Performance Based Pay

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Performance Based Pay
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Todays class brought to you by China/Hong Kong
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Real excitement of Compensation

• How do you create Performance base pay system
  that works. Companies extoll their Performance
  based pay system, yet none seems to be
  universally strong.

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Skill based pay

• Determine compensable competencies for type of
  work. Tie to strategic issues.
• Provide training opportunities to get increased
  competencies!
• Offer competency tests either selection or post
  selection. Floor performance standards.

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• Sauer Danfoss- base pay and then added pay for
  skills.

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Why not rely on external market only?

• Or Why is this important?

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Strategic issues

• Relative importance of base pay vs performance
  pay.
• Company emphasizing innovation, customer service,
  teams, internal labor markets etc.

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Pay for perf

• Benchmark

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Pay for performance

• Video

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• Controversial
• Intrinsic vs extrinsic motivation
• Does extrinsic motivation always prevail?
• If so, then must people be paid to do everything?
  When do they sacrifice self-interest for
  organizational interest?

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Pay is but one tool for performance management

• Strategic HR relies on Performance
  management--which tools used. How to create an
  organizational culture related to performance
  management.
• Do you wish to pay for performance?
• What are problems/advantages?

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Medical Care

• McFarland Clinic
• Medical care is hot because of culture change.
• Doctors, lab, x-ray, receptionists.
• Pay for performance or other motivators?
• What type of climate are you building.

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What type of culture is

• Most likely to link pay and performance.
• Least likely to link pay and performance (rely on
  other motivators).

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Other ways to link pay and individual performance

• Bonuses
• Commissions
• Stock options

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How Incentives for teams?

• P-G fit
• PO fit
• Brainstorm in teams
• Consider types of incentives, group,
  organizational individual.

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Kerr Case
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ISSUE

• Folly of Hoping for A but no extrinsic rewards.
• Folly of Hoping for A but rewarding for B.
• Outcome measures.

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Summary

• What is pay used for?
• What influences the relative use in different
  organizations.
• If primarily motivation--how can it be used to
  recruit and retain or visa-versa.

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Goal

• Current trends towards flexibility
• Cost Issues (cost containment and cost benefit).
• Benefits management

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Types of benefits

• Security (Income protection)
• Convenience (time/stress management).

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Why are benefits important?

• From an employee perspective
• From an employer perspective

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Employers

• Quality of life and the impact on productivity
  (spillover of work and family).
• Recruitment
• Retention

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Trends towards Flexibility in electing benefits

• Cafeteria benefits. allocation may elect
  variety of benefits given costs. ISU offers
  health, disability, accidental death, life,
  dental.
• What do you need. Either pay for more coverage
  or elect. Not really cost management issue--just
  help retention and recruitment.

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Towards Flexibility in Coverage
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What is the basis for this?
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Trends towards Increasing coverage

• Prepaid legal
• adoption benefits
• Hopefully more in benchmarking

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Benchmark reports
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Family Benefits Increasing

• Job as family benefits administrator
• More benefits

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Change over time
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Cost issues

• Do Benefits pay for themselves? Costs/benefits
  ratio. How do you determine?
• Increasing trend towards results
• Getting into the rankings

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Reducing claims
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Pay for themselves

• Why do companies offer preventative medicine--
  smoke enders, weight watchers, free shots
• What about Wellness programs
• Should Ford Keep up Volvos benefits?

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Should you offer

• Fertility medical coverage and child care?
• Car pooling and disability insurance?

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Should you

• For health insurance, verify not covered under
  other insurers

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Family Benefits

• Chubb estimates from exit interviews that 50
  employees left for childcare reasons
• It cost 97 of wages to replace non-exempt and
  150 of wages to replace exempt.
• 3 million dollars in replacement costs

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offers

• Paid time off
• Child-care for snow days
• telecommuting
• Flexibility

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In spite of popularity

• Few firms offer
• People strongly value Security benefits.
• New benefits excluding child care are modest cost.

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Who offers

• Unions
• Larger employers
• Industry
• Corporate image

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Benefits of Benefits

• Does it help?

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Problems with Benefits

• Employee backlash especially family benefits.
• Not clear that benefits have much impact on
  recruitment unless clearly one of the 100 best
  places to work or equivalent in a region. Some
  evidence for retention. Would the money best be
  put elsewhere?

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Will these go away in times of high unemployment
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Eldercare, spouse care, parent care
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Linking Benefits to Strategy/Labor Markets

• Retailer relies on students for seasonal sales.
  Evidence is clear that sales is more than double
  if return. How to increase retention through
  benefits.
• Vacation days could be example for retention of
  employees.

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Benefits Management

• Benefits communication
• Have it and want people to take advantage of
  them. ISU has problems with wellness.
• How to communicate? Just in time.

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Summary

• Importance of benefits increasing.
• Portion of benefits as total compensation
  increased over the past thirty years.
• Purpose is critical and getting the most for your
  dollar.