understandand Measure Job
Performance
Select the Right Raters
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Old-School view

• Manager writes evaluation
• Employee listens to managers perspective
• Employee comments not highly valued, could be
  damaging to future aspirations

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Enlightened view

• Manager and Employee agree on SMART objectives
• Specific
• Measurable
• Achievable
• Realistic
• Time-bound
• Employee and Manager both contribute their views
  on how employee performed

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Progressive view

• 360 degree review process considers the input of
  the manager and the employee but also peers,
  subordinates and customers

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Select the Right Raters
Supervisors
Peers
Self
Vendors
Subordinates
Customers
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Strategy to Better Understandand Measure Job
Performance
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The Rating Process

• Rater observes behavior of a ratee
• Rater encodes ratee behavior
• Rater stores information in memory
• When it is time to evaluate a ratee, rater
• Reviews performance dimensions and
• Retrieves stored observations to determine
  relevance to performance dimensions
• Information is reconsidered and integrated with
  other available information as rater decides on
  final ratings

21
Understand Why Raters Make Mistakes
Errors in rating process
Errors in observation (attention)
Errors in storage and recall
Errors in actual evaluation
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Training Raters to Rate More Accurately

• Rater-error training
• Goal is to reduce psychometric errors by
  familiarizing raters with their existence
• Performance dimension training
• Exposes supervisors toperformance dimensions
  used
• Performance-standard training
• Provides raters with a standard orframe of
  reference for making appraisal

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Ways to Improve Rater Training

• Straightforward lecturing to ratees is
  ineffective
• Individualized or small group discussions are
  more effective (role play)
• When discussions are combined with extensive
  practice and feedback, rating accuracy improves
• Longer training programs are generally more
  successful than shorter programs
• Performance-dimension and performance-standard
  training are more effective than rater-error
  training
• Success results from efforts to reduce halo
  errors and improve accuracy

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Putting it All TogetherThe Performance
Evaluation Process
Key elements making for a good outcome
1
Need a sound basis for establishing performance
appraisal dimensions and scales associated with
each dimension
2
Need to involve employees in every stage of
developing performance dimensions and building
scales
3
Need to ensure raters are trained in use of
appraisal system and that all employees
understand how system operates
4
Need to ensure raters are motivated to rate
accurately
5
Raters should maintain a diary of employee
performance
6
Raters should attempt a performance diagnosis to
determine if performance problems exist
7
Appraisal process should follow guidelines in
Exhibit 11.11
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Tips on Appraising Performance
1
Establish clear sense of direction
2
Provide opportunity for employees to participate
in setting goals and standards for performance
3
Provide prompt, honest, and meaningful feedback
4
Allow for immediate and sincere reinforcement
5
Provide coaching and suggestions for improvement
6
Provide fair and respectful treatment
7
Allow an opportunity for employees to understand
and influence decisions which effect them
26
EEO and Performance Evaluation
Key Issues Establishing a Performance Appraisal
System
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Tying Pay to SubjectivelyAppraised Performance
Central issue involving merit pay
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Pay Increase Guidelines withLow Motivational
Impact

• Provide equal increases to all employees
  regardless of performance
• General increase
• Cost-of-living adjustments
• Pay increases based on a preset progression
  pattern based on seniority

29
Pay Increase Guidelines that have greater
motivational impact

• Pay increases tied to actual performance
• Clear link between how your boss rated you and
  how you did (objective)
• Employee buys into the process and system

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Performance-based Guidelines
Does this difference in pay increase make
you want to work as hard as needed to raise your
rating score?
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Designing Merit Guidelines
Four Questions . . .
1
What should the poorest performer be paid as an
increase?
2
How much should average performers be paid as an
increase?
3
How much should top performers be paid?
4
What should be the size of the percentage
increase differential between different levels of
performance?
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Merit Pay Grid

• Merit grids combine three variables
• Level of performance
• Distribution of employees within pay ranges
• Overall merit budget increase percentage

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Sample (Generous) Merit Pay Grid
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Sample (Tight) Merit Pay Grid
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Promotional Increases as aPay-for-Performance
Tool

• Promotion should be accompanied by a salary
  increase - 8 to 12
• Characteristics of promotional pay increases
• Size of increment is approximately double a
  normal merit increase
• Represent a reward to employees for commitment
  and exemplary performance

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Exceptions Happen

• Must have some money to make adjustments
• Bring employees to range minimum
• Adjust for new college grad compression
• Recognize market movement in key roles
• Fix mistakes in starting rate

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Reminder

• Merit increases need to be meaningful in size
• Consistent with company goals/objectives culture
  and philosophy
• Can not be counted on as a panacea
• Work for about 12 weeks before and 6 weeks after
• If that.

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The Performance Management Process
Establish Expectations
Coaching and Development
Performance Management - Continuous process
where employees and managers work together
Feedback
Review
Rewards and Recognition