Chapter 10-14 Test: employee benefits, performance

Please read the below carefully.

1. Quiz Chapter 14

*15 multiple choice questions. Can take the quiz up to 3 times, highest score will be recorded, but only have 30 minutes.

*Quiz chapter notes attached.

2. Test Chapter 10-14

*50 multiple choice questions. Only 120 minutes (2 hours) to complete this test in ONE sitting.

*Test Chapter notes attached.

Both assignments need to be complete by Thursday,Oct. 17th @ NOON EST.

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Chapter 14 PROVIDING EMPLOYEE BENEFITS

This chapter describes the contents of an employee benefits package and the way organizations administer employee benefits. The important role of benefits as a part of employee compensation, major types of employee benefits: benefits required by law, paid leave, insurance policies, retirement plans, and other benefits, how to choose which of these alternatives to include in an employee benefits package so that it contributes to meeting the organization’s goals, regulations affecting how employers design and administer benefits programs and why and how organizations should effectively communicate with employees about their benefits is discussed.

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What Do I Need to Know?

LO 14-1 Discuss the importance of benefits as a part of employee compensation.

LO 14-2 Summarize the types of employee benefits required by law.

LO 14-3 Describe the most common forms of paid leave.

LO 14-4 Identify the kinds of insurance benefits offered by employers.

LO 14-5 Define the types of retirement plans offered by employers.

LO 14-6 Describe how organizations use other benefits to match employees’ wants and needs.

LO 14-7 Explain how to choose the contents of an employee benefits package.

LO 14-8 Summarize the regulations affecting how employers design and administer benefits programs.

LO 14-9 Discuss the importance of effectively communicating the nature and value of benefits to employees.

After reading and discussing this chapter, you need to know:

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The Role of Employee Benefits 1 of 2

Benefits contribute to attracting, retaining, and motivating employees.
Help employers tailor their compensation to kinds of employees they need
Employees have come to expect that benefits will help them maintain economic security.
Benefits impose significant costs.

LO 14-1 Discuss the importance of benefits as a part of employee compensation.

As part of a the total compensation paid to employees, benefits serve functions similar to pay. Different employees look for different types of benefits. Employers need to examine their benefits package regularly to see whether they meet the needs of today. At the same time, benefits packages are more complex than pay structures, so benefits are harder for employees to understand and appreciate. Even if employers spend large sums on benefits, if employees do not understand how to use them or why they are valuable, the cost of the benefits will be largely wasted.

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Figure 14.1 Benefits as a Percentage of Total Compensation

Jump to Appendix 1 long image description

Source: Bureau of Labor Statistics, “Employer Costs for Employee Compensation,” http://data.bls.gov, accessed June 6, 2016

On average, out of every dollar spent on compensation, more than 30 cents go to benefits. As Figure 14.1 shows, this share has grown over the decades. These numbers indicate that an organization managing its labor costs must pay careful attention to the cost of its employee benefits.

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The Role of Employee Benefits 2 of 2

Certain benefits are required by law.
Tax laws can make benefits favorable to employees.
Employers can get volume discounts on insurance.
Creative benefits packages make companies more competitive.

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Table 14.1 Benefits Required by Law

Benefit	Employer Requirement
Social Security	Flat payroll tax on employees and employers
Unemployment insurance	Payroll tax on employers that depends on state requirements and experience rating.
Workers’ compensation insurance	Provide coverage according to state requirements. Premiums depend on experience rating.
Family and medical leave	Up to 12 weeks of unpaid leave for childbirth, adoption, or serious illness.
Health care	For employers with at least 50 employees, payment of a fee to the federal government if the employer does not meet conditions for providing health insurance benefits.

The federal and state governments require various forms of social insurance to protect workers from the financial hardships of being out of work. Table 14.1 summarizes legally required benefits. Social Security covers over 90 percent of U.S. employees. The main exceptions are railroad and federal, state, and local government employees, who often have their own plans.

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Benefits Required by Law 1 of 8

Social Security

Federal Old Age, Survivors, Disability and Health Insurance (OASDHI) program (Social Security) combines:

Old age (retirement) insurance

Survivor’s insurance

Disability insurance

Hospital insurance (Medicare Part A)

Supplementary medical insurance (Medicare Part B)

LO 14-2 Summarize the types of employee benefits required by law.

In 1935 the federal Social Security Act established old-age insurance and unemployment insurance. Congress later amended the act to add survivor’s insurance (1939), disability insurance (1956), hospital insurance (Medicare Part A, 1965), and supplementary medical insurance (Medicare Part B, 1965) for the elderly. Together, the law and its amendments created what is now the Old Age, Survivors, Disability, and Health Insurance (OASDHI) program, informally known as Social Security.

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Benefits Required by Law 2 of 8

Social Security (continued)

Employers and employees share Social Security cost through a payroll tax. The percentage is set by law.
In 2016, employers and employees each paid a tax of 7.65% on the first $118,500 of the employee’s earnings. Of that, the majority goes to OASDI, and 2.9% of earnings go to Medicare (Part A)
For earnings above $118,500, only the 2.9% for Medicare is assessed, with half paid by the employer and half paid by the employee.

Workers who meet eligibility requirements receive the retirement benefits according to their age and earnings history. Employers and employees share the cost of Social Security through a payroll tax. they can receive full benefits, or if they elect to begin receiving benefits at age 62, they receive benefits at a permanently reduced level. In 2012, the maximum benefit for a worker who retires at age 65 is more than $2,300, and it is above $3,200 for a worker who delays retirement until age 70.The full retirement age rises with birth year: a person born in 1940 reaches full retirement age at 65 years and 6 months, and a person born in 1960 or later reaches full retirement age at 67. The benefit amount rises with the person’s past earnings, but the level goes up very little after a certain level.

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Benefits Required by Law 3 of 8

Unemployment Insurance

Federally mandated program administered by states to minimize unemployment hardships
Most funding comes from federal and state taxes on employers.
Size of unemployment tax imposed on each employer depends on the employer’s experience rating

Careful HR planning can minimize layoffs and keep their experience rating favorable.

Along with OASDHI, the Social Security Act of 1935 established a program of unemployment insurance. Technically, the federal government left it to each state’s discretion to establish an unemployment insurance program. At the same time, the Social Security Act created a tax incentive structure that quickly led every state to establish the program.

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Benefits Required by Law 4 of 8

Unemployment Insurance continued

To receive benefits, workers must meet four conditions:

They meet requirements demonstrating they had been employed.

They are available for work.

They are actively seeking work.

They were not discharged for cause, did not quit voluntarily, and are not out of work because of a labor dispute.

Workers who meet these conditions receive benefits at the level set by the state – typically about half the person’s previous earnings – for a period of 26 weeks. All states have minimum and maximum weekly benefit levels.

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Benefits Required by Law 5 of 8

Workers’ Compensation

State programs that provide benefits to workers who suffer work-related injuries or illnesses, or to their survivors.

Operate under a principle of no-fault liability:

Employee does not need to show that the employer was grossly negligent in order to receive compensation.

Employer is protected from lawsuits.

Prior to workers’ compensation laws, employees who suffered work-related injury or illness had to bear the cost unless they won a lawsuit against their employer. Those who sued often lost the case because of the defenses available to employers. Employees are not eligible if their injuries are self-inflicted or if they result from intoxication or “willful disregard of safety rules.

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Benefits Required by Law 6 of 8

Workers’ Compensation (continued)

Four major categories of benefits:

Disability income

Medical care

Death benefits

Rehabilitative benefits

About 9 out of 10 U.S. workers are covered by state workers’ compensation laws; amount of benefits income varies among states.
Generally it is two-thirds of the worker’s earnings before the disability.
Benefits are tax free.

The cost of workers’ compensation is borne by the employer. The states differ in terms of how they fund workers’ compensation insurance. Some states have a single state fund. Most states allow employers to purchase coverage from private insurance companies. Most also permit self-funding by employers. Organizations can minimize the cost of this benefit by keeping workplaces safe and making employees and their managers conscious of safety issues.

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Benefits Required by Law 7 of 8

Workers’ Compensation (continued)

Cost of workers’ compensation insurance depend on:

Kinds of occupations involved

State where company is located

Employer’s experience rating

Unfavorable experience ratings lead to higher insurance premiums.

Companies have therefore redoubled efforts to improve their experience ratings and control future costs for unemployment insurance. For example, helping laid-off workers find a new job can shorten the time in which they are receiving benefits. Some states allow shared work arrangements, in which companies reduce wages and hours, and employees receive partial unemployment benefits, rather than laying off workers. U.S. economic recession that began in 2008 put quite a strain on the country’s unemployment insurance system. Although the economy seems to be on the rebound, unemployment levels have been slow to recede.

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Benefits Required by Law 8 of 8

Family and Medical Leave Act (FMLA) of 1993

Requires organizations with 50 or more employees to provide up to 12 weeks of unpaid leave:

After childbirth or adoption

To care for a seriously ill family member

For an employee’s own serious illness

Employers must guarantee these employees same or comparable job when they return to work.
Pregnancy Discrimination Act

In the United States, unpaid leave is required by law for certain family needs. Recent amendments signed into law expand the coverage for time off to care for an injured family member returning home from military combat. Employers need to keep track of leave requests to prevent abuse of the policy.

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Test Your Knowledge 1 of 2

XYZ company has determined that they will have to reduce their benefits costs to stay competitive. Which of the following solutions is not a choice for XYZ?

Eliminate health coverage

Reduce the percentage of employees’ Social Security insurance they pay.

Reduce their unemployment insurance costs by managing their workforce to avoid layoffs.

Institute a safety program to minimize worker’s compensation costs.

XYZ company evaluated their benefits costs and determined they will have to reduce their costs to stay competitive. Which of the following solutions is not a choice for XYZ?

Eliminate health coverage
Reduce the percentage of employees’ Social Security insurance they pay.
Reduce their unemployment insurance costs by managing their workforce to avoid layoffs.
Institute a safety program to minimize worker’s compensation costs.

Answer: B

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Optional Benefits Programs 1 of 13

Insurance

Life and medical

Health insurance for dependents and domestic partners

Retirement plans
Paid leave

Vacations

Holidays

Employers should also establish policies for leaves without pay – for example leaves of absence to pursue non-work goals or to meet family needs. Unpaid leave is an employee benefit because the employee usually retains seniority and other benefits during the leave. Paid holidays are time off on specified days in addition to vacation time. In Western Europe and the United States, employees typically have about 10 paid holidays each year, regardless of length of service. The most common paid holidays in the United States are New Year’s Day, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.

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Figure 14.2 Percentage of Full-Time Workers with Access to Selected Benefit Programs

Jump to Appendix 2 long image description

Source: Bureau of Labor Statistics, “Employee Benefi ts in the United States, March 2015” news release, July 24, 2015, http://www.bls.gov.

Figure 14.2 shows the percentage of full-time workers receiving the most common employee benefits. Part-time workers often receive fewer benefits. The most widely offered benefits are paid leave for vacations and holidays, life and medical insurance, and retirement plans. Benefits packages at smaller companies tend to be more limited than at larger companies. As Figure 14.2 shows, almost three-quarters of full-time employees receive medical benefits. The policies typically cover three basic types of medical expenses: hospital expenses, surgical expenses, and visits to physicians. Some employers offer additional coverage, such as dental care, vision care, birthing centers, and prescription drug programs.

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Optional Benefits Programs 2 of 13

Paid Leave

Most common: Vacations, holidays and sick leave
Optional: Jury duty, funerals of family members, military duty, voting or giving blood
Paid holidays (10)
Sick leave is often based on length of service.
Personal days – days off for personal needs
Floating holidays – paid holidays that vary from year to year
Paid time off – a pool of days to use as the employee wants

LO 14-3 Describe the most common forms of paid leave.

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Optional Benefits Programs 3 of 13

Group Insurance

Medical insurance

70% of all full-time employees in U.S. receive medical benefits
Policies typically cover:

Hospital expenses

Surgical expenses

Visits to physicians

Additional coverage may include:

Dental care

Vision care

Birthing centers

Prescription drug programs

Mental Health Parity and Addiction Equity Act of 2008

For the average person, the most important benefit by far is medical insurance. Although few employees fully appreciate what health insurance costs the employer, most value this benefit and look for it when they are contemplating a job offer

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Optional Benefits Programs 4 of 13

Medical Insurance

Consolidated Omnibus Budget Reconciliation Act (COBRA) of 1985

Federal law that requires employers to permit employees or their dependents to extend their health insurance coverage at group rates for up to 36 months following a qualifying event:

Layoff

Reduction in hours

Employee’s death

Qualifying events include termination (except for gross misconduct), a reduction in hours that leads to loss of health insurance, and the employee’s death (in which case the surviving spouse or dependent child would extend the coverage). To extend the coverage, the employee or the surviving spouse or dependent must pay for the insurance, but the payments are at the group rate. These employees and their families must have access to the same services as those who did not lose their health insurance.

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Optional Benefits Programs 5 of 13

Six employer approaches to controlling health care benefits costs:

Managed care

Health maintenance organizations (HMO)

Preferred provider organizations (PPO)

Flexible spending accounts

Consumer-driven health plans (CDHP)

Employee wellness programs (EWP)

Health insurance is a significant and fast-growing share of benefits costs at U.S. organizations. Employers have looked for ways to control the cost of health care coverage while keeping this valuable benefit. Although few employees fully appreciate what health insurance costs the employer, most value this benefit and look for it when they are contemplating a job offer. A recent survey by the Society for Human Resource Management found that 84 percent of employers were offering PPOs, but only 33 percent included HMOs as an option in their benefit plans.

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Figure 14.3 Health Care Costs in Various Countries

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Source: Organisation for Economic Co-operation and Development, “Health Expenditures and Financing,” OECD.Stat, http://stats.oecd.org, accessed June 6, 2016.

Figure 14.3 shows that the United States spends more of its total wealth on health care than other countries do. Most Western European countries have nationalized health systems, but the majority of Americans with coverage for health care expenses get it through their own or a family member’s employer. As a result, a growing number of employees whose employers cannot afford this benefit are left without insurance to cover health care expenses. Employers have looked for ways to control the cost of health care coverage while keeping this valuable benefit. They have used variations of managed care, employee driven savings, and promotion of employee wellness.

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Optional Benefits Programs 6 of 13

Life Insurance

Employers may provide life insurance to employees or offer the opportunity to buy coverage at low group rates.
Term life insurance – if the employee dies during the term of the policy, the employee’s beneficiaries receive a death benefit payment.

Along with a basic policy, the employer may give employees the option of purchasing additional coverage, usually at a nominal cost.

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Optional Benefits Programs 7 of 13

Short-Term Disability Insurance

Insurance that pays a percentage of a disabled employee’s salary as benefits to employee for six months or less.

Long-Term Disability Insurance

Insurance that pays a percentage of a disabled employee’s salary after an initial period and potentially for rest of employee’s life.

Employees risk losing their incomes if a disability makes them unable to work. Disability insurance provides protection against this loss of income. Disability payments are a percentage of the employee’s salary—typically 50 to 70 percent. Social Security includes some long-term disability benefits. To manage benefits costs, the employer should ensure that the disability insurance is coordinated with Social Security and any other programs that help workers who become disabled.

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Optional Benefits Programs 8 of 13

Retirement Plans

About half of employees working in private business sector have employer-sponsored retirement plans.

Contributory plan – retirement plan funded by contributions from employer and employee.

Non-contributory plan – retirement plan funded entirely by employer contributions.

Defined benefit plan – pension plan that guarantees a specified level of retirement income. Employer sets up a pension fund to invest contributions. Such plans must meet funding requirements of Employee Retirement Income Security Act (ERISA) of 1974.

LO 14-5 Define the types of retirement plans offered by employers.

About half of employees working for private businesses (non-government) have employer-sponsored retirement plans. Retirement plans may be:

Non-contributory plans
Contributory plans

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Figure 14.4 Sources of Income for Persons 65 and Older

Jump to Appendix 4 long image description

Sources: Ke Bin Wu, “Sources of Income for Older Americans, 2012,” AARP Public Policy Institute, fact sheet 296, December 2013, accessed at http://www.aarp.org.

Despite the image of retired people living on their Social Security checks, Figure 14.4 shows that those checks amount to less than half of a retired person’s income. Among persons over age 65, pensions provided a significant share of income in 2010. Employers have no obligation to offer retirement plans beyond the protection of Social Security, but most offer some form of pension or retirement savings plan.

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Optional Benefits Programs 9 of 13

Employee Retirement Income Security Act (ERISA):

federal law that increased responsibility of pension plan trustees to protect retirees,

Established certain rights related to vesting and portability, and created the Pension Benefit Guarantee Corporation.

Pension Benefit Guarantee Corporation (PBGC)

federal agency that insures retirement benefits and guarantees retirees a basic benefit if employer experiences financial difficulties.

(ERISA) of 1974 increased the responsibility of pension plan trustees to protect retirees, established certain rights related to vesting (earning a right to receive the pension) and portability (being able to move retirement savings when changing employers), and created the Pension Benefit Guarantee Corporation (PBGC). The PBGC is the federal agency that insures retirement benefits and guarantees retirees a basic benefit if the employer. To fund the PBGC, employers must make annual contributions of $35 per fund participant. experiences financial difficulties. In 2012, the maximum PBGC benefit for someone who retired at age 65 was $4,653 per month.

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Optional Benefits Programs 10 of 13

Retirement Plans (continued)

Defined contribution plan – the employer sets up an individual account for each employee and specifies the size of the investment into that account.
Money purchase plans
Profit-sharing and employee stock ownership plans
Section 401(k) plans
Cash balance plan –the employer sets up an individual account for each employee and contributes a percentage of the employee’s salary.

These plans free employers from risks that investments will not perform as well as expected. Responsibility for wise investing is with each employee.

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Figure 14.5 Value of Retirement Savings Invested at Different Ages

Jump to Appendix 5 long image description

Many employees do not appreciate the importance of beginning to save early in their careers. As Figure 14.5 shows, an employee who invests $3,000 a year ($250 a month) between the ages of 21 and 29 will have far more at age 65 than an employee who invests the same amount between ages 31 and 39. Another important is to diversify investments. Based on investment performance between 1946 and 1990, stocks earned an average of 11.4 percent per year, bonds earned 5.1 percent, and bank savings accounts earned 5.3 percent. But in any given year, one of these types of investments might outperform the other. And within the categories of stocks and bonds, it is important to invest in a wide variety of companies. If one company performs poorly, the investments in other companies might perform better.

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Test Your Knowledge 2 of 2

Jakar does not know a lot about investing and wants to ensure he has some retirement income when he is old enough to retire. Agnes plans on changing employers every few years and is interested in investing her own money. Which plan would be best for Jakar and Agnes, respectively?

Defined contribution; defined benefit

Contributory; defined benefit

Defined benefit; defined contribution

Defined contribution; non-contributory

Defined contribution; defined benefit
Contributory; defined benefit
Defined benefit; defined contribution
Defined contribution; non-contributory

Answer: C

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Optional Benefits Programs 11 of 13

Government Requirements for Vesting and Communication

Vesting Rights

Guarantee that when employees become participants in a pension plan and work a specified number of years, they will receive a pension at retirement age, regardless of whether they remained with the employer.

Summary Plan Description

Report that describes a pension plan’s funding, eligibility requirements, risks, and other details.

Employers also provide an individual benefit statement which describes employee’s vested and unvested benefits.

Along with requirements for funding defined benefit plans, ERISA specifies a number of requirements related to eligibility for benefits (vesting) and communication with employees. Communication helps employees understand and value their retirement benefits.

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Optional Benefits Programs 12 of 13

Family-Friendly Benefits

Family leave
Child care
College savings
Elder care

LO 14-6 Describe how organizations use other benefits to match employees’ wants and needs.

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Optional Benefits Programs 13 of 13

Other Quality of Work-Life Benefits

Subsidized cafeterias
On-site health care services
Moving and relocation expenses
Employee discounts on products
Employee buying service

Tuition reimbursement
On-site fitness center
On-site dry cleaning services
Dues for professional organizations
Off-site company recreation area
Pet services

The scope of possible employee benefits is limited by the imagination of the organization’s decision makers. Organizations have developed a wide variety of benefits to meet the needs of employees and to attract and keep the kinds of workers who will be of value to the organization.

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Selecting Employee Benefits 1 of 4

The Organization’s Objectives

Decisions about which benefits to offer should take into account:

Organization’s goals, objectives and budget

Expectations of the organization’s current employees and potential future recruits.

An organization that does not offer expected benefits will have difficulty attracting and keeping employees.

LO 14-7 Explain how to choose the contents of an employee benefits package.

Although the government requires certain benefits, employers have a wide latitude in creating the total benefits package they offer employees. Employees have come to expect certain things from employers. If employees believe their employer feels no commitment to their welfare, they are less likely to feel committed to their employer.

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Table 14.2 An Organization’s Benefits Objectives 1 of 2

To establish and maintain an employee benefit program that is based primarily on the employees’ needs for leisure time and on protection against the risks of old age, loss of health, and loss of life.

To establish and maintain an employee benefit program that complements the efforts of employees on their own behalf.

To evaluate the employee benefit plan annually for its effect on employee morale and productivity, giving consideration to turnover, unfilled positions, attendance, employee’s complaints, and employee’s opinions.

To compare the employee benefit plan annually with that of other leading companies in the same field and to maintain a benefit plan with an overall level of benefits based on cost per employee that falls within the second quintile of these companies.

To maintain a level of benefits for nonunion employees that represents the same level of expenditures per employee as for union employees.

To determine annually the costs of new, changed, and existing programs as percentages of salaries and wages and to maintain these percentages as much as possible.

A logical place to begin selecting employee benefits is to establish objectives for the benefits package. This helps the organization select the most effective benefits and monitor whether the benefits are doing what they should. Table 14.2 is an example of one organization’s benefits objectives. Cost of health care benefits and retaining employees are key objectives.

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Table 14.2 An Organization’s Benefits Objectives 2 of 2

Source: Adapted from B.T. Beam Jr. and J.J. McFadden, Employee Benefits, 3rd edition. Copyright © 1992 by Dearborn Financial Publishing, Inc. Published by Dearborn Financial Publishing, Inc., Chicago. All rights reserved.

To self-fund benefits to the extent that a long-run cost savings can be expected for the firm and catastrophic losses can be avoided.

To coordinate all benefits with social insurance programs to which the company makes payments.

To provide benefits on a noncontributory basis except for dependent coverage, for which employees should pay a portion of the cost.

To maintain continual communications with all employees concerning benefit programs.

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Selecting Employee Benefits 2 of 4

Employee Expectations and Values

Employees expect to receive benefits that are legally required and widely available.

They value benefits they are likely to use.

Value differs from one employee to another.

The choice of benefits may influence current employees’ satisfaction and may also affect the organization’s recruiting, in terms of both the ease of recruiting and the kinds of employees attracted to the organization.

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Selecting Employee Benefits 3 of 4

Organizations can address differences in employees’ needs and empower their employees by offering flexible benefits plans in place of a single benefits package for all employees.

Cafeteria-style plan: a benefits plan that offers employees a set of alternatives from which they can choose the types and amounts of benefits they want.

Cafeteria-style plans have a number of advantages. The selection process can make employees more aware of the value of the benefits, particularly when the plan assigns each employee a sum of money to allocate to benefits. The individual choice in a cafeteria plan enables each employee to match his or her needs to the company’s benefits, increasing the plan’s actual value to the employee. Because employees would not select benefits they don’t want, the company avoids the cost of providing employees with benefits they don’t value. A drawback of cafeteria-style plans is that they have a higher administrative cost, especially in the design and start-up stages. Organizations can avoid some of the higher cost, however, by using software packages and standardized plans that have been developed for employers wishing to offer cafeteria-style benefits.

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Selecting Employee Benefits 4 of 4

Benefits’ Costs

Ways to save money

Shift from traditional health insurance to PPOs and CDHPs.

Shift more of the cost to employees.

Exclude or limit coverage for certain types of claims.

Learn which providers and treatments deliver the best value.

With the cost of health care continuing to soar, employers are trying to help employees stay healthy and use their benefits efficiently. This slide (and the one that follows) presents some ways companies have slowed the rise in their health benefits costs.

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Legal Requirements for Employee Benefits 1 of 3

Tax Treatment of Benefits

More favorable tax treatment of benefits classified as qualified plans
Employees may immediately take a tax deduction for the funds they contribute to the plans
Plan must meet certain requirements

LO 14-8 Summarize the regulations affecting how employers design and administer benefits programs.

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Legal Requirements for Employee Benefits 2 of 3

Antidiscrimination Laws

Intended to provide equal employment opportunity without regard to race, sex, age, disability, and several other protected categories
Pregnancy Discrimination Act
Age Discrimination in Employment Act (ADEA)
Older Workers Benefit Protection Act of 1990
Americans with Disabilities Act

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Legal Requirements for Employee Benefits 3 of 3

Accounting Requirements

Financial Accounting Standards Board (FASB)
Ensure that financial statements are a true picture of the company’s financial status
Employers must set aside the funds they expect to need for benefits to be paid after retirement

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Communicating Benefits to Employees

Organizations must communicate benefits information to employees.
It is difficult for employees and job applicants to understand the value of their benefits, so companies must help.

LO 14-9 Discuss the importance of effectively communicating the nature and value of benefits to employees.

Employees and job applicants often have a poor idea of what benefits they have and what the market value of their benefits is. The Internet gives employers powerful capabilities for keeping information about the value of employee benefits at the forefront of workers’ minds and for helping workers understand how to get the most out of their benefits.

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Summary 1 of 4

Like pay, benefits help employers attract, retain, and motivate employees.
Employees expect at least a minimum level of benefits, and providing more than minimum helps an organization compete in the labor market.
Benefits are also a significant expense, but employers provide benefits because employees value them and many benefits are required by law.

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Summary 2 of 4

Employers must contribute to Social Security through a payroll tax shared by employers and employees.
Employers must also pay federal and state taxes for unemployment insurance.
State laws require that employers purchase workers’ compensation insurance.
Major categories of paid leave are vacations, holidays, and sick leave.

Employers need to prepare for future requirements to provide all employees with health insurance, as well as to educate themselves about other provisions such as insurance exchanges, tax rebates for small businesses, and broadened coverage from health insurers.

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Summary 3 of 4

Medical insurance is one of the most valued employee benefits.
To manage costs of health insurance, many organizations offer coverage through a health maintenance organization or preferred provider organization, or they may offer flexible spending accounts.
Retirement plans may be contributory or noncontributory and defined benefit plans or defined contribution plans.

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Summary 4 of 4

Employers have responded to work-family role conflicts by offering family-friendly benefits.
In deciding contents of a benefits package, organizations need to establish objectives and select benefits that support those objectives.
Organizations should also consider employees’ expectations and values.
Employers must comply with numerous laws and regulations affecting how they design and administer benefits programs.

Communicating information about benefits is important so that employees will appreciate the value of their benefits. Communicating their value is the main way benefits attract, motivate, and retain employees.

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Appendix 1 Figure 14.1 Benefits as a Percentage of Total Compensation

1928 2.9 percent

1955 14.5 percent

1965 17.7 percent

1975 23.1 percent

1986 26.2 percent

1995 28.8 percent

2005 29.8 percent

2010 30.3 percent

2015 31.3 percent

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Appendix 2 Figure 14.2 Percentage of Full-Time Workers with Access to Selected Benefit Programs

Medical care 89 percent

Life insurance 75 percent

Retirement plans 77 percent

Paid vacation 88 percent

Sick leave 77 percent

Paid holidays 89 percent

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Appendix 3 Figure 14.3 Health Care Costs in Various Countries

Mexico 6.5 percent

Chile 7.5 percent

Korea 8 percent

United Kingdom 9 percent

Canada 10.5 percent

Germany 11 percent

France 11.5 percent

United States 16.2 percent

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Appendix 4 Figure 14.4 Sources of Income for Persons 65 and Older

Social security 38 percent

Earnings 30 percent

Pension, retirement, savings 19 percent

Investments 11 percent

Other 2 percent

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Appendix 5 Figure 14.5 Value of Retirement Savings Invested at Different Ages

The 21 to 29 age group will have 437,405 dollars at 65, which is a value of 0.45 million dollars.

The 31 to 39 age group will have 218,993 dollars, which is a value of 0.2 million dollars.

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After reading and discussing this chapter, you need to know:

LO 14-1 Discuss the importance of benefits as a part of employee compensation.

LO 14-2 Summarize the types of employee benefits required by law.

XYZ company evaluated their benefits costs and determined they will have to reduce their costs to stay competitive. Which of the following solutions is not a choice for XYZ?

Eliminate health coverage
Reduce the percentage of employees’ Social Security insurance they pay.
Reduce their unemployment insurance costs by managing their workforce to avoid layoffs.
Institute a safety program to minimize worker’s compensation costs.

Answer: B

LO 14-3 Describe the most common forms of paid leave.

Along with a basic policy, the employer may give employees the option of purchasing additional coverage, usually at a nominal cost.

LO 14-5 Define the types of retirement plans offered by employers.

About half of employees working for private businesses (non-government) have employer-sponsored retirement plans. Retirement plans may be:

Non-contributory plans
Contributory plans

These plans free employers from risks that investments will not perform as well as expected. Responsibility for wise investing is with each employee.

Defined contribution; defined benefit
Contributory; defined benefit
Defined benefit; defined contribution
Defined contribution; non-contributory

Answer: C

LO 14-6 Describe how organizations use other benefits to match employees’ wants and needs.

LO 14-7 Explain how to choose the contents of an employee benefits package.

LO 14-8 Summarize the regulations affecting how employers design and administer benefits programs.

LO 14-9 Discuss the importance of effectively communicating the nature and value of benefits to employees.

Chapter 13 RECOGNIZING EMPLOYEE CONTRIBUTIONS WITH PAY

This chapter explores the choices available to organizations with regard to incentive pay. It describes the link between pay and employee performance, ways organizations provide a variety of pay incentives to individuals, pay related to group and organizational performance. It explores organizational processes that can support the use of incentive pay and discusses incentive pay for the organization’s executives.

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What Do I Need to Know?

LO 13-1 Discuss the connection between incentive pay and employee performance.

LO 13-2 Describe how organizations recognize individual performance.

LO 13-3 Identify ways to recognize group performance.

LO 13-4 Explain how organizations link pay to their overall performance.

LO 13-5 Describe how organizations combine incentive plans in a “balanced scorecard.”

LO 13-6 Summarize processes that can contribute to the success of incentive programs.

LO 13-7 Discuss issues related to performance-based pay for executives.

After reading and discussing this chapter, you need to know:

©McGraw-Hill Education.

Incentive Pay 1 of 3

Incentive pay

Forms of pay linked to an employee’s performance as an individual, group member, or organization member
Influential because the amount paid is linked to certain predefined behaviors or outcomes
May be in the form of a commission or a bonus

Along with wages and salaries, many organizations offer incentive pay – that is, pay specifically designed to energize, direct, or control employees’ behavior. The next slide illustrates the popularity of this type of pay.

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Incentive Pay 2 of 3

Effective Incentive Pay Requirements

Performance measures are linked to the organization’s goals.

Employees believe they can meet performance standards.

Organization gives employees the resources they need to meet their goals.

Employees value the rewards given.

Employees believe the reward system is fair.

Pay plan takes into account that employees may ignore any goals that are not rewarded.

For incentive pay to motivate employees to contribute to the organization’s success, the pay plans must be well designed. In particular, effective plans meet the six requirements listed on this slide.

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Jet Blue

JetBlue employees who notice a co-worker contributing to the company’s success can nominate the person for rewards by posting their appreciation on the airline’s internal social network.

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Incentive Pay 3 of 3

Motivating employees with incentives

Employees must feel the incentive plan is fair.
Give employees a say in allocating incentives.
Employees also want interesting work, appreciation for their efforts, flexibility, and a sense of belonging to the work group, and the inner satisfaction of work well done.

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Pay for Individual Performance 1 of 5

Incentives:

Piecework rates
Standard hour plans
Merit pay
Individual bonuses
Sales commissions

LO 13-2 Describe how organizations recognize individual performance.

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Pay for Individual Performance 2 of 5

Piecework rate

a wage based on the amount an employee produces

Straight piecework plan

the employer pays the same rate per piece no matter how much the worker produces

Differential piece rates

the piece rate depends on the amount produced

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Figure 13.1 How Incentives Sometimes Work

Jump to Appendix 2 long image description

Unless a plan is well designed to include performance standards, it may not reward employees for focusing on quality or customer satisfaction if it interferes with the day’s output. In Figure 13.1 the employees quickly realize they can earn huge bonuses by writing software “bugs” and then fixing them, while writing bug-free software affords no chance to earn bonuses.

©McGraw-Hill Education.

Pay for Individual Performance 3 of 5

Standard Hour Plan

An incentive plan that pays workers extra for work done in less than a preset “standard time”

Similar to piecework plans

Merit Pay

A system of linking pay increases to ratings on performance appraisals.
Use a merit increase grid.

individual’s performance rating

individual’s compa-ratio

Much like piecework plans, standard hour plans encourage employees to work as fast as they can, but not necessarily to care about quality or service. Merit pay systems gives lowest paid best performers the biggest pay increases.

©McGraw-Hill Education.

Table 13.1 Sample Merit Increase Grid Recommended Salary Increase

COMPA-RATIO*

Performance rating	80%-90%	91%-110%	111%-120%
Exceeds expectations	7%	5%	3%
Meets expectations	4%	3%	2%
Below expectations	2%	–	–
* Compa-ratio is the employee’s salary divided by the midpoint of his or her salary range.

As shown in Table 13.1, decisions about merit pay are based on two factors:

The individual’s performance rating, and
The individual’s compa-ratio (pay relative to average pay. This system gives the biggest pay increases to the best performers and to those whose pay is relatively low for their job.

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Figure 13.2 Ratings and Raises: Under-Rewarding the Best

Jump to Appendix 3 long image description

Source: Stephen Miller, “Holding Steady, Expect Salary Budgets to Rise 3.1% in 2016,” Society for Human Resource Management, July 2015, https://www.shrm.org; “WorldatWork 2015–2016 Salary Budget Survey,” July 12, 2015, https://www.worldatwork.org.

As Figure 13.2 shows, companies typically spread merit raises fairly evenly across all employees. However, experts advise making pay increases far greater for top performers than for average employees—and not rewarding the poor performers with a raise at all. Imagine if the raises given to the bottom two categories in Figure 13.2 instead went toward 7% or greater raises for the one-quarter of employees who are high performers. This type of decision signals that excellence is rewarded. As the unemployment rate continues to fall, upward pressure on wages may increase the possible range for merit increases. If average pay rises by 4% or more, there are more dollars to distribute among high- and middle-performing employees.

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Pay for Individual Performance 4 of 5

Performance Bonuses

Not rolled into base pay

The employee must re-earn them during each performance period.

May be a one-time reward

May be linked to objective performance measures, rather than subjective ratings.

Bonuses for individual performance can be extremely effective and give the organization great flexibility in deciding what kinds of behavior to reward. organizations also may motivate employees with one-time bonuses. When one organization acquires another, it usually wants to retain certain valuable employees in the organization it is buying, so organizations involved in an acquisition may pay retention bonuses —one-time incentives paid in exchange for remaining with the company—to top managers, engineers, top-performing salespeople, and information technology specialists.

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Pay for Individual Performance 5 of 5

Sales Commissions

Commissions – incentive pay calculated as a percentage of sales.
Some earn a commission in addition to a base salary.
Straight commission plan – some earn only commissions.
Some earn no commissions at all, but a straight salary.

A variation on piece rates and bonuses is the payment of commissions, or pay calculated as a percentage of sales. Commission rates vary tremendously from one industry and company to another. Paying most or all of a salesperson’s compensation in the form of salary frees the salesperson to focus on developing customer goodwill. Paying most or all of a salesperson’s compensation in the form of commissions encourages the salesperson to focus on closing sales. In this way, differences in salespeople’s compensation directly influence how they spend their time, how they treat customers, and how much the organization sells. The nature of salespeople’s compensation also affects the kinds of people who will want to take and keep sales jobs with the organization.

©McGraw-Hill Education.

Commission

Performance bonuses for production workers are not rolled into base pay. The bonuses could be tied to various measures, including the quantity of products shipped in a specific time period.

Ask students: “What type of individual might enjoy a job like this?”

Hard-driving, ambitious, risk-taking salespeople might enjoy the potential rewards of a straight commission plan. An organization that wants salespeople to concentrate on listening to customers and building relationships might want to attract a different kind of salesperson by offering more of the pay in the form of a salary. Basing part or all of a salesperson’s pay on commissions assumes that the organization wants to attract people with some willingness to take risks—probably a reasonable assumption about people whose job includes talking to strangers and encouraging them to spend money.

©McGraw-Hill Education.

Test Your Knowledge 1 of 2

John works twisting pretzels in a pretzel factory. Pablo works on IT systems integration at a credit card company. The best pay plans for these individuals would be ________ and _______, respectively.

Merit pay, individual bonus

Sales commissions; merit pay

Piecework, Merit pay

Individual bonus, sales commissions

John works twisting pretzels in a pretzel factory. Pablo works on IT systems integration a credit card company. The best pay plans for these individuals would be ________ and _______, respectively.

Merit pay, individual bonus
Sales commissions; merit pay
Piecework, Merit pay
Individual bonus, sales commissions

Answer: C

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Pay for Group Performance 1 of 3

Gainsharing

Group incentive program that measures improvements in productivity and effectiveness and distributes a portion of each to employees.

Addresses challenge of identifying appropriate performance measures for complex jobs.
Frees employees to determine how to improve their own and their group’s performance.

LO 13-3 Identify ways to recognize group performance.

Organizations that want employees to focus on efficiency may adopt a gainsharing, Knowing they can enjoy a financial benefit from helping the company be more productive, employees supposedly will look for ways to improve and work more efficiently.

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Pay for Group Performance 2 of 3

10 Conditions for Effective Gainsharing

Management commitment

Need for change or commitment to continuous improvement

Management acceptance and encouragement of employee input

High levels of cooperation and interaction

Employment security

Information sharing on productivity and costs.

Goal setting.

Commitment of all involved parties to the process of change and improvement.

Performance standard and calculation that employees understand and consider fair and that is closely related to managerial objectives.

Employees who value working in groups.

Gainsharing is most likely to succeed when organizations provide the right conditions. Among the conditions identified, the ones listed on this slide (and the following slide) are among the most common.

©McGraw-Hill Education.

Figure 13.3 Finding the Gain in a Scanlon Plan

Jump to Appendix 4 long image description

Source: Example adapted from B. Graham-Moore and Timothy L. Ross, Gainsharing: Plans for Improving Performance (Washington, DC: Bureau of National Affairs, 1990), p. 57.

A popular form of gainsharing is the Scanlon plan, developed in the 1930s by Joseph N. Scanlon, president of a union local at Empire Steel and Tin Plant in Mansfield, Ohio. The Scanlon plan gives employees a bonus if the ratio of labor costs to the sales value of production is below a set standard. In the example provided in Figure 13.3, the standard is a ratio of 20/100, or 20 percent, and the workers produced parts worth $1.2 million. To meet the standard, the labor costs should be less than 20 percent of $1.2 million, or $240,000. Since the actual labor costs were $210,000, the workers will get a gainsharing bonus based on the $30,000 difference between the $240,000 target and the actual cost.

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Pay for Group Performance 3 of 3

Group Bonuses

Tend to be for smaller work groups.
Reward the members of a group for attaining a specific goal, usually measured in terms of physical output.

Team Awards

Similar to group bonuses, but more likely to use a broad range of performance measures:

Cost savings

Successful completion of a project

Meeting deadlines

Both types of incentives have the advantage that they encourage group or team members to cooperate so that they can achieve their goal. Depending on the reward system, competition among individuals may be replaced by competition among groups. The organization should carefully set the performance goals for these incentives so that concern for costs or sales does not obscure other objectives, such as quality, customer service, and ethical behavior.

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Group bonuses

Group members that meet a sales goal or a product development team that meets a deadline or successfully launches a product may be rewarded with a bonus for group performance.

Ask students: “What are some advantages and disadvantages of group bonuses?”

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Figure 13.4 Types of Pay for Organizational Performance

Figure 13.4 Two important ways organizations measure their performance are in terms of their profits and their stock price. In a competitive marketplace, profits result when an organization is efficiently providing products that customers want at a price they are willing to pay. Stock is the owners’ investment in a corporation; when the stock price is rising, the value of that investment is growing. Rather than trying to figure out what performance measures will motivate employees to do the things that generate high profits and a rising stock price, many organizations offer incentive pay tied to those organizational performance measures. The expectation is that employees will focus on what is best for the organization.

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Pay for Organizational Performance 1 of 2

Profit sharing

Incentive pay in which payments are a percentage of the organization’s profits and do not become part of the employees’ base salary.
May encourage employees to think like owners.
Evidence is not clear whether profit sharing helps organizations perform better.

13-45 Explain how organizations link pay to their overall performance.

Given the limitations of profit sharing plans, one strategy is to use them as a component of a pay system that includes other kinds of pay more directly linked to individual behavior. This increases employees’ commitment to organizational goals while addressing concerns about fairness.

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Pay for Organizational Performance 2 of 2

Stock Ownership

Stock Options

Rights to buy a certain number of shares of stock at a specified price.
Traditionally, stock options have been granted to executives.

ESOPs

(ESOP) – an arrangement in which the organization distributes shares of stock to all its employees by placing it in a trust.
Most common form of employee ownership.

While profit-sharing plans are intended to encourage employees to “think like owners,” a stock ownership plan actually makes employees part owners of the organization. Like profit sharing, employee ownership is intended as a way to encourage employees to focus on the success of the organization as a whole. Some companies are trying to push eligibility for options further down the organization’s structure.

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Figure 13.5 Number of ESOPs

Jump to Appendix 5 long image description

Source: National Center for Employee Ownership, “A Statistical Profile of Employee Ownership,” updated December 2015, http://www.nceo.org.

In an ESOP, the organization distributes shares of stock to its employees by placing the stock into a trust managed on the employees’ behalf. Employees receive regular reports on the value of their stock, and when they leave the organization, they may sell the stock to the organization or (if it is a publicly traded company) on the open market. ESOPs are the most common form of employee ownership, with the number of employees in such plans increasing from approximately 250,000 in 1975 to more than 10 million active participants (those who are currently employed and earning benefits).The number of participants has grown even while the number of companies offering ESOPs has shrunk somewhat, as shown in Figure 13.5.

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Test Your Knowledge 2 of 2

For each of the following jobs, identify the best type of incentive (e.g., individual, group, organizational). Be prepared to explain your answer.

Director of Marketing, Pepsi

Recruiter, Verizon

Cashier, CVS (drugstore)

Salesperson, Macy’s

Individual

Group

Organizational

Use this question as way to start discussion about the issues when applying incentive pay programs to different types of jobs. Depending on their rationale, there could be multiple correct answers. For each of the following jobs, identify the best type of incentive (e.g., individual, group, organizational) and explain why you chose it.

Director of Marketing, Pepsi – B or C; probably need to be a part of a team, so individual contribution could be measured by success of the marketing team, could receive portion of the proceeds attributed to increased market share by her team
Recruiter, Verizon- A or B; could be individual, although you’d need a good tracking system, would want as many good people as possible, could cause problems if it got too competitive
Cashier, CVS (drugstore) C – organizational because can’t really reward individually unless you were able to monitor customer service, performing the cashier job does not have tremendous variability so may want to reward staying with the company by promising the chance to share the organization’s profits
Salesperson, Macy’s; A or B– could definitely be individual because you can track purchases made by salesperson, want them to sell as much as possible

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Balanced Scorecard

Balanced scorecard

A combination of performance measures directed toward the company’s long- and short-term goals and used as the basis for awarding incentive pay.

Four categories of a balanced scorecard include:

financial

customer

internal

learning and growth

Any form of incentive pay has advantages and disadvantages. Because of this, many organizations design a mix of pay programs. The aim is to balance the disadvantages of one type of incentive pay with the advantages of another type. One way of accomplishing this goal is to design a balanced scorecard – a combination of performance measures directed toward the company’s long- and short-term goals and used as the basis for awarding incentive pay.

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Table 13.2 Sample Balanced Scorecard for an Electric Cooperative 1 of 2

Goals
Performance category	Critical success factors	Base (2%)	Target (3%)	Stretch (5%)
Member service (40% of incentive pay)	Reliability (average interruption duration)	140 minutes	130 minutes	120 minutes
Customer satisfaction (index from quarterly survey.	9.0	9.1	9.2
Financial performance (25% of incentive pay)	Total operating expenses (¢/kilowatt-hour)	4.03¢	3.99¢	3.95¢
Cash flow (% of investment)	75%	80%	85%

Organizations customize their balanced scorecards according to their markets, products, and objectives. The scorecards of a company that is emphasizing low costs and prices would be different from the scorecards of a company emphasizing innovative use of new technology. Table 13.2 shows the kinds of information that go into a balanced scorecard. The balanced scorecard combine the advantages of different incentive-pay plans and helps employees understand the organization’s goals. By communicating the balanced scorecard to employees, the organization shows employees information about what its goals are and what it expects employees to accomplish. In Table 13.2, for example, the organization indicates not only that the manager should meet the four performance objectives but also that it is especially concerned with the financial target, because half the incentive is based on this one target. This scorecard for an Electric Cooperative includes four performance measures:

Financial performance
Internal processes
Innovation and learning

Member service. Table 13.2, the organization indicates not only that the manager should meet the four performance objectives but also that it is especially concerned with the financial target because half the incentive is based on this one target.

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Table 13.2 Sample Balanced Scorecard for an Electric Cooperative 2 of 2

Source: Adapted from Tim Sullivan and Henry Cano, “Introducing a Balanced Scorecard for Elective Cooperatives: A Tool for Measuring and Improving Results,” Management Quarterly, Winter 2009, Business & Company Resource Center, http://galenet.galegroup.com

Goals
Performance category	Critical success factors	Base (2%)	Target (3%)	Stretch (5%)
Internal processes (20% of incentive pay	Safety (safety index based on injury rate and severity)	4.6	3.6	2.6
Innovation and learning (15% of incentive pay)	Member value (revenue/kWh sold)	Budget	– 10% state median	-13% state median
Efficiency and effectiveness (total margins/number of employees)	$534,400	$37,200	$40,000

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Processes That Make Incentives Work

Participation in Decisions

Employee participation in pay-related decisions can be part of a general move toward employee empowerment.
Employee participation can contribute to the incentive plan’s success.

Communication

Communication demonstrates that the pay plan is fair.
When employees understand the incentive pay plan’s requirements, the plan is more likely to influence their behavior as desired.
Important when changing the pay plan.

Communication and employee participation can contribute to the belief that the organization’s pay structure is fair. The process by which the organization creates and administers incentive pay can help it use incentives to achieve the goal of motivating employees. . It is particularly important to communicate with employees when changing the plan. Employees tend to feel concerned about changes. Pay is a frequent topic of rumors and assumptions based on incomplete information, partly because of pay’s importance to employees. When making any changes, the human resource department should determine the best ways to communicate the reasons for the change.

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Incentive Pay for Executives 1 of 3

Short-Term Incentives

Bonuses based on ROI, year’s profits, or other measures related to the organization’s goals.
Actual payment of bonus may be delayed to gain tax advantages.

Long-Term Incentives

Include stock options and stock purchase plans.
Rationale is that executives will want to do what is best for the organization because that will cause the value of their stock to grow.

LO 13-7 Discuss issues related to performance-based pay for executives.

Because executives have a much stronger influence over the organization’s performance than other employees do, incentive pay for executives warrants special attention. Researchers have tried in vain to find a link between the size of CEOs’ incentive pay and companies’ performance in terms of profits or other financial measures. In an analysis of CEO pay at 300 large U.S.-traded companies, none of the 10 top-paid CEOs worked for companies that attained the top 10% in terms of performance, even though their pay far exceeded the median. And in a study that compared historical CEO pay with the companies’ performance over the following three years, CEOs who earned in the top 10% saw their companies do increasingly worse than others over the three years that followed. A corporation’s shareholders—its owners—want the corporation to encourage managers to act in the owners’ best interests. They want managers to care about the company’s profits and stock price, and incentive pay can encourage this interest. Relying on such long-term incentives is associated with greater profitability.

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Incentive Pay for Executives 2 of 3

Performance Measures for Executives

Balanced scorecard
Securities and Exchange Commission (SEC) has required companies to more clearly report executive compensation levels and the company’s performance relative to that of competitors
Dodd-Frank Wall Street Reform and Consumer Protection Act requires that public companies report the ratio of median compensation of all its employees to the CEO’s total compensation

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Incentive Pay for Executives 3 of 3

Ethical Issues

Executives need to be honest about their company’s performance even when dishonesty or shading of the truth offers the tempting potential for large earnings.
Insider trading

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Summary 1 of 4

Organizations may recognize individual performance through such incentives as piecework rates, standard hour plans, merit pay, sales commissions, and bonuses for meeting individual performance objectives.
Group incentives include gainsharing, bonuses, and team awards.
Incentives for meeting organizational objectives include profit sharing and stock ownership.

Piecework rates pay employees according to the amount they produce. Standard hour plans pay workers extra for work done in less than a preset “standard time.” Merit pay links increases in wages or salaries to ratings on performance appraisals. Bonuses are similar to merit pay, because they are paid for meeting individual goals, but they are not rolled into base pay, and they usually are based on achieving a specific output, rather than subjective performance ratings. A sales commission is incentive pay calculated as a percentage of sales closed by a salesperson. Gainsharing programs, such as Scanlon plans, measure increases in productivity and distribute a portion of each gain to employees. Group bonuses reward the members of a group for attaining a specific goal, usually measured in terms of physical output. Team awards are more likely to use a broad range of performance measures, such as cost savings, successful completion of a project, or meeting a deadline. Profit sharing plans pay workers a percentage of the organization’s profits; these payments do not become part of the employees’ base salary. Stock ownership incentives may take the form of stock options or employee stock ownership plans.

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Summary 2 of 4

Communication is especially important when the organization is changing its pay plan.
Because executives have such a strong influence over the organization’s performance, incentive pay for them receives special attention.
Performance measures should encourage behavior that is in the organization’s best interests, including ethical behavior.

Communicating with employees is important because it demonstrates that the pay plan is fair and helps them understand what is expected of them. Executives need ethical standards that keep them from insider trading or deceptive practices designed to manipulate the organization’s stock price. includes financial goals to satisfy stockholders, quality- and price-related goals for customer satisfaction, efficiency goals for improved operations, and goals related to acquiring skills and knowledge for the future.

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Summary 3 of 4

A balanced scorecard can be used as the basis for awarding incentive pay. It helps employees to understand and care about the organization’s goals.
It includes financial goals to satisfy stockholders, quality- and price-related goals for customer satisfaction, efficiency goals for improved operations, and goals related to acquiring skills and knowledge for the future.

Mix of pay programs is intended to balance disadvantages of one type of incentive with advantages of another type.

©McGraw-Hill Education.

Summary 4 of 4

Incentives for meeting organizational objectives include profit sharing and stock ownership.
Profit-sharing plans pay workers a percentage of the organization’s profits; these payments do not become part of the employees’ base salary.
Stock ownership incentives may take the form of stock options or employee stock ownership plans.
Ethical issues may be an issue in executive incentive pay.

A stock option is the right to buy a certain number of shares at a specified price. The employee benefits by exercising the option at a price lower than the market price, so the employee benefits when the company’s stock price rises. value the rewards, have the resources they need to meet the standards, and believe the pay plan is fair. Organizations may recognize individual performance through such incentives as piecework rates, standard hour plans, merit pay, sales commissions, and bonuses for meeting individual performance objectives.

•A stock option is the right to buy a certain number of shares at a specified price. The employee benefits by exercising the option at a price lower than the market price, so the employee benefits when the company’s stock price rises.

©McGraw-Hill Education.

Appendix 1 Employers Stress Merit Pay to Retain Workers

Four components are listed, with the percentage of each used in compensation plans to attract and keep talent.

Merit-based pay 33 percent.

Discretionary incentives 16 percent.

Nondiscretionary incentives 11 percent.

Stock options or grants 6 percent.

Return to slide

©McGraw-Hill Education.

Appendix 2 Figure 13.1 How Incentives Sometimes Work

Panel 1. Boss says, our goal is to write bug-free software. I’ll pay a ten-dollar bonus for every bug you find and fix.

Panel 2. Employees are shown rejoicing, shouting yahoo! We’re rich! And yes, yes, yes!

Panel 3. The boss says, I hope this drives the right behavior. Meanwhile, an employee states, I’m gonna write me a new minivan this afternoon!

Return to slide

©McGraw-Hill Education.

Appendix 3 Figure 13.2 Ratings and Raises – Under-rewarding the Best

High performers get an average pay increase of 4.1 percent. Middle performers 2.6 percent, and low performers .6 percent.

Return to slide

©McGraw-Hill Education.

Appendix 4 Figure 13.3 Finding the Gain in a Scanlon Plan

Target ratio is labor costs to by sales value of production. In this example, it’s 20/100.

Sales value of production is 1,200,000 dollars.

The goal is the target ratio of 20/100 multiplied by 1,200,000 dollars. This equals 240,000 dollars.

The actual is 210,000. 240,000 dollars minus 210,000 dollars equals a gain of 30,000 dollars.

Return to slide

©McGraw-Hill Education.

Appendix 5 Figure 13.5 Number of ESOPs

1975: 1,500 ESOPs

2002: 9,000 ESOPs

2007: 7,000 ESOPs

2013: 6,500 ESOPs

Return to slide

After reading and discussing this chapter, you need to know:

LO 13-2 Describe how organizations recognize individual performance.

As shown in Table 13.1, decisions about merit pay are based on two factors:

The individual’s performance rating, and
The individual’s compa-ratio (pay relative to average pay. This system gives the biggest pay increases to the best performers and to those whose pay is relatively low for their job.

Ask students: “What type of individual might enjoy a job like this?”

John works twisting pretzels in a pretzel factory. Pablo works on IT systems integration a credit card company. The best pay plans for these individuals would be ________ and _______, respectively.

Merit pay, individual bonus
Sales commissions; merit pay
Piecework, Merit pay
Individual bonus, sales commissions

Answer: C

LO 13-3 Identify ways to recognize group performance.

Ask students: “What are some advantages and disadvantages of group bonuses?”

13-45 Explain how organizations link pay to their overall performance.

Director of Marketing, Pepsi – B or C; probably need to be a part of a team, so individual contribution could be measured by success of the marketing team, could receive portion of the proceeds attributed to increased market share by her team
Recruiter, Verizon- A or B; could be individual, although you’d need a good tracking system, would want as many good people as possible, could cause problems if it got too competitive
Cashier, CVS (drugstore) C – organizational because can’t really reward individually unless you were able to monitor customer service, performing the cashier job does not have tremendous variability so may want to reward staying with the company by promising the chance to share the organization’s profits
Salesperson, Macy’s; A or B– could definitely be individual because you can track purchases made by salesperson, want them to sell as much as possible

Financial performance
Internal processes
Innovation and learning

LO 13-7 Discuss issues related to performance-based pay for executives.

Mix of pay programs is intended to balance disadvantages of one type of incentive with advantages of another type.

Chapter 11 SEPARATING AND RETAINING EMPLOYEES

This chapter explores the dual challenges of separating and retaining employees. Topics include distinguishing involuntary and voluntary turnover, separation process, including ways to manage this process fairly and measures the organization can take to encourage employees to stay and describes measures to take depending on whether performance is high or low.

©McGraw-Hill Education.

What Do I Need to Know?

LO 11-1 Distinguish between involuntary and voluntary turnover, and describe their effects on an organization.

LO 11-2 Discuss how employees determine whether the organization treats them fairly.

LO 11-3 Identify legal requirements for employee discipline.

LO 11-4 Summarize ways in which organizations can discipline employees fairly.

LO 11-5 Explain how job dissatisfaction affects employee behavior.

LO 11-6 Describe how organizations contribute to employees’ job satisfaction and retain key employees.

After reading and discussing this chapter, you should be able to:

©McGraw-Hill Education.

Introduction

Organizations need to manage high-performing and low-performing employees
Retaining employees helps retain customers and increase sales.
Organizations with low turnover and satisfied employees tend to perform better

This chapter explores the dual challenges of separating and retaining employees. Organizations want to keep their high-performing employees. Retaining employees helps retain customers and increase sales. Organizations with low turnover and satisfied employees tend to perform better. Organizations have to act when an employee’s performance consistently falls short. Sometimes terminating a poor performer is the only way to show fairness, ensure quality, and maintain customer satisfaction.

©McGraw-Hill Education.

Managing Voluntary and Involuntary Turnover 1 of 3

What was the primary reason you’ve ever quit a job?

I did not like my boss or coworkers

I was not a fit with the company culture

Better pay somewhere else

More interesting or challenging work somewhere else

I was fired or laid off

Other

LO 11-1 Distinguish between involuntary and voluntary turnover, and describe their effects on an organization.

Retaining employees helps retain customers and investors.

What was the primary reason you’ve ever quit a job?

Didn’t like my boss
I wasn’t a fit with the company culture
Better pay somewhere else
More interesting or challenging work somewhere else
I’ve never quit a job
Other
Ask students to comment on their answers. Link these comments to the concepts of voluntary and involuntary turnover from the employee’s perspective and functional vs. dysfunctional turnover from the employer’s perspective.

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Managing Voluntary and Involuntary Turnover 2 of 3

Involuntary Turnover

Turnover initiated by an employer.
Often with employees who would prefer to stay.

Voluntary Turnover

Turnover initiated by employees.
Often when the organization would prefer to keep them.

Organizations must try to ensure that good performers want to stay with the organization and that employees whose performance is chronically low are encouraged – or forced – to leave. Both of these challenges involve employee turnover – employees leaving the organization. Typically, the employees who leave voluntarily are either the organization’s worst performers, who quit before they are fired, or its best performers, who can most easily find attractive new opportunities.

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Table 11.1: Costs Associated with Turnover

Involuntary Turnover	Voluntary Turnover
Recruiting, selecting, and training replacements	Recruiting, selecting, and training replacements
Lost productivity	Lost productivity
Lawsuits	Loss of talented employees
Workplace violence

Organizations try to avoid the need for involuntary turnover and to minimize voluntary turnover, especially among top performers. Both kinds of turnover are costly, as summarized in Table 11.1. Replacing workers is expensive, and new employees need time to learn their jobs and build teamwork skills. Effective HRM can help the organization minimize both kinds of turnover, as well as carry it out effectively when necessary. Despite a company’s best efforts at personnel selection, training, and compensation, some employees will fail to meet performance requirements or will violate company policies.

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Managing Voluntary and Involuntary Turnover 3 of 3

Employment-at-Will Doctrine

If the organization and employee do not have a specific employment contract, the employer or employee may end the employment relationship at any time.
Implied contracts
Discharge cannot violate a law or public policy

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Test Your Knowledge 1 of 5

True (A) or False (B)

A manager who decides to fire an employee should quietly take action alone and then let others know afterwards.

Separating employees has financial and personal risks.

True (A) or False (B)

A manager who decides to fire an employee should quietly take action alone and then let others know afterwards.
Separating employees has financial and personal risks.

Answers: 1. B, 2. A.

Because of the critical financial and personal risks associated with employee dismissal, organizations must develop a standardized, systematic approach to discipline and discharge.
These decisions should not be left solely to the discretion of individual managers and supervisors.
Policies that can lead to employee separation should be based on the principles of justice and law and should allow for various ways to intervene.

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Employee Separation 1 of 11

Organizations must develop a standardized, systematic approach to discipline and discharge
Not to be left solely to the discretion of individual managers or supervisors
Should be based on principles of justice and law
Should allow for various ways to intervene

Because of the critical financial and personal risks associated with employee dismissal, it is easy to see why organizations must develop a standardized, systematic approach to discipline and discharge.

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Employee Separation 2 of 11

A judgment that the consequences given to employees are just.

Outcome Fairness

A judgment that the organization carried out its actions in a way that took the employee’s feelings into account.

Interactional Justice

A judgment that fair methods were used to determine the consequences an employee receives.

Procedural Justice

LO 11-2 Discuss how employees determine whether the organization treats them fairly.

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Figure 11.1: Principles of Justice

Jump to Appendix 1 long image description

The sensitivity of a system for disciplining and possibly terminating employees is obvious, and it is critical that the system be seen as fair. Employees form conclusions about the system’s fairness based on the system’s outcomes and procedures and the way managers treat employees when carrying out those procedures.

Figure 11.1 shows six principles that determine whether people perceive procedures as fair. The procedures should be consistent from one person to another, and the manager using them should suppress any personal biases.

Outcome fairness
Procedural justice
Interactional justice. The procedures should be based on accurate information, not rumors or falsehoods. The procedures should also be correctable, meaning the system includes safeguards, such as channels for appealing a decision or correcting errors. The procedures should take into account the concerns of all the groups affected—for example, by gathering information from employees, customers, and managers and be consistent with prevailing ethical standards, such as concerns for privacy and honesty.

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Test Your Knowledge 2 of 5

A company whose earnings are very low has to reduce the amount given in raises to avoid laying people off. The amount of the raise for each employee is determined objectively based on their performance. An employee working for this company will most likely feel ____________ and _________________.

High outcome fairness; high interactional injustice

Low outcome fairness; high procedural justice

Low interactional justice, high outcome fairness

Low outcome fairness, low procedural justice

A company whose earnings are very low has to reduce the amount given in raises to avoid laying people off. The amount of the raise for each employee is determined based on their performance. An employee working for this company will most likely feel ____________ and _________________.

High outcome fairness; high interactional injustice
Low outcome fairness; high procedural justice
Low interactional justice, high outcome fairness
Low outcome fairness, low procedural justice

Answer: B

It is possible to be unhappy with the outcome but not feel that it is unfair. For example, a company whose earnings are very low and has to reduce raises to avoid laying people off, the employee may not be happy with the low raise but will not perceive it as unfair because they realize the same is happening to everyone else and there is a good reason – poor performance of the company.

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Employee Separation 3 of 11

Legal Requirements

Wrongful Discharge

Discharge may not violate an implied agreement.

e.g., employer had promised job security

e.g. action inconsistent with company rules.

Discharge may not violate public policy.

e.g., terminating employee for refusing to do something illegal or unsafe.

Discrimination

Employers must make discipline decisions without regard to a person’s age, sex, race, or other protected status.
Evenhanded, carefully documented discipline can avoid such claims.

LO 11-3 Identify legal requirements for employee discipline.

The law gives employers wide latitude in hiring and firing, but employers must meet certain requirements. They must avoid wrongful discharge and illegal discrimination. They also must meet standards related to employees’ privacy and adequate notice of layoffs. These considerations are discussed on this and the next slide.

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Employee Separation 4 of 11

Employees’ Privacy

Information gathered and used for discipline must be relevant.
Privacy issues concerning the employer’s wish to search or monitor employees.
Employers must be prudent in deciding who will see the information

Searches and surveillance should be for a legitimate business purpose, and employees should know about and consent to them. Social media is another area where employers have considered employees’ personal activities to be relevant. For example, . Hospitals have discovered that their employees discussed patients on Facebook, which is illegal as well as unethical.

Question: Under what conditions do you think an employer should monitor employees’ personal use of social media?

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Table 11.2 Measures for Protecting Employees’ Privacy

Ensure that information is relevant.

Publicize information-gathering policies and consequences.

Request consent before gathering information.

Treat employees consistently.

Conduct searches discreetly.

Share information only with those who need it.

No matter how sensitively the organization gathers information leading to disciplinary actions, it should also consider privacy issues when deciding who will see the information. Table 11.2 summarizes the measures for protecting employees’ privacy.

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Test Your Knowledge 3 of 5

Pam Jones worked for 41 years at the same company and had positive performance ratings and personnel records. She needed a calculator for work which she purchased with her own money but was not reimbursed because she lost the receipt. Later, a security guard stopped her as she was leaving work and discovered the calculator in her belongings. After a brief internal investigation, she was fired and it was announced through internal notices that she had committed a theft. The employee sued for libel, saying the company used her as an example to prevent other thefts.

Read the following passage to the class: Pam Jones worked for 41 years at the same company and had positive performance ratings and personnel records. She needed a calculator for work which she purchased with her own money but was not reimbursed because she lost the receipt. Later, a security guard stopped her as she was leaving work and discovered the calculator in her belongings. After an brief internal investigation, she was fired and it was announced through internal notices that she had committed a theft. The employee sued for libel, saying the company used her as an example to prevent other thefts.

What are the key issues in the case?
Employee privacy, why were they searching employees on the way out? Could be indicator of poor, distrustful culture.
As the HR Director, how would you resolve this case?
Student’s answers will vary but should indicate a sense of due process for the employee and sensitivity around publicizing this event internally.
This is based on an actual case where the plaintiff won millions from the company.

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Employee Separation 5 of 11

Notification of Layoffs

Organizations that plan broad-scale layoffs may be subject to the Workers’ Adjustment Retraining and Notification Act (WARN)
Employers required to give notice before any closing or layoff

Sometimes terminations are necessary not because of individuals’ misdeeds, but because the organization determines that for economic reasons it must close a facility. An organization that plans such broad-scale layoffs may be subject to the Workers’ Adjustment Retraining and Notification Act. This federal law requires that organizations with more than 100 employees give 60 days’ notice before any closing or layoff that will affect at least 50 full-time employees. Seek legal advice before implementing a plant closing

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Test Your Knowledge 4 of 5

After hiring Bob for a newly created marketing specialist position, his boss assures him that he will be secure in the job until he retires. A year later, that department is eliminated. Bob complains he was guaranteed employment until retirement. Is he right?

No, an employer can hire or fire someone whenever they want.

No, there was no written contract.

Yes, he was given a verbal contract.

No, an employer can hire or fire someone whenever they want.
No, there was no written contract.
Yes, he was given a verbal contract.
Answer C, verbal contracts such as this have held up in courts in some states. Employers have to be careful how they frame the positions to employees. They don’t want to overemphasize the fact employment is at will but they also don’t want to make any guarantees they can’t fulfill.

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Employee Separation 6 of 11

Progressive Discipline

Hot-Stove Rule

Principle of discipline that says discipline should be like a hot stove, giving clear warning and following up with consistent, objective, and immediate consequences.

Progressive Discipline

A formal discipline process in which the consequences become more serious if the employee repeats the offense.

LO 11-4 Summarize ways in which organizations can discipline employees fairly.

Hot-Stove Rule- principle of discipline that says discipline should be like a hot stove, giving clear warning and following up with consistent, objective, immediate consequences. The glowing or burning stove gives warning not to touch. Anyone who ignores the warning will be burned. The stove has no feelings to influence which people it burns, and it delivers the same burn to any touch and is immediate. Like the hot stove, an organization’s discipline should give warning and have consequences that are consistent, objective, and immediate.

Progressive discipline- organizations look for methods of handling problem behavior that are fair, legal, and effective. The principles of justice suggest that the organization prepare for problems by establishing a formal discipline process in which the consequences become more serious if the employee repeats the offense. Such a system is called progressive discipline.

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Figure 11.2: Progressive Discipline Responses

Jump to Appendix 2 long image description

A typical progressive discipline system identifies and communicates unacceptable behaviors and responds to a series of offenses with the actions shown in Figure 11.2 –spoken and then written warnings, temporary suspension, and finally, termination. This process fulfills the purpose of discipline by teaching employees what is expected of them and creating a situation in which employees must try to do what is expected. It seeks to prevent misbehavior (by publishing rules) and to correct, rather than merely punish, misbehavior. A progressive discipline system should have requirements for documenting the rules, offenses, and responses. should provide an opportunity to hear every point of view and to correct errors, following a procedure that is consistent for all employees.

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Employee Separation 7 of 11

Rules of behavior should cover disciplinary problems such as:

Tardiness

Absenteeism

Unsafe work practices

Poor quantity or quality of work

Sexual harassment

Impaired by alcohol or drugs

Theft of company property

Cyberslacking

Creating a formal discipline process is a primary responsibility of the human resource department. For each infraction, the HR professional would identify a series of responses, such as those in Figure 11.2. In addition, the organization must communicate these rules and consequences in writing to every employee.

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Figure 11.3 Options for Alternative Dispute Resolution

Sometimes problems are easier to solve when an impartial person helps to create the solution. ADR methods of solving a problem by bringing in an impartial outsider but not using the court system. Generally, a system for alternative dispute resolution proceeds through the four stages shown in Figure 11.3. They are briefly summarized on the next two slides.

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Employee Separation 8 of 11

Alternative Dispute Resolution

Open-Door Policy

An organization’s policy of making managers available to hear complaints.

Peer Review

Process for resolving disputes by taking them to a panel composed of representatives from the organization at same levels as the people in the dispute.

Organizations also may resolve problems through alternative dispute resolution, including an open-door policy, peer review, mediation, and arbitration. Typically, the first “open door” is that of the employee’s immediate supervisor, and if the employee does not get a resolution from that person, the employee may appeal to managers at higher levels. This policy works only to the degree that employees trust management and managers who hear complaints listen and are able to act.

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Employee Separation 9 of 11

Alternative Dispute Resolution (continued)

Mediation

Nonbinding process in which a neutral party from outside the organization hears the case and tries to help the people in a conflict arrive at a settlement.

Arbitration

Binding process in which a professional arbitrator from outside the organization (usually a lawyer or judge) hears the case and resolves it by making a decision.

Mediation process is not binding, meaning the mediator cannot force a solution. Typically, an ADR process begins with an open-door policy, which is the simplest, most direct, and least expensive way to settle a dispute. When the parties to a dispute cannot resolve it themselves, the organization can move the dispute to peer review, mediation, or arbitration. At some organizations, if mediation fails, the process moves to arbitration as a third and final option. Although arbitration is a formal process involving an outsider, it tends to be much faster, simpler, and more private than a lawsuit.

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Employee Separation 10 of 11

Employee assistance programs (EAP)

A referral service that employees can use to seek professional treatment for emotional problems or substance abuse.
Many EAPs are fully integrated into employers’ overall health benefits plans.

While ADR is effective in dealing with problems related to performance and disputes between people at work, many of the problems that lead an organization to want to terminate an employee involve drug or alcohol abuse. In these cases, the organization’s discipline program should also incorporate an employee assistance program (EAP).

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Employee Separation 11 of 11

Outplacement counseling

A service in which professionals try to help dismissed employees manage the transition from one job to another.
Goals are to help former employee address psychological issues associated with losing a job- grief, depression and fear, while helping them find a new job.

An employee who has been discharged is likely to feel angry and confused about what to do next. If the person feels that there is nothing to lose and nowhere else to turn, the potential for violence or a lawsuit is greater than most organizations are willing to tolerate. This concern is one reason many organizations provide outplacement counseling. Whatever the reason for downsizing, asking employees to leave is a setback for the employee and for the company. Retaining people who can contribute knowledge and talent is essential to business success.

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Employee Engagement

Employee engagement is the degree to which employees are fully involved in their work and the strength of their commitment to their job and company.

Employees who are engaged and provide a clear competitive advantage to that firm, including higher productivity, better customer service and lower turnover.

Some survey results suggest that less than one-third of employees consider themselves as engaged. Still, some companies have managed to sustain and improve engagement levels during the recession by systematically gathering feedback from employees, analyzing their responses, and implementing changes. In these companies, engagement measures are considered as important as customer service or financial data.

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Job Withdrawal 1 of 2

Job Withdrawal

A set of behaviors with which employees try to avoid the work situation physically, mentally, or emotionally.
Results when circumstances such as the nature of the job, supervisors and coworkers, pay levels, or the employee’s own disposition cause the employee to become dissatisfied with the job.

Organizations need employees who are fully engaged and committed to their work. Therefore, retaining employees goes beyond preventing them from quitting. The organization needs to prevent a broader negative condition, called job withdrawal.

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Figure 11.4 Job Withdrawal Process

Jump to Appendix 3 long image description

LO 11-5 Explain how job dissatisfaction affects employee behavior.

As shown in Figure 11.4, job dissatisfaction produces job withdrawal. The causes of job dissatisfaction identified in Figure 11.4 fall into four categories: personal dispositions, tasks and roles, supervisors and co-workers and pay and benefits. Job withdrawal may take the form of:

Behavior change
Physical job withdrawal
Psychological job withdrawal

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Job Withdrawal/Job Dissatisfaction

Personal Dispositions

Negative affectivity

Core self-evaluations

Tasks & Roles

Role ambiguity, conflict and overload

Supervisors and Coworkers

Negative behavior by managers

Conflicts between employees

Pay & Benefits

Pay is an indicator of status

Pay & benefits enhance self-worth

Many aspects of people and organizations can cause job dissatisfaction, and managers and HR professionals need to be aware of them because correcting them can increase job satisfaction and prevent job withdrawal. Employees want regular performance feedback from their supervisors and want their ideas to be heard. They also have expectations from seniors, including honest communication and a workplace that enables high performance. Interestingly, employees are more engaged when their supervisors give negative feedback, focused on their weaknesses, than when supervisors give no feedback Ideally, managers should catch and correct job dissatisfaction early, because there is evidence linking changes in satisfaction levels to turnover: when satisfaction is falling, employees are far more likely to quit. Two other personal qualities associated with job satisfaction are negative affectivity and negative self-evaluations. People with negative affectivity experience feelings such as anger, contempt, disgust, guilt, fear, and nervousness more than other people do, at work and away. They tend to focus on the negative aspects of themselves and others and tend to be dissatisfied with their jobs, even after changing employers or occupations. Core self-evaluations are bottom-line opinions individuals have of themselves and may be positive or negative. People with a positive core self-evaluation have high self-esteem, believe in their ability to accomplish their goals, are emotionally stable and tend to experience job satisfaction. people with negative core self-evaluations tend to blame other people for their problems, including their dissatisfying jobs. They are less likely to work toward change; they either do nothing or act aggressively toward the people they blame. Negative affectivity means pervasive low levels of satisfaction with all aspects of life, compared with other people’s feelings.

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Role conflicts

Military reservists who are sent overseas often experience role conflict among three roles: soldier, family member, and civilian employee. Overseas assignments often intensify role conflicts.

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Job Withdrawal 2 of 2

Behavior change

Whistle-blowing

Lawsuits

Physical job withdrawal

Psychological withdrawal

Decrease in job involvement

Decrease in organizational commitment

The driving force behind job withdrawal is dissatisfaction. Most employers would prefer to avoid lawsuits and whistle-blowing. Keeping employees satisfied is one way to do this.

Behavior change

Change the condition – use the internal system for making complaints or the grievance process Whistle-blowing – going outside the organization to authorities or regulatory agencies describing the actions of their employer
Lawsuits – filing suit against an employer for unfair treatment or discrimination

Physical job withdrawal:

Arriving late
Calling in sick
Requesting a transfer
Leaving the organization

Psychological Withdrawal:

Decrease in job involvement – the degree to which people identify themselves with their jobs.
Decrease in organizational commitment – the degree to which an employee identifies with the organization and is willing to put forth effort on its behalf.

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Job Satisfaction 1 of 7

Job satisfaction

a pleasant feeling resulting from the perception that one’s job fulfills or allows for the fulfillment of one’s important job values.
3 components of job satisfaction are:

Values

Perceptions

Ideas of what is important

LO 11-6 Describe how organizations contribute to employees’ job satisfaction and retain key employees.

Organizations want to prevent withdrawal behaviors. To prevent job withdrawal, organizations need to promote job satisfaction. People will be satisfied with their jobs as long as they perceive that their jobs meet their important values. Two other aspects of pay satisfaction influence job satisfaction- satisfaction

with pay structure—the way the organization assigns different pay levels to different levels and job categories and pay raises.

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Job Satisfaction 2 of 7

Personal Dispositions

Negative affectivity and negative core self-evaluation, are associated with job dissatisfaction
A positive attitude often raises overall levels of employee satisfaction

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Figure 11.5 Increasing Job Satisfaction

Jump to Appendix 4 long image description

As shown in Figure 11.5, organizations can contribute to job satisfaction by addressing the four sources of job dissatisfaction:

Personal dispositions
Job tasks and roles
Supervisors and coworkers

Pay and benefits. Sometimes personal qualities of the employee, such as negative affectivity and negative core self-evaluation, are associated with job dissatisfaction. This linkage suggests employee selection in the first instance plays a role in raising overall levels of employee satisfaction. Interviews should explore employees’ satisfaction with past jobs. If an applicant says he was dissatisfied with his past six jobs, what makes the employer think the person won’t be dissatisfied with the organization’s vacant position? Employers should recognize that dissatisfaction with other facets of life can spill over into the workplace. A worker who is having problems with a family member may attribute some of the negative feelings to the job or organization. When it comes to generating satisfaction, the most important aspect of work is the degree to which it is meaningfully related to workers’ core values.

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Figure 11.6 Steps in the Role Analysis Technique

Jump to Appendix 5 long image description

Role analysis technique: A process of formally identifying expectations associated with a role. Because role problems rank just behind job problems in creating job dissatisfaction, some interventions aim directly at role elements. Figure 11.6 shows the steps involved in the role analysis technique.

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Job Satisfaction 3 of 7

Tasks and Roles

Job complexity
Meaningful work
Clear and appropriate roles
Role analysis technique – formally identifying expectations associated with a role

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Job Satisfaction 4 of 7

Supervisors and Co-Workers

Both can affect an employee’s job satisfaction.
A person may be satisfied with them because they

share same values, attitudes, and philosophies.

provide social support, meaning they are sympathetic and caring.

help the person attain some valued outcome.

When employees are satisfied with their jobs and want to stay, they tend to make ethical decisions to a greater degree than employees who are not satisfied. The satisfied employees also tend to be more cooperative and more inclined to help out their coworkers. Because a supportive environment reduces dissatisfaction, many organizations foster team building both on and off the job (such as with softball or bowling leagues). The idea is that playing together as a team will strengthen ties among group members and develop relationships in which individuals feel supported by one another.

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Job Satisfaction 5 of 7

Pay and Benefits

HR should monitor pay levels in their industry and the trades they employ
Two aspects of pay satisfaction influence job satisfaction
Satisfaction with pay structure
Pay raises

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Job Satisfaction 6 of 7

How can an organization measure whether efforts to have fun at work and build positive work relationships can actually translate to greater job satisfaction?

Ask students: “Would a strong sense of teamwork and friendship help you enjoy your work more?”

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Test Your Knowledge 5 of 5

Serena feels her job processing payroll checks is boring and uninteresting. Which intervention would be most appropriate to retain Serena?

Communicating the companies values

Increasing her pay

Expanding her job

Hiring someone she can chat with during the day

Serena feels her job processing payroll checks is boring and uninteresting. Which intervention would be most appropriate to retain Serena?

Communicating the companies values
Increasing her pay
Expanding her job
Hiring someone she can chat with during the day

Answer: C, students answers may vary and can generate a discussion of processes used to ascertain the root cause of problems.

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Job Satisfaction 7 of 7

Monitoring Job Satisfaction

Employers should be aware of satisfaction levels, so they can make changes if employees are dissatisfied.
Usual way to measure job satisfaction is to survey.
A systematic, ongoing program of employee surveys should be part of the organization’s HR strategy to monitor trends and prevent voluntary turnover.
The exit interview

More organizations are analyzing basic HR data to look for patterns in employee retention and turnover. The results may confirm expectations or generate surprises that merit further investigation. Either way, they can help HR departments and managers determine which efforts deliver the best return.

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Figure 11.7 Example of Job Descriptive Index (JDI)

Jump to Appendix 6 long image description

A widely used measure of job satisfaction is the Job Descriptive Index (JDI). Figure 11.7 shows several items from the JDI scale.

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Figure 11.8 Example of a Simplified, Nonverbal Measure of Job Satisfaction

Jump to Appendix 7 long image description

Some job satisfaction scales avoid language altogether, relying on pictures. The faces scale in Figure 11.8 is an example of this type of measure. The faces scale in Figure 11.8 is an example of this type of measure. Other scales exist for measuring more specific aspects of satisfaction. For example, the Pay Satisfaction Questionnaire (PSQ) measures satisfaction with specific aspects of pay, such as pay levels, structure, and raises.

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Summary 1 of 4

Involuntary turnover occurs when the organization requires employees to leave, often when they would prefer to stay.
Voluntary turnover occurs when employees initiate the turnover, often when the organization would prefer to keep them.

Both are costly because of the need to recruit, hire, and train replacements.
Involuntary turnover can also result in lawsuits and even violence.

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Summary 2 of 4

Employees draw conclusions based on outcomes of decisions regarding them, procedures applied, and way managers treat employees when carrying out those procedures.
Employee discipline should not result in wrongful discharge, such as a termination that violates an implied contract or public policy.
Discipline should be administered evenhandedly, without discrimination.

Discipline should respect individual employees’ privacy. Searches and surveillance should be for a legitimate business purpose, and employees should know about and consent to them. Reasons behind disciplinary actions should be shared only with those who need to know them. When termination is part of a plant closing, employees should receive the legally required notice, if applicable.

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Summary 3 of 4

Discipline should follow principles of the hot-stove rule, meaning discipline should give warning and have consequences that are consistent, objective, and immediate.
A system that can meet these requirements is progressive discipline, in which rules are established and communicated, and increasingly severe consequences follow each violation of the rules.
Organizations may also resolve problems through alternative dispute resolution.

Usually, consequences range from a spoken warning through written warnings, suspension, and termination. These actions should be documented in writing. Organizations also may resolve problems through alternative dispute resolution, including an open-door policy, peer review, mediation, and arbitration. When performance problems seem to result from substance abuse or mental illness, the manager may refer the employee to an employee assistance program. When a manager terminates an employee or encourages an employee to leave, outplacement counseling may smooth the process.

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Summary 4 of 4

Circumstances involving the nature of a job, supervisors and coworkers, pay levels, or employee’s own disposition may produce job dissatisfaction. When employees become dissatisfied, they may engage in job withdrawal.
To prevent job withdrawal, organizations need to promote job satisfaction which is related to a person’s values and based on perception.
Different employees have different views of which values are important.

Job withdrawal may include behavior change, as employees try to bring about changes in policy and personnel through inside action or through whistle-blowing or lawsuits. Physical job withdrawal may range from tardiness and absenteeism to job transfer or leaving the organization altogether. Especially when employees cannot find another job, they may psychologically withdraw by displaying low levels of job involvement. and organizational commitment.

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Appendix 1 Figure 11.1: Principles of Justice

Outcome fairness. Consistent outcomes; knowledge of outcomes; outcomes in proportion to behaviors.
Procedural justice. Consistent procedures; avoidance of bias; accurate information; way to correct mistakes; representation of all interests; ethical standards.
Interactional justice. Explanation of decision; respectful treatment; consideration; empathy.

Return to slide

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Appendix 2 Figure 11.2: Progressive Discipline Responses

Unofficial spoken warning. Official written warning. Second written warning plus threat of temporary suspension. Temporary suspension plus written notice that this is a last chance to improve. Termination.

Return to slide

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Appendix 3 Figure 11.4 Job Withdrawal Process

Personal dispositions, tasks and roles, supervisors and co-workers, and pay and benefits are all factors that can lead to job dissatisfaction. This in turn leads to job withdrawal, which includes behavior change, physical job withdrawal, and psychological job withdrawal.

Return to slide

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Appendix 4 Figure 11.5 Increasing Job Satisfaction

Hiring employee predisposed to being satisfied.

Referring depressed employees for help.

Designing complex, meaningful jobs.

Establishing clear, appropriate roles.

Reinforcing shared values.

Encouraging social support.

Helping employees pursue goals.

Setting satisfactory pay levels.

Communicating pay structure and policies.

Return to slide

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Appendix 5 Figure 11.6 Steps in the Role Analysis Technique

Members of role set write expectations for role.

Members of role set discuss expectations.

Preliminary list of role’s duties and behaviors.

Role occupant lists expectations for others in role set.

Members of role set discuss expectations and reach consensus on occupant’s role.

Modified list of role’s duties and behaviors.

Return to slide

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Appendix 6 Figure 11.7 Example of Job Descriptive Index (JDI)

Instructions: Think of your present work. What is it like most of the time? In the blank beside each work given below, write Y for Yes if it describes your work, N for No if it does not describe your work, or question mark if you cannot decide.

Five categories are shown, each with three options to respond to.

Work itself. Routine, satisfying, good.
Pay. Less than I deserve. Highly paid. Insecure.
Promotion opportunities. Dead-end job. Unfair policies. Based on ability.
Supervision. Impolite. Praises good work. Doesn’t supervise enough.
Co-workers. Intelligent. Responsible. Boring.

Return to slide

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Appendix 7 Figure 11.8 Example of a Simplified, Nonverbal Measure of Job Satisfaction

Text reads, consider all aspects of your job. Circle the face that best describes your feelings about your job in general.

A set of seven illustrated faces is presented, ranging from very happy (7), and progressing to looking very angry (1).

Return to slide

After reading and discussing this chapter, you should be able to:

LO 11-1 Distinguish between involuntary and voluntary turnover, and describe their effects on an organization.

Retaining employees helps retain customers and investors.

What was the primary reason you’ve ever quit a job?

Didn’t like my boss
I wasn’t a fit with the company culture
Better pay somewhere else
More interesting or challenging work somewhere else
I’ve never quit a job
Other
Ask students to comment on their answers. Link these comments to the concepts of voluntary and involuntary turnover from the employee’s perspective and functional vs. dysfunctional turnover from the employer’s perspective.

True (A) or False (B)

A manager who decides to fire an employee should quietly take action alone and then let others know afterwards.
Separating employees has financial and personal risks.

Answers: 1. B, 2. A.

Because of the critical financial and personal risks associated with employee dismissal, organizations must develop a standardized, systematic approach to discipline and discharge.
These decisions should not be left solely to the discretion of individual managers and supervisors.
Policies that can lead to employee separation should be based on the principles of justice and law and should allow for various ways to intervene.

LO 11-2 Discuss how employees determine whether the organization treats them fairly.

Outcome fairness
Procedural justice
Interactional justice. The procedures should be based on accurate information, not rumors or falsehoods. The procedures should also be correctable, meaning the system includes safeguards, such as channels for appealing a decision or correcting errors. The procedures should take into account the concerns of all the groups affected—for example, by gathering information from employees, customers, and managers and be consistent with prevailing ethical standards, such as concerns for privacy and honesty.

High outcome fairness; high interactional injustice
Low outcome fairness; high procedural justice
Low interactional justice, high outcome fairness
Low outcome fairness, low procedural justice

Answer: B

LO 11-3 Identify legal requirements for employee discipline.

Question: Under what conditions do you think an employer should monitor employees’ personal use of social media?

What are the key issues in the case?
Employee privacy, why were they searching employees on the way out? Could be indicator of poor, distrustful culture.
As the HR Director, how would you resolve this case?
Student’s answers will vary but should indicate a sense of due process for the employee and sensitivity around publicizing this event internally.
This is based on an actual case where the plaintiff won millions from the company.

No, an employer can hire or fire someone whenever they want.
No, there was no written contract.
Yes, he was given a verbal contract.
Answer C, verbal contracts such as this have held up in courts in some states. Employers have to be careful how they frame the positions to employees. They don’t want to overemphasize the fact employment is at will but they also don’t want to make any guarantees they can’t fulfill.

LO 11-4 Summarize ways in which organizations can discipline employees fairly.

LO 11-5 Explain how job dissatisfaction affects employee behavior.

Behavior change
Physical job withdrawal
Psychological job withdrawal

The driving force behind job withdrawal is dissatisfaction. Most employers would prefer to avoid lawsuits and whistle-blowing. Keeping employees satisfied is one way to do this.

Behavior change

Change the condition – use the internal system for making complaints or the grievance process Whistle-blowing – going outside the organization to authorities or regulatory agencies describing the actions of their employer
Lawsuits – filing suit against an employer for unfair treatment or discrimination

Physical job withdrawal:

Arriving late
Calling in sick
Requesting a transfer
Leaving the organization

Psychological Withdrawal:

Decrease in job involvement – the degree to which people identify themselves with their jobs.
Decrease in organizational commitment – the degree to which an employee identifies with the organization and is willing to put forth effort on its behalf.

LO 11-6 Describe how organizations contribute to employees’ job satisfaction and retain key employees.

with pay structure—the way the organization assigns different pay levels to different levels and job categories and pay raises.

As shown in Figure 11.5, organizations can contribute to job satisfaction by addressing the four sources of job dissatisfaction:

Personal dispositions
Job tasks and roles
Supervisors and coworkers

Ask students: “Would a strong sense of teamwork and friendship help you enjoy your work more?”

Serena feels her job processing payroll checks is boring and uninteresting. Which intervention would be most appropriate to retain Serena?

Communicating the companies values
Increasing her pay
Expanding her job
Hiring someone she can chat with during the day

Answer: C, students answers may vary and can generate a discussion of processes used to ascertain the root cause of problems.

A widely used measure of job satisfaction is the Job Descriptive Index (JDI). Figure 11.7 shows several items from the JDI scale.

Both are costly because of the need to recruit, hire, and train replacements.
Involuntary turnover can also result in lawsuits and even violence.

Chapter 12 ESTABLISHING A PAY STRUCTURE

This chapter describes how managers weigh the importance and costs of pay to arrive at a structure for compensation and the levels of pay for different jobs. Basic decisions in terms of pay structure and pay level, considerations that influence these decisions: legal requirements related to pay, economic forces, the nature of the organization’s jobs, and employees’ judgments about the fairness of pay levels, methods for evaluating jobs and market data to arrive at a pay structure, alternatives to the usual focus on jobs and two issues of current importance—pay for employees on leave to serve in the military and pay for executives are discussed.

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What Do I Need to Know?

LO 12-1 Identify the kinds of decisions involved in establishing a pay structure.

LO 12-2 Summarize legal requirements for pay policies.

LO 12-3 Discuss how economic forces influence decisions about pay.

LO 12-4 Describe how employees evaluate the fairness of a pay structure.

LO 12-5 Explain how organizations design pay structures related to jobs.

LO 12-6 Describe alternatives to job-based pay.

LO 12-7 Summarize how to ensure that pay is actually in line with the pay structure.

LO 12-8 Discuss issues related to paying employees serving in the military and paying executives.

After reading and discussing this chapter, you should be able to:

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Your Opinion

1- Strongly Disagree, 3- Neutral, 5- Strongly Agree

Pay decisions should be based on performance, not seniority.

I would like to know what my coworkers get paid.

I would not mind if others knew my salary.

Pay secrecy helps a company stay competitive.

Use these questions to begin a discussion of issues surrounding pay philosophies and perceptions of fairness.

1-Strongly Disagree, 3-Neutral, 5- Strongly Agree

Pay decisions should be based on performance, not seniority.
I would like to know what my coworkers get paid.
I would not mind if others knew my salary.
Pay secrecy helps a company stay competitive.

From the employer’s point of view, pay is a powerful tool for meeting the organization’s goals. Pay has a large impact on the organization such as:

Affects employee attitudes and behaviors

Influences which kinds of employees are attracted to and retained by the organization

Can align employees’ interests with organizational goals

Viewed as a sign of status and success

Pay structure consists of the relative pay for different jobs within the organization.

Pay level is the average amount, including wages, salaries, and bonuses, the organization pays for a particular job.

Pay structure and pay levels help the organization achieve goals related to employee motivation, cost control, and the ability to attract and retain talented human resources.

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Introduction

Pay is a powerful tool for meeting the organization’s goals and costs a company between 5% and 40% of revenues.
Pay has a large impact on employee attitudes and behaviors and influences the kinds of people who are attracted to (or remain with) the organization.
Employees attach great importance to pay decisions when they evaluate their relationship with their employer.

Managers weigh the importance and costs of pay to arrive at a structure for compensation and the levels of pay for different jobs. Organizations must carefully manage and communicate decisions about pay. By rewarding certain behaviors, it can align employees’ interests with the organization’s goals. Employees care about policies affecting earnings because the policies affect the employees’ income and standard of living. Besides the level of pay, employees care about its fairness compared with what others earn. Also, employees consider pay a sign of status and success. They attach great importance to pay decisions when they evaluate their relationship with their employer.

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Decisions About Pay

Job Structure

Relative pay for different jobs within the organization

Pay Structure

Pay policy resulting from job structure and pay-level decisions.

Pay Level

Average amount the organization pays for a particular job.

LO 12-1 Identify the kinds of decisions involved in establishing a pay structure.

Because pay is important both in its effect on employees and on account of its cost, organizations need to plan what they will pay employees in each job. Pay policies and practices in the United States are subject to government laws and regulations. Just as competing businesses may not conspire to set prices, they may not conspire to set wage rates.

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Figure 12.1 Issues in Developing a Pay Structure

Jump to Appendix 1 long image description

Establishing a pay structure simplifies the process of making decisions about individual employees’ pay by grouping together employees with similar jobs. As shown in Figure 12.1, HR professionals develop this structure based on:

Legal requirements
Market forces
The organization’s goals

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Legal Requirements for Pay 1 of 6

Equal Employment Opportunity

Employers must not base differences in pay on an employee’s age, sex, race, or other protected status.
No guarantee of equal pay for men and women, white and minorities or any other group
Comparable-worth policies
The Lilly Ledbetter Fair Pay Act of 2009

Under the laws governing Equal Employment Opportunity employers may not base differences in pay on an employee’s age, sex, race, or other protected status. Any differences in pay must instead be tied to such business-related considerations as job responsibilities or performance. The goal is for employers to provide equal pay for equal work. Job descriptions, job structures, and pay structures can help organizations demonstrate that they are upholding these laws. These laws do not guarantee equal pay for men and women, whites and minorities, or any other groups, because so many legitimate factors, from education to choice of occupation, affect a person’s earnings.

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Pay differences

Two employees who do the same job cannot be paid different wages because of race or age. Only if there are differences in their experience, skills, seniority, or job performance are there legal reasons why their pay might be different

Among full-time workers in 2012, women on average earned 73 cents for every dollar earned by men. Among male employees, black workers earned 76 cents for every dollar earned by white workers, and Hispanic workers earned just 67 cents (a racial gap among black and Hispanic female employees also exists, at 84 and 73 cents per dollar, respectively)

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Legal Requirements for Pay 2 of 6

Minimum wage

Lowest amount that employers may pay under federal or state law, stated as an amount of pay per hour.

Fair Labor Standards Act (FLSA)

Federal law that establishes a minimum wage and requirements for overtime pay and child labor.

In the United States, employers must pay at least the minimum wage established by law. A wage is the rate of pay per hour.

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Legal Requirements for Pay 3 of 6

FLSA establishes a minimum wage of:

$7.25 per hour.

FLSA also permits a lower “training wage”

paid to workers under age of 20 for up to 90 days

approximately 85% of minimum wage.

Some states have laws specifying minimum wages; in these states, employers must pay whichever rate is higher. Some states have laws specifying minimum wages; in these states, employers must pay whichever rate is higher. An issue related to the minimum wage is that it tends to be lower than the earnings required for a full-time worker to rise above the poverty level. A number of cities have therefore passed laws requiring a so-called living wage, essentially a minimum wage based on the cost of living in a particular region.

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Legal Requirements for Pay 4 of 6

Overtime Pay

Overtime rate under FLSA is 1½ times employee’s usual hourly rate, including any bonuses, and piece-rate payments.
Exempt employees – managers, outside salespeople, and other employees not covered by FLSA requirement for overtime pay.
Nonexempt employees – employees covered by FLSA requirements for overtime pay.

Another requirement of the FLSA is that employers must pay higher wages for overtime, as defined as hours worked beyond 40 hours per week. Not everyone is eligible for overtime pay. Under the FLSA, executive, professional, administrative, and highly compensated white-collar employees are considered exempt employees, meaning employers need not pay them one and a half times their regular pay for working more than 40 hours per week. Exempt status depends on the employee’s job responsibilities, salary level (at least $455 per week), and “salary basis,” meaning that the employee is paid a given amount regardless of the number of hours worked or quality of the work. Paying an employee on a salary basis means the organization expects that this person can manage his or her own time to get the work done, so the employer may deduct from the employee’s pay only in certain limited circumstances, such as disciplinary action or for unpaid leave for personal reasons. Additional exceptions apply to certain occupations, including outside salespersons, teachers, and computer professionals (if they earn at least $27.63 per hour). The standards are fairly complicated.

Any employee who is not in one of the exempt categories is called a nonexempt employee. Most workers paid on an hourly basis are nonexempt and therefore subject to the laws governing overtime pay. However, paying a salary does not necessarily mean a job is exempt.

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Figure 12.2 Computing Overtime Pay

Jump to Appendix 2 long image description

Figure 12.2 shows how this applies to an employee who works 50 hours to earn a base rate of $12 per hour plus a weekly bonus of $40. The overtime pay is based on the base pay ($480) plus the bonus ($40), for a rate of $13.00 per hour. For each of the 10 hours of overtime, the employee would earn $19.50, so the overtime pay is $195.00 ($19.50 times 10). When employees are paid per unit produced or when they receive a monthly or quarterly bonus, those payments must be converted into wages per hour, so that the employer can include these amounts when figuring the correct overtime rate. Overtime pay is required, whether or not the employer specifically asked or expected the employee to work more than 40 hours. In other words, if the employer knows the employee is working overtime but does not pay time and a half, the employer may be violating the FLSA. Not everyone is eligible for overtime pay. Under the FLSA, executive, professional, administrative, and highly compensated white-collar employees are considered exempt employees, meaning employers need not pay them one and a half times their regular pay for working more than 40 hours per week. the standards are fairly complicated. For more details about the standards for exempt employees, contact the Labor Department’s Wage and Hour Division or refer to its website at www.dol.gov/whd.

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Legal Requirements for Pay 5 of 6

Child Labor

Children aged 16 and 17 may not be employed in hazardous occupations defined by U.S. Department of Labor.
Children aged 14 and 15 may work only outside school hours, in jobs defined as nonhazardous, and for limited time periods.
A child under age 14 may not be employed in any work associated with interstate commerce.
Exemptions include baby-sitting, acting, and delivering newspapers.

FLSA sharply restricts the use of child labor, with the aim of protecting children’s health, safety, and educational opportunities. Restrictions apply to children younger than 18. A child under age 14 may not be employed in any work associated with interstate commerce, except work performed in a nonhazardous job for a business entirely owned by the child’s parent or guardian. A few additional exemptions from this ban include acting, babysitting, and delivering newspapers to consumers.
Besides FLSA, state laws also restrict the use of child labor. Many states have laws requiring working papers or work permits for minors, and many states restrict the number of hours or times of day that minors aged 16 and older may work. Before hiring any workers under the age of 18, employers must ensure they are complying with child labor laws of their state, as well as the FLSA requirements for their industry.

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Legal Requirements for Pay 6 of 6

Prevailing Wages

Two federal laws govern pay policies of federal contractors:

Davis-Bacon Act of 1931

Walsh-Healy Public Contracts Act of 1936

Under these laws, federal contractors must pay their employees at rates at least equal to the prevailing wages in the area.

These laws do not cover all companies. Davis-Bacon covers construction contractors that receive more than $2,000 in federal money. Walsh-Healy covers all government contractors receiving$10,000 or more in federal funds.

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Economic Influences on Pay 1 of 3

Product Markets

Organization’s product market includes organizations that offer competing goods and services.
Organizations compete on quality, service, and price.
Cost of labor is a significant part of an organization’s costs.

Labor Markets

Organizations must compete to obtain human resources in labor markets.
Competing for labor establishes minimum an organization must pay to hire an employee for a particular job.

LO 12-3 Discuss how economic forces influence decisions about pay.

An organization cannot make spending decisions independent of the economy. Organizations must keep costs low enough that they can sell their products profitably, yet they must be able to attract workers in a competitive labor market. Workers prefer higher-paying jobs and avoid employers that offer less money for the same type of job. In this way, competition for labor establishes the minimum an organization must pay to hire an employee for a particular job. If an organization pays less than the minimum, employees will look for jobs with other organizations.

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Nurses

There is currently a strong demand for nurses in the labor market. Hospitals will have to pay competitive wages and other perks to attract and retain staff.

Ask students: “How does this differ from the current airline industry’s labor market?”

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Economic Influences on Pay 2 of 3

Pay Level: Deciding What to Pay

Pay ranges depend on the competitive environment.
Market rate vs. paying above market rate to acquire top talent
Pay policies are one of the most important human resource tools for encouraging desired employee behaviors and discouraging undesired behaviors.

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Economic Influences on Pay 3 of 3

Benchmarking – a procedure in which an organization compares its own practices against those of successful competitors

Pay surveys

Bureau of Labor Statistics (BLS)
Society for Human Resource Management (SHRM)
WorldatWork

HR professionals need to determine whether to gather data focusing on particular industries or on job categories. Industry-specific data are especially relevant for jobs with skills that are specific to the type of product. For jobs with skills that can be transferred to companies in other industries, surveys of job classifications will be more relevant.

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Employee Judgments About Pay Fairness 1 of 3

Judging Fairness

Employees compare their pay and contributions against three yardsticks:

What they think employees in other organizations earn for doing the same job.

What they think other employees holding different jobs within the organization earn for doing work at the same or different levels.

What they think other employees in the organization earn for doing the same job as theirs.

LO 12-4 Describe how employees evaluate the fairness of a pay structure.

In developing a pay structure, it is important to keep in mind employees’ opinions about fairness. After all, one of the purposes of pay is to motivate employees, and they will not be motivated by pay if they think it is unfair.

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Figure 12.3 Opinions About Fairness – Pay Equity

Jump to Appendix 4 long image description

The ways employees respond to their impressions about equity can have a great impact on the organization. To decide whether a level of pay is equitable, the person compares her ratio of outcomes and inputs with other people’s outcome/input ratios, as shown in Figure 12.3 .Typically, if employees see their pay as equitable, their attitudes and behavior continue unchanged. If employees see themselves as receiving an advantage, they usually rethink the situation to see it as merely equitable. If employees conclude that they are under-rewarded, they are likely to make up the difference in one of three ways. (These are discussed on the following slide.)

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Employee Judgments About Pay Fairness 2 of 3

If employees conclude that they are under-rewarded, they are likely to make up the difference in one of three ways:

They might put forth less effort (reducing their inputs).

They might find a way to increase their outcomes (e.g., stealing).

They might withdraw (by leaving the organization or refusing to cooperate).

Employees’ beliefs about fairness also influence their willingness to accept transfers or promotions.

Equity theory tells organizations that employees care about their pay relative to what others are earning and that these feelings are based on what employees perceive (what they notice and form judgments about). An organization can do much to contribute to what employees know and, as a result, what they perceive.
HR should prepare managers to explain why the organization’s pay structure is designed as it is and to judge whether employee concerns about the structure indicate a need for change. A common issue is whether to reclassify a job because its content has changed. If an employee takes on more responsibility, the employee will often ask the manager for help in seeking more pay for the job.
If the organization researches salary levels and concludes that it is paying its employees generously, it should communicate this. If the employees do not know what the organization learned from its research, they may reach an entirely different conclusion about their pay.

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Employee Judgments About Pay Fairness 3 of 3

Communicating Fairness

Employees’ feelings about their pay relative to others’ are based on what they perceive.
Companies should assume that shared knowledge includes pay.
The Internet makes it easy to gather wage and salary data.

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Table 12.1 Job Evaluation of Three Jobs with Three Factors

Compensable Factors
Job title	Experience	Education	Complexity	Total
Computer operator	40	30	40	110
Computer programmer	40	50	65	155
Systems analyst	65	60	85	210

Table 12.1 evaluates the compensable factors for three jobs.

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Test Your Knowledge (1 of 2)

Mariah found out that a friend of hers with a similar job in the same town makes significantly more money than she does. Which of the following is probably not the cause of this?

Different cost-of-living

The companies are in different product markets with different pay strategies

Mariah is a poor performer

Mariah’s job is non-exempt

Mariah found out that a friend of hers with a similar job in the same town makes significantly more money than she does. Which of the following is probably not the cause of this?

Different cost-of-living
The companies are in different product markets with different pay strategies
Mariah is a poor performer
Mariah’s job is non-exempt

Answer A – if they live in the same town, they would presumably have the same cost-of living. Given that they are similar jobs they probably are both either exempt or non-exempt but even if they were different, non-exempt jobs often make more money than exempt positions.

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Job Structure: Relative Value of Jobs 1 of 2

Job Evaluation

Administrative procedure for measuring relative internal worth of the organization’s jobs.

Compensable Factors

5 characteristics of a job that the organization values and chooses to pay for:

Experience

Education

Complexity

Working conditions

Responsibility

LO 12-5 Explain how organizations design pay structures related to jobs.

Along with market forces and principles of fairness, organizations consider the relative contribution each job should make to the organization’s overall performance. Creation of a pay structure requires that the organization develop an internal structure showing the relative contribution of its various jobs.

One typical way of doing this is with a job evaluation.

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Table 12.1 Job Evaluation of Three Jobs with
Three Compensable Factors

Compensable factors
Job Title	Experience	Education	Complexity	Total
Computer operator	40	30	40	110
Computer programmer	40	50	65	155
Systems analyst	65	60	85	210

To conduct a job evaluation, the organization’s job evaluation committee identifies each job’s compensable factors – the characteristics of a job that the organization values and chooses to pay for Job evaluations provide the basis for decisions about internal worth. According to the sample assessments in Table 12.1, the job of systems analyst is worth almost twice as much to this organization as the job of computer operator. Therefore, the organization would be willing to pay almost twice as much for the work of a systems analyst as it would for the work of a computer operator.

As in the example in Table 12.1, the scores for each factor are totaled to arrive at an overall evaluation for each job.

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Job Structure: Relative Value of Jobs 2 of 2

Key Jobs

Jobs that have relatively stable content and are common among many organizations.
Organizations define key jobs to help create pay structures.
Pay can be based on survey data.

Pay for the key jobs can be based on survey data, and pay for the organization’s other jobs can be based on the organization’s job structure. A job with a higher evaluation score than a particular key job would receive higher pay than that key job.

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Pay Structure: Putting It All Together 1 of 5

Hourly wage

Pay in terms of a rate per hour

Piecework rate

Rate of pay for each unit produced

Salary

Rate of pay per month or year

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Pay Structure: Putting It All Together 2 of 5

Pay Rates

Determining salaries for nonkey jobs
Pay policy line reflects the pay structure in the market

Pay Grades

Sets of jobs having similar worth or content, grouped together to establish rates of pay
May not match market rate

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Figure 12.4 Pay Policy Lines

Pay policy line

Graphed line showing the mathematical relationship between job evaluation points and pay rate.

Jump to Appendix 5 long image description

The pay policy line reflects the pay structure of the external market in relationship to the job evaluation points for the organization’s key jobs. It is then used to determine salaries for non-key jobs, for which the organization has no survey data For example, using the pay policy line in Figure 12.4, a job with 315 evaluation points would have a predicted salary of $6,486 per month. The pay policy line reflects the pay structure in the market, which does not always match rates in the organization (see key job F in Figure 12.4). Survey data may show that people in certain jobs are actually earning significantly more or less than the amount shown on the pay policy line.

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Figure 12.5 Sample Pay Grade Structure

Pay grades

Sets of jobs having similar worth or content, grouped together to establish rates of pay.

Jump to Appendix 6 long image description

A typical approach is to use the market rate or the pay policy line as the midpoint of a range for the job or pay grade. The minimum and maximum values for the range may also be based on market surveys of those amounts. Pay ranges are most common for white-collar jobs and for jobs that are not covered by union contracts. Figure 12.5 shows an example of pay ranges based on the pay policy line in Figure 12.4. Notice that the jobs are grouped into five pay grades, each with its own pay range. In this example, the range is widest for employees who are at higher levels in terms of their job evaluation points. That is because the performance of these higher-level employees will likely have more effect on the organization’s performance, so the organization needs more latitude to reward them. For instance, as discussed earlier, the organization may want to select a higher point in the range to attract an employee who is more critical to achieving the organization’s goals.

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Pay Structure: Putting It All Together 3 of 5

Pay ranges

A set of possible pay rates defined by a minimum, maximum, and midpoint of pay for employees holding a particular job or a job within a particular pay grade.

Red-circle rate

Pay at a rate that falls above pay range for the job.

Green-circle rate

Pay at a rate that falls below pay range for the job.

The organization establishes a minimum, maximum, and midpoint of pay for employees holding a particular job or a job within a particular pay grade. Employees holding the same job may receive somewhat different pay, depending on where their pay falls within the range.

Test Your Knowledge (2 of 2)

To correct a Red-circled employee, I would…

Give them a raise

Demote them

Give them a bonus, but no raise

Move them to a job with a higher pay range

To correct a Red-circled employee, I would…..

Give them a raise – will exacerbate the problem
Demote them – will lower their morale
Give them a bonus, but no raise – good way to reward them without increasing salary costs
Move them to a job with a higher pay range – need to ensure they had the requisite skills for a different position

Answer: C, is probably the best answer. A discussion of the pros and cons of each of these approaches in relation to the organization’s goals may be beneficial

Pay Structure: Putting It All Together 4 of 5

Pay differentials

Adjustment to a pay rate to reflect differences in working conditions or labor markets.
Many businesses in the U.S. provide pay differentials based on geographic location.
The most common approach is to move an employee higher in the pay structure to compensate for higher living costs.

In some situations organizations adjust pay to reflect differences in working conditions or labor markets.

Night Hours

Night hours are less desirable for most workers so some companies pay a differential for night work to compensate them.

Pay Structure: Putting It All Together 5 of 5

Delayering

Reducing number of levels in organization’s job structure.
More assignments are combined into a single layer called broad bands.
More emphasis on acquiring experience, rather than promotions.

Skill-Based Pay Systems

Pay structures that set pay according to employees’ levels of skill or knowledge and what they are capable of doing.
Appropriate where changing technology requires employees to continually widen and deepen their knowledge.

Alternatives to Job-Based Pay

LO 12-6 Describe alternatives to job-based pay.

The traditional and most widely used approach to developing a pay structure focuses on setting pay for jobs or groups of jobs. This emphasis on jobs has some limitations. One approach is to move away from job-based pay toward pay structures that reward employees based on their knowledge and skills.

Pay Structure and Actual Pay

Compa-Ratio

the ratio of average pay to midpoint of pay range.
If average equals midpoint, CR is 1.
If CR is greater than 1, average pay is above midpoint.
IF CR is less than 1, average pay is below midpoint.

LO 12-7 Summarize how to ensure that pay is actually in line with the pay structure.

Figure 12.6 Finding a Compa-Ratio

Jump to Appendix 7 long image description

Compa-ratio is the ratio of average pay to the midpoint of the pay range. Figure 12.6 shows an example. Assuming the organization has pay grades, the organization would find a compa-ratio for each pay grade: the average paid to all employees in the pay grade divided by the midpoint for the pay grade. If the average equals the midpoint, the compa-ratio is 1. More often, the compa-ratio is somewhat above 1 (meaning the average pay is above the midpoint for the pay grade) or below 1 (meaning the average pay is below the midpoint).Assuming that the pay structure is well planned to support the organization’s goals, the compa-ratios should be close to 1. A compa-ratio greater than 1 suggests that the organization is paying more than planned for human resources and may have difficulty keeping costs under control. A compa-ratio less than 1 suggests that the organization is underpaying for human resources relative to its target and may have difficulty . Attracting and keeping qualified employees. When compa-ratios are more or less than 1, the numbers signal a need for the HR department to work with managers to identify whether to adjust the pay structure or the organization’s pay practices. The compa-ratios may indicate that the pay structure no longer reflects market rates of pay.

Current Issues Involving Pay Structure

Pay During Military Duty

How should companies handle employees who are called for active duty in the military for extended time periods?

Uniformed Services Employment and Reemployment Rights Act (USERRA)

Pay for Executives

Based on equity theory, how does executive compensation affect employees?

LO 12-8 Discuss issues related to paying employees serving in the military and paying executives.

An organization’s policies regarding pay structure greatly influence employees’ and even the general public’s opinions about the organization. Recent issues related to pay structure include:

Pay during Military Duty

How should companies handle employees who are called for active duty in the military for extended time periods?
Employees on active military duty – the law ensures that employers make jobs available for active military when they return for up to five years. But often their military pay is a fraction of what they earn as a civilian. Some companies will pay the difference between the military pay and their normal pay or some will continue to pay health benefits. While this is expensive, many companies feel that maintaining a positive relationship with employees and the goodwill of the American public make the expense worthwhile.

Pay for Executives

Based on equity theory, how does executive compensation affect employees?
Equity theory would suggest that the amount more that CEO’s receive should be reflected in that much greater impact on the organization. If employees don’t perceive that equity they may find companies to work for in which CEO compensation is more fair.

Figure 12.7 Average CEO Pay at 100 Large
U.S. Companies

A study by Chief Executive Group found that CEOs at private companies received median compensation of $362,900.Notice also that as shown in Figure 12.7, only a small share of the average compensation paid to CEOs is in the form of a salary. Most CEO compensation takes the form of performance-related pay, such as bonuses and stock. This variable pay, discussed in the next chapter, causes the pay of executives to vary much more widely than other employees’ earnings. Organizations need to plan not only how much to pay managers and executives, but also how to pay them.

Summary 1 of 6

Organizations make decisions to define a job structure, or relative pay for different jobs within the organization. Organizations also must establish pay levels, or the average paid for the different jobs.
These decisions are based on the organization’s goals, market data, legal requirements, and principles of fairness.

Together, job structure and pay level establish a pay structure policy.

Summary 2 of 6

To meet the standard of equal employment opportunity, employers must provide equal pay for equal work, regardless of an employee’s age, race, sex, or other protected status.
Differences in pay must relate to factors such as a person’s qualifications or market levels of pay.
Under the Fair Labor Standards Act (FLSA):

Employer must pay at least minimum wage established by law.

Overtime pay for hours worked beyond 40 in each week must be paid.

Managers, professionals, and outside salespersons are exempt from the overtime pay requirement. Employers must meet FLSA requirements concerning child labor. Federal contractors also must meet requirements to pay at least the prevailing wage in the area where their employees work.

Summary 3 of 6

To remain competitive, employers must meet product and labor market demands.

Limit costs as much as possible.

Pay at least going rate in their labor markets.

According to equity theory, employees think of their pay relative to their inputs – training, experience, and effort.
To decide whether their pay is equitable, they compare their outcome (pay)/input ratio with other people’s outcome/input ratios.

Organizations make decisions about whether to pay at, above, or below the pay rate set by these market forces.

Summary 4 of 6

The traditional approach to building a pay structure is to use a job-based approach.
Alternatives to the traditional approach include broad banding and skill-based pay.
The Uniformed Services Employment and Reemployment Rights Act (USERRA) requires employers to make jobs available to any of their employees who leave to fulfill military duties for up to five years.

While these employees are performing their military service, many are earning far less. To demonstrate their commitment to these employees and to earn the public’s goodwill, many companies pay the difference between their military and civilian earnings, even though this policy is costly.

Summary 5 of 6

Executive pay has drawn public scrutiny because top executive pay is much higher than average workers’ pay.
Employees’ opinions about equity of executive pay can have a large effect on the organization’s performance.

The great difference is an issue in terms of equity theory.

Summary 6 of 6

According to equity theory, employees think of their pay relative to their inputs, such as training, experience, and effort. To decide whether their pay is equitable, they compare their outcome (pay)/input ratio with other people’s outcome/input ratios.

•Employees make these comparisons with people doing the same job in other organizations and with people doing the same or different jobs in the

same organization. If employees conclude that their outcome/input ratio is less than the comparison person’s, they conclude that their pay is unfair and may engage in behaviors to create a situation they think is fair.

Appendix 1 Figure 12.1 Issues in Developing a Pay Structure

Legal requirements. Equal pay for equal work. Minimum wage. Overtime page. Restrictions on child labor.
Market forces. Product markets. Labor markets.
Organization’s Goals. High-quality workforce. Cost control. Equity and fairness. Legal compliance.

These three sets of issues lead to decisions on pay level, job structure, and pay structure. Pay structure includes pay rates, pay grades, pay ranges, and pay differentials.

Return to slide

Appendix 2 Figure 12.2 Computing Overtime Pay

Employee’s base pay: 12 dollars and hour and 40 dollars a week bonus.

Employee’s hours: 50 (40 regular, 10 overtime).

Pay for the first 40 hours. 12 dollars and hour multiplies by 40 hours equals 480 dollars.

Bonus of 40 dollars leads to a total of 520 dollars.

Hourly rate. 520 dollars divided by 40 equals 13.00 dollars per hour.

Overtime rate. 13 dollars multiplied by 1.5 equals 19.50 dollars.

Overtime pay. 19.50 dollars multiplied by 10 hours equals 195.00 dollars.

Total pay for the week. 520.00 dollars plus 195.00 dollars equals 715.00 dollars.

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Appendix 3 Occupational Employment and Wage Estimates

Management 48 dollars per hour.

Computer and mathematical 39 dollars per hour.

Legal 38 dollars per hour.

Architecture and engineering 47 dollars per hour.

Sales and related 13 dollars per hour.

Personal care and service 10 dollars per hour.

Farming, fishing, and forestry 9 dollars per hour.

Food preparation and serving 9 dollars per hour.

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Appendix 4 Figure 12.3 Opinions About Fairness –
Pay Equity

Two sets of scales are shown.

When equity (pay seems fair) is perceived, my outcomes/inputs are balanced with your outcomes/inputs.

When inequity (pay seems unfair) is perceived, my outcomes/inputs are outweighed by your outcomes/inputs.

Return to slide

Appendix 5 Figure 12.4 Pay Policy Lines

A line graph lists monthly salaries on the vertical axis and job evaluation points on the horizontal axis. This data is combined to provide a predicted salary for certain jobs, which is represented by an inclining line on the graph. In this example, a job evaluation with 315 points receives a predicted salary of 6,486 dollars. This point falls just below the inclining pay policy line.

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Appendix 6 Figure 12.5 Sample Pay Grade Structure

A line graph lists monthly salaries on the vertical axis and job evaluation points on the horizontal axis. This data is combined to provide a predicted salary for certain jobs, which is represented by an inclining line. Points representing current pay for a job are plotted on the line graph. They fall above, on, or below the pay policy line.

Return to slide

Appendix 7 Figure 12.6 Finding a Compa-Ratio

Pay grade: 1.

Midpoint of range: 2,175 dollars per month.

Salaries of employees in pay grade. Employee 1 2,306 dollars. Employee 2 2,066 dollars. Employee 3 2,523 dollars. Employee 4 2,414 dollars.

Average salary of employees. 2,306 dollars plus 2,066 dollars plus 2,523 dollars plus 2,414 dollars equals 9,309 dollars.

9,309 dollars divided by 4 equals 2,327.25 dollars.

To calculate the compa-ratio, the average (2,327.25 dollars) is divided by the midpoint (2,175.00 dollars). This equals a compa-ratio of 1.07.

Return to slide

After reading and discussing this chapter, you should be able to:

Use these questions to begin a discussion of issues surrounding pay philosophies and perceptions of fairness.

1-Strongly Disagree, 3-Neutral, 5- Strongly Agree

Pay decisions should be based on performance, not seniority.
I would like to know what my coworkers get paid.
I would not mind if others knew my salary.
Pay secrecy helps a company stay competitive.

From the employer’s point of view, pay is a powerful tool for meeting the organization’s goals. Pay has a large impact on the organization such as:

Affects employee attitudes and behaviors

Influences which kinds of employees are attracted to and retained by the organization

Can align employees’ interests with organizational goals

Viewed as a sign of status and success

Pay structure consists of the relative pay for different jobs within the organization.

Pay level is the average amount, including wages, salaries, and bonuses, the organization pays for a particular job.

Pay structure and pay levels help the organization achieve goals related to employee motivation, cost control, and the ability to attract and retain talented human resources.

LO 12-1 Identify the kinds of decisions involved in establishing a pay structure.

Legal requirements
Market forces
The organization’s goals

In the United States, employers must pay at least the minimum wage established by law. A wage is the rate of pay per hour.

FLSA sharply restricts the use of child labor, with the aim of protecting children’s health, safety, and educational opportunities. Restrictions apply to children younger than 18. A child under age 14 may not be employed in any work associated with interstate commerce, except work performed in a nonhazardous job for a business entirely owned by the child’s parent or guardian. A few additional exemptions from this ban include acting, babysitting, and delivering newspapers to consumers.
Besides FLSA, state laws also restrict the use of child labor. Many states have laws requiring working papers or work permits for minors, and many states restrict the number of hours or times of day that minors aged 16 and older may work. Before hiring any workers under the age of 18, employers must ensure they are complying with child labor laws of their state, as well as the FLSA requirements for their industry.

LO 12-3 Discuss how economic forces influence decisions about pay.

Ask students: “How does this differ from the current airline industry’s labor market?”

LO 12-4 Describe how employees evaluate the fairness of a pay structure.

Equity theory tells organizations that employees care about their pay relative to what others are earning and that these feelings are based on what employees perceive (what they notice and form judgments about). An organization can do much to contribute to what employees know and, as a result, what they perceive.
HR should prepare managers to explain why the organization’s pay structure is designed as it is and to judge whether employee concerns about the structure indicate a need for change. A common issue is whether to reclassify a job because its content has changed. If an employee takes on more responsibility, the employee will often ask the manager for help in seeking more pay for the job.
If the organization researches salary levels and concludes that it is paying its employees generously, it should communicate this. If the employees do not know what the organization learned from its research, they may reach an entirely different conclusion about their pay.

Table 12.1 evaluates the compensable factors for three jobs.

Mariah found out that a friend of hers with a similar job in the same town makes significantly more money than she does. Which of the following is probably not the cause of this?

Different cost-of-living
The companies are in different product markets with different pay strategies
Mariah is a poor performer
Mariah’s job is non-exempt

LO 12-5 Explain how organizations design pay structures related to jobs.

One typical way of doing this is with a job evaluation.

As in the example in Table 12.1, the scores for each factor are totaled to arrive at an overall evaluation for each job.

To correct a Red-circled employee, I would…..

Give them a raise – will exacerbate the problem
Demote them – will lower their morale
Give them a bonus, but no raise – good way to reward them without increasing salary costs
Move them to a job with a higher pay range – need to ensure they had the requisite skills for a different position

Answer: C, is probably the best answer. A discussion of the pros and cons of each of these approaches in relation to the organization’s goals may be beneficial

In some situations organizations adjust pay to reflect differences in working conditions or labor markets.

LO 12-6 Describe alternatives to job-based pay.

LO 12-7 Summarize how to ensure that pay is actually in line with the pay structure.

LO 12-8 Discuss issues related to paying employees serving in the military and paying executives.

An organization’s policies regarding pay structure greatly influence employees’ and even the general public’s opinions about the organization. Recent issues related to pay structure include:

Pay during Military Duty

How should companies handle employees who are called for active duty in the military for extended time periods?
Employees on active military duty – the law ensures that employers make jobs available for active military when they return for up to five years. But often their military pay is a fraction of what they earn as a civilian. Some companies will pay the difference between the military pay and their normal pay or some will continue to pay health benefits. While this is expensive, many companies feel that maintaining a positive relationship with employees and the goodwill of the American public make the expense worthwhile.

Pay for Executives

Based on equity theory, how does executive compensation affect employees?
Equity theory would suggest that the amount more that CEO’s receive should be reflected in that much greater impact on the organization. If employees don’t perceive that equity they may find companies to work for in which CEO compensation is more fair.

Together, job structure and pay level establish a pay structure policy.

Organizations make decisions about whether to pay at, above, or below the pay rate set by these market forces.

The great difference is an issue in terms of equity theory.

•Employees make these comparisons with people doing the same job in other organizations and with people doing the same or different jobs in the

CHAPTER 10 MANAGING EMPLOYEES’ PERFORMANCE

This chapter examines a variety of approaches to performance management including activities involved in managing performance, specific approaches to performance management, various sources of performance information, errors that commonly occur during the assessment of performance, ways of giving performance feedback effectively and intervening when performance must improve and legal and ethical issues affecting performance management.

What Do I Need to Know?

LO 10-1 Identify the activities involved in performance management.

LO 10-2 Discuss the purposes of performance management systems.

LO 10-3 Define five criteria for measuring the effectiveness of a performance management system.

LO 10-4 Compare the major methods for measuring performance.

LO 10-5 Describe major sources of performance information in terms of their advantages and disadvantages.

LO 10-6 Define types of rating errors, and explain how to minimize them.

LO 10-7 Explain how to provide performance feedback effectively.

LO 10-8 Summarize ways to produce improvement in unsatisfactory performance.

LO 10-9 Discuss legal and ethical issues that affect performance management.

After reading and discussing this chapter, you should know:

Introduction

Performance management

Process through which managers ensure that employees’ activities and outputs contribute to the organization’s goals.
Process requires:

Knowing what activities and outputs are desired

Observing whether they occur

Providing feedback to help employees meet expectations

Although many employees dread the annual “performance appraisal” meeting at which a boss picks apart the employee’s behaviors from the past year, performance management can potentially deliver many benefits—to individual employees as well as to the organization as a whole. Effective performance management can tell top performers they are valued, encourage communication between managers and their employees, establish consistent standards for evaluating employees, and help the organization identify its strongest and weakest employees. To meet these objectives, companies must think of effective performance management as a process, not an event.

Test Your Knowledge 1 of 4

If the performance management system created competition among team members, I would

Make collaboration a criterion to be evaluated.

Nothing, competition is good.

Increase the specificity of the feedback.

Focus on personal traits rather than behaviors.

If the performance management system created competition among team members, I would:

Make collaboration a criterion to be evaluated.
Nothing, competition is good.
Increase the specificity of the feedback.
Focus on personal traits rather than behaviors.

Answer: A

Figure 10.1: Steps in the Performance Management Process

Jump to Appendix 1 long image description

LO 10-1 Identify the activities involved in performance management.

Using this performance management process helps managers and employees focus on the organization’s goals. Figure 10.1 shows the six steps in the performance management process. As shown in the model, feedback and formal performance evaluation are important parts of the process; however, they are not the only critical components. An effective performance management process contributes to the company’s overall competitive advantage and must be given visible support by the CEO and other senior managers. This support ensures that the process is consistently used across the company, appraisals are completed on time, and giving and receiving ongoing performance feedback is recognized as an accepted part of the company’s culture.

Purposes of Performance Management

Strategic Purpose

Effective performance management helps the organization achieve its business objectives

Administrative Purpose

Ways in which organizations use the system to provide information for day-to-day decisions about salary, benefits, and recognition programs

Developmental Purpose

Serves as a basis for developing employees’ knowledge and skills

LO 10-2 Discuss the purposes of performance management systems.

Organizations establish performance management systems to meet three purposes: : strategic, administrative, and developmental.

Strategic helps link employees’ behavior with the organization’s goals. Performance management defines what the organization expects from each employee and measures each employee’s performance to identify where those expectations are and are not being met. This enables the organization to take corrective action, such as training, incentives, or discipline. Performance management can achieve its strategic purpose only when measurements are truly linked to the organization’s goals and when the goals and feedback about performance are communicated to employees
Administrative- Performance management can support decision making related to employee retention, termination for poor behavior, and hiring or layoffs. Information in a performance appraisal can have a great impact on the future of individual employees.
Developmental- Even employees who are meeting expectations can become more valuable when they hear and discuss performance feedback. Effective performance feedback makes employees aware of their strengths and of the areas in which they can improve.

Criteria for Effective Performance Management

Fit with strategy

Validity

Reliability

Acceptability

Specific feedback

Selecting these measures is a critical part of planning a performance manage system. Five criteria determine the effectiveness of performance measures:

Fit with strategy- A performance management system should aim at achieving employee behavior and attitudes that support the organization’s strategy, goals, and culture.
Validity- refers to whether the appraisal measures all the relevant aspects of performance and omits irrelevant aspects of performance.
Reliability describes the consistency of the results that the performance measure will deliver. Interrater-reliability has consistency of results when more than one person measures performance. Test-retest reliability refers to consistency of results over time. If a performance measure lacks test-retest reliability, determining whether an employee’s performance has truly changed over time will be impossible.
Acceptability- whether or not a measure is valid and reliable, it must meet the practical standard of being acceptable to the people who use it.
Specific feedback- A performance measure should specifically tell employees what is expected of them and how they can meet those expectations. Being specific helps performance management meet the goals of supporting strategy and developing employees. If a measure does not specify what an employee must do to help the organization achieve its goals, it does not support the strategy. If the measure fails to point out employees’ performance problems, they will not know how to improve.

Figure 10.2: Contamination and Deficiency of a Job Performance Measure

Jump to Appendix 2 long image description

Figure 10.2 shows two sets of information. The circle on the left represents all the information in a performance appraisal; the circle on the right represents all relevant measures of job performance. The overlap of the circles contains the valid information. Information that is gathered but irrelevant is “contamination.”

Test Your Knowledge 2 of 4

Sarah is a computer programmer whose job mainly consists of independently coding software. Interpersonal and teamwork skills are included on performance appraisal. Measuring these skills most closely represents:

Criterion contamination

Criterion deficiency

Unreliability

Sarah is a computer programmer whose job mainly consists of independently coding software. If interpersonal and teamwork skills were weighted heavily on his job performance measure it would suffer from

Criterion contamination
Criterion deficiency
Unreliability

Answer: A

Methods for Measuring Performance 1 of 7

Making Comparisons

Simple ranking
Alternation ranking
Forced distribution
Paired comparison

LO 10-4 Compare the major methods for measuring performance.

Table 10.1: Basic Approaches to Performance Measurement 1 of 3

Criteria
Approach	Fit with strategy	Validity	Reliability	Acceptability	Specificity
Comparative	Poor, unless manager takes time to make link	Can be high if ratings are done carefully	Depends on rater, but usually no measure of agreement used	Moderate; easy to develop and use, but resistant to normative standard	Very low
Attribute	Usually low; requires manager to make link	Usually low; can be fine if developed carefully	Usually low; can be improved by specific definitions of attributes	High; easy to develop and use	Very low

Organizations have developed a wide variety of methods of measuring performance.

Table 10.1 compares the methods/approaches to measuring performance in terms of our criteria for effective performance management.

Table 10.1: Basic Approaches to Performance Measurement 2 of 3

Criteria
Approach	Fit with strategy	Validity	Reliability	Acceptability	Specificity
Behavioral	Can be quite high	Usually high; minimizes contamination and deficiency	Usually high	Moderate; difficult to develop, but accepted well for use	Very high
Results	Very high	Usually high; can be both contaminated and deficient	High; main problem can be test-retest—depends on timing of measure	High; usually developed with input from those to be evaluated	High regarding results, but low regarding behaviors necessary to achieve them

Table 10.1: Basic Approaches to Performance Measurement 3 of 3

Criteria
Approach	Fit with strategy	Validity	Reliability	Acceptability	Specificity
Quality	Very high	High, but can be both contaminated and deficient	High	High; usually developed with input from those to be evaluated	High regarding results, but low regarding behaviors necessary to achieve them

Methods for Measuring Performance 2 of 7

Rating Attributes

Graphic Rating Scale

Lists traits and provides a rating scale for each trait.

Employer uses the scale to indicate extent to which an employee displays each trait.

Mixed-Standard Scale

Uses several statements describing each trait to produce a final score for that trait.

Instead of focusing on arranging a group of employees from best to worst, performance measurement can look at each employee’s performance relative to a uniform set of standards. The measurement may evaluate employees in terms of:

Attributes (characteristics or traits) believed desirable. Behaviors measurements that identify whether the employee behaved in desirable ways. Most companies conduct performance appraisals, and the measure used most often is quality of work, according to an annual survey by Business & Legal Resources. Other commonly used performance measures include attitude/cooperation, communication skills, attendance and punctuality and dependability/reliability.

Figure 10.3: Example of a Graphic Rating Scale

The following areas of performance are significant to most positions. Indicate your assessment of performance on each dimension by circling the appropriate rating.
Performance Dimension	Rating
Distinguished	Excellent	Commendable	Adequate	Poor
Knowledge	5	4	3	2	1
Communication	5	4	3	2	1
Judgment	5	4	3	2	1
Managerial skill	5	4	3	2	1
Quality performance	5	4	3	2	1
Teamwork	5	4	3	2	1
Interpersonal skills	5	4	3	2	1
Initiative	5	4	3	2	1
Creativity	5	4	3	2	1
Problem solving	5	4	3	2	1

Figure 10.3 shows an example of a graphic rating scale that uses a set of ratings from 1 to 5. A drawback of this approach is that it leaves to the particular manager the decisions about what is “excellent knowledge” or “commendable judgment” or “poor interpersonal skills.” The result is low reliability, because managers are likely to arrive at different judgments.

Methods for Measuring Performance 3 of 7

Rating Behaviors

Critical-Incident Method

Specific examples of employees acting in ways that are either effective or ineffective
Employees receive feedback about what they do well and what they do poorly and how they are helping the organization achieve its goals

Behaviorally Anchored Rating Scale (BARS)

Scale showing specific statements of behavior that describe different levels of performance

One way to overcome drawbacks of rating attributes is to measure employees’ behavior. To rate behaviors, the organization begins by defining which behaviors are associated with success on the job. Which kinds of behavior help the organization achieve its goals? The appraisal for asks the manager to rate an employee in terms of each of the identified behaviors. Techniques used include:

Critical incident method
Behaviorally anchored rating scale (BARS)
Behavioral observation scale (BOS)
Organizational Behavior modification (OBM)

Methods for Measuring Performance 4 of 7

Rating Behaviors (continued)

Behavioral Observation Scale (BOS)

A variation of a BARS which uses all behaviors necessary for effective performance to rate performance at a task.

A BOS also asks the manager to rate frequency with which the employee has exhibited the behavior during rating period.

Organizational Behavior Modification (OBM)

A plan for managing behavior of employees through a formal system of feedback and reinforcement.

Four components of OBM:

1. Define a set of key behaviors necessary for job performance.

2. Use a measurement system to assess whether the employee exhibits the key behaviors.

3. Inform employees of the key behaviors, perhaps in terms of goals for how often to exhibit the behaviors.

4. Provide feedback and reinforcement based on employees’ behavior.

Figure 10.5 Example of a Behavioral Observation Scale (BOS)

Figure 10.5 provides a simplified example of a BOS for measuring the behavior “overcoming resistance to change.” A major drawback of this method is the amount of information required. A BOS can have 80 or more behaviors, and the manager must remember how often the employee exhibited each behavior in a 6- to 12-month rating period. This is taxing enough for one employee, but managers often must rate 10 or more employees. Even so, compared to BARS and graphic rating scales, managers and employees have said they prefer BOS for ease of use, providing feedback, maintaining objectivity, and suggesting training need.

Methods for Measuring Performance 5 of 7

Measuring Results

Productivity is an important measure of success because getting more done with a smaller amount of resources (money or people) increases the company’s profits.
Management by Objectives (MBO): people at each level of the organization set goals in a process that flows from top to bottom, so that all levels are contributing to the organization’s overall goals.
These goals become the standards for evaluating each employee’s performance.

Productivity usually refers to the output of production, but it can be used more generally as a performance measure. The organization identifies the products—set of activities or objectives—it expects a group or individual to accomplish. Performance measurement can focus on managing by objective, measurable results of a job or work group. An MBO system has three components:

Goals are specific, difficult, and objective.
Managers and their employees work together to set the goals.

3. The manager gives objective feedback through the rating period to monitor progress toward the goals. MBO can have a very positive effect on an organization’s performance. The two right-hand columns in next slide, Table 10.2 are examples of feedback given after one year.

Table 10.2: Management by Objectives:
Two Objectives for a Bank

Key Result Area	Objective	% Complete	Actual Performance
Loan portfolio management	Increase portfolio value by 10% over the next 12 months	90	Increased portfolio value by 9% over the past 12 months
Sales	Generate fee income of $30,000 over the next 12 months	150	Generated fee income of $45,000 over the past 12 months

In Table 10.2 the goals listed in the second column provide two examples for a bank. The two right-hand columns are examples of feedback given after one year.

Test Your Knowledge 3 of 4

The performance management system at XYZ company currently is perceived as unfair and is time-consuming for managers. Which of the following systems is the most likely and least likely used, respectively?

Paired comparisons; Results

Results; Forced distribution

Behavioral; Attributes

Attributes; Comparative

The performance management system at XYZ company currently is perceived as unfair and is time consuming for managers. Which of the following systems is the most likely and least likely used, respectively.

Paired comparisons, Results
Results, Forced distribution
Behavioral, Attributes
Attributes, Comparative

Answer: A

Methods for Measuring Performance 6 of 7

A TQM approach to performance measurement involves employees and their internal and external customers working together to improve overall customer satisfaction.

Jump to Appendix 3 long image description

Methods for Measuring Performance 7 of 7

Total quality management (TQM)

Provide methods for performance measurement and management.

Combines measurements of attributes and results.

Two kinds of feedback in TQM

Subjective feedback

Statistical quality control

Subjective feedback comes from managers, peers, and customers about the employee’s personal qualities such as cooperation and initiative.
Statistical quality control’s methods use charts to detail causes of problems, measures of performance, or relationships between work-related variables. statistical quality control.

Ask: Why might TQM NOT support decisions about work assignments, training, or compensation?

Sources of Performance Information

LO 10-5 Describe major sources of performance information in terms of their advantages and disadvantages.

To get as complete an assessment as possible, some organizations combine information from most or all of the possible sources, in what is called a 360-degree performance appraisal. the most used source of performance information is the employee’s manager. It is usually assumed that supervisors have extensive knowledge of the job requirements and that they have enough opportunity to observe their employees. However, in some jobs, the supervisor does not have enough opportunity to observe the employee performing job duties. Peers are an excellent source of information about performance in a job where the supervisor does not often observe the employee. Peers are more favorable toward participating in reviews to be used for employee development. Subordinates—the people reporting to the manager—often have the best chance to see how well a manager treats employee. To protect employees, the process should be anonymous and use at least three employees to rate each manage. Self-ratings are rarely used alone, but they can contribute valuable information although hat individuals have a tendency to inflate assessments of their performance. A common approach is to have employees evaluate their own performance before the feedback session. The customer is often the only person who directly observes the service performance and may be the best source of performance information.

Performance Management

Performance management is critical for executing a talent management system and involves one-on-one contact with managers to ensure that proper training and development are taking place.

Errors in Performance Measurement 1 of 4

Types of Rating Errors

Contrast errors: rater compares an individual, not against an objective standard, but against other employees.
Distributional errors: rater tends to use only one part of a rating scale:

Leniency: the reviewer rates everyone near the top

Strictness: the rater favors lower rankings

Central tendency: the rater puts everyone near the middle of the scale

LO 10-6 Define types of rating errors, and explain how to minimize them.

Several kinds of errors and biases commonly influence performance measurements. People often tend to give a higher evaluation to people they consider similar to themselves. Most of us think of ourselves as effective, so if others are like us, they must be effective, too. It is sometimes wrong, and when similarity is based on characteristics such as race or sex, decisions may be discriminatory.

Errors in Performance Measurement 2 of 4

Types of Rating Errors (continued)

Rater bias: raters often let their opinion of one quality color their opinion of others.
Halo error: when bias is in a favorable direction. This can mistakenly tell employees they don’t need to improve in any area.
Horns error: when bias involves negative ratings. This can cause employees to feel frustrated and defensive.

Fairness in rating performance and interpreting performance appraisals requires that managers understand the kinds of distortions that commonly occur. Usually people make these errors unintentionally, especially when the criteria for measuring performance are not very specific.

Halo and horn errors- someone who speaks well might be seen as helpful or talented in other areas simply because of the overall good impression created by this one quality. Or someone who is occasionally tardy might be seen as lacking in motivation. When the bias is in a favorable direction, this is called the halo error. When it involves negative ratings, it is called the horns error.

Errors in Performance Measurement 3 of 4

Ways to Reduce Errors

Employees rate fictional employees and discuss their rating decisions
Actual examples of various performances are studied
Data analytics is used to find patterns

Test Your Knowledge 4 of 4

Bill rates all of his employees very low except for Jan. Jan gets above average ratings because she consistently comes to work on time. The rating errors Bill makes are _______ and _______, respectively.

Leniency; Horn

Strictness; Halo

Similar-to-me; Central Tendency

Horn; Strictness

Leniency; Horn
Strictness; Halo
Similar-to-me; Central Tendency
Horn; Strictness

Answer: B

Errors in Performance Measurement 4 of 4

Political Behavior in Performance Appraisals

Distorting a performance evaluation to advance one’s personal goals

A technique to minimize appraisal politics is a calibration meeting.

Meeting at which managers discuss employee performance ratings and provide evidence supporting their ratings with the goal of eliminating influence of rating errors

Sometime raters intentional distort their ratings on purpose to advance their personal goals. One technique to minimize appraisal politics is to hold calibration meetings.

Giving Performance Feedback 1 of 3

Scheduling Performance Feedback

Performance feedback should be a regular, expected management activity.

Annual feedback is not enough.

Employees should receive feedback so often that they know what the manager will say during their annual performance review.

Preparing for a Feedback Session

Managers should be prepared for each formal feedback session.

Once the manager and others have measured an employee’s performance, this information must be given to the employee. Only after the employee has received feedback can he or she begin to plan how to correct any shortcomings. Managers should also enable the employee to be well prepared. The manager should ask the employee to complete a self-assessment ahead of time to think about their performance over the past rating period and to be aware of their strengths and weaknesses so they can participate more fully in the discussion. he organization can also help managers give accurate and fair appraisals by training them to use the appraisal process, encouraging them to recognize accomplishments that the employees themselves have not identified, and fostering a climate of openness in which employees feel they can be honest about their weaknesses.

Giving Performance Feedback 2 of 3

When giving performance feedback, do it in an appropriate meeting place.

Meet in a setting that is neutral and free of distractions.

Ask students, “What other factors are important for a feedback session?”

The manager should create the right context for the meeting. The location should be neutral. If the manager’s office is the site of unpleasant conversations, a conference room may be more appropriate. In announcing the meeting to an employee, the manager should describe it as a chance to discuss the role of the employee, the role of the manager, and the relationship between them. Managers should also say (and believe) that they would like the meeting to be an open dialogue. Managers should also enable the employee to be well prepared. The manager should ask the employee to complete a self-assessment ahead of time.

Giving Performance Feedback 3 of 3

Conducting the Feedback Session

“Tell-and-Sell” – managers tell employees their ratings and then justify those ratings.
“Tell-and-Listen” – managers tell employees their ratings and then let employees explain view.
“Problem-Solving” – managers and employees work together to solve performance problems.

Delivering feedback feels to the manager as if he or she is standing in judgment of others—a role few people enjoy. Managers can do much to smooth the feedback process and make it effective. Receiving criticism feels even worse. Although the problem-solving approach is superior, most managers rely on the tell-and-sell approach. Managers can improve employee satisfaction with the feedback process by letting employees voice their opinions and discuss performance goals. Frequent feedback as an opportunity for strengthening a relationship of trust between the manager and the employee.

Finding Solutions to Performance Problems

The type of action called for depends on what the employee lacks.

Lack of ability
Lack of motivation
Lack of both

In general, employees who combine high ability with high motivation are solid performers.

LO 10-8 Summarize ways to produce improvement in unsatisfactory performance.

Legal and Ethical Issues in Performance Management 1 of 2

Legal Requirements for Performance Management

Uniform Guidelines on Employee Selection Procedures
Require that organizations avoid using criteria such as race and age as a basis for employment decisions
Unjust dismissal
The usual claim is that the person was dismissed for reasons besides the ones that the employer states.
Performance management systems provide evidence to support an organization’s employment decisions.

LO 10-9 Discuss legal and ethical issues that affect performance management.

Legal and Ethical Issues in Performance Management 2 of 2

Electronic Monitoring and Employee Privacy

Records of employees’ performance ratings, disciplinary actions, and work-rule violations are often stored in electronic databases
Electronic monitoring can improve productivity, it also generates privacy concerns

Summary 1 of 4

Performance management is the process through which managers ensure that employees’ activities and outputs contribute to the organization’s goals.
Organizations establish performance management systems to meet three broad purposes:

Strategic purpose

Administrative purpose

Developmental purpose

Performance measures should fit with the organization’s strategy by supporting its goals and culture.

Organizations establish performance management systems to meet three broad purposes. Effective performance management helps the organization with strategic purposes, that is, meeting business objectives. It does this by helping to link employees’ behavior with the organization’s goals. The administrative purpose of performance management is to provide information for day-to-day decisions about salary, benefits, recognition, and retention or termination. The developmental purpose of performance management is using the system as a basis for developing employees’ knowledge and skills.

Summary 2 of 4

Performance information may come from an employee’s self-appraisal and from appraisals by the employee’s supervisor, employees, peers, and customers.
Using only one source makes the appraisal more subjective.
Organizations may combine many sources into a 360-degree performance appraisal.

Performance information may come from an employee’s self-appraisal and from appraisals by the employee’s supervisor, employees, peers, and customers. Using only one source makes the appraisal more subjective. Organizations may combine many sources into a 360-degree performance appraisal.

Summary 3 of 4

Organizations can minimize appraisal politics by establishing a fair appraisal system, involving managers and employees in developing the system, allowing employees to challenge evaluations, communicating expectations, and having open discussion.
Performance feedback should be a regular, scheduled management activity, so that employees can correct problems as soon as they occur.

Managers should prepare by establishing a neutral location, emphasizing that the feedback session will be a chance for discussion, and asking the employee to prepare a self-assessment. During the feedback session, managers should strive for a problem-solving approach and encourage employees to voice their opinions and discuss performance goals.

Summary 4 of 4

Performance feedback discussions should focus on behavior and results rather than on personalities.
Managers must make sure that performance management systems and decisions treat employees equally, without regard to race, sex, or other protected status.
A system is more likely to be legally defensible if it is based on behaviors and results, rather than on traits, and if multiple raters evaluate each person’s performance.

The system should include a process for coaching or training employees to help them improve, rather than simply dismissing poor performers. An ethical issue of performance management is the use of electronic monitoring. This type of performance measurement provides detailed, accurate information, but employees may find it demoralizing, degrading, and stressful. They are more likely to accept it if the organization explains its purpose, links it to help in improving performance, and keeps the performance data private.

Appendix 1 Figure 10.1: Steps -Performance Management Process

Step 1. Define performance outcomes for company division and department.

Step 2. Develop employee goals, behavior, and actions to achieve outcomes.

Step 3. Provide support and ongoing performance discussions.

Step 4. Evaluate performance (This step leads to one of the following two steps).

Step 5. Indentify improvements needed.

Step 6. Provide consequences for performance results.

Steps 5 and 6 lead back to Step 1 and the cycle begins again.

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Appendix 2 Figure 10.2: Contamination and Deficiency of a Job Performance Measure

One circle is labeled job performance measure. The second is labeled actual, or “true,” job performance. The area where the circles overlap is labeled validity. The remainder of the job performance measure circle is labeled contamination. The remainder of the actual, or “true,” job performance circle is labeled deficiency.

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Appendix 3 A TQM approach to performance measurement

The graphic states, A TQM approach to performance measurement involves employees and their internal and external customers working together to improve overall customer satisfaction.

Elements of Total Quality Management include customer focus, personnel involvement, process approach, system approach, and permanent improvement.

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Appendix 4 Improving Performance

High ability, low motivation. Misdirected effort. Coaching; frequent performance feedback; goal setting; training or temporary assignment for skill development; restructured job assignment.
High ability, high motivation. Solid performers. Reward good performance; identify development opportunities; provide honest, direct feedback.
Low ability, low motivation. Deadwood. Withholding pay increases; demotion; outplacement; firing; specific, direct feedback on performance problems.
Low ability, high motivation. Underutilizers. Give honest, direct feedback; provide counseling; use team building and conflict resolution; link rewards to performance outcomes; offer training for needed knowledge or skills; manage stress levels.

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After reading and discussing this chapter, you should know:

If the performance management system created competition among team members, I would:

Make collaboration a criterion to be evaluated.
Nothing, competition is good.
Increase the specificity of the feedback.
Focus on personal traits rather than behaviors.

Answer: A

LO 10-1 Identify the activities involved in performance management.

LO 10-2 Discuss the purposes of performance management systems.

Organizations establish performance management systems to meet three purposes: : strategic, administrative, and developmental.

Strategic helps link employees’ behavior with the organization’s goals. Performance management defines what the organization expects from each employee and measures each employee’s performance to identify where those expectations are and are not being met. This enables the organization to take corrective action, such as training, incentives, or discipline. Performance management can achieve its strategic purpose only when measurements are truly linked to the organization’s goals and when the goals and feedback about performance are communicated to employees
Administrative- Performance management can support decision making related to employee retention, termination for poor behavior, and hiring or layoffs. Information in a performance appraisal can have a great impact on the future of individual employees.
Developmental- Even employees who are meeting expectations can become more valuable when they hear and discuss performance feedback. Effective performance feedback makes employees aware of their strengths and of the areas in which they can improve.

Selecting these measures is a critical part of planning a performance manage system. Five criteria determine the effectiveness of performance measures:

Fit with strategy- A performance management system should aim at achieving employee behavior and attitudes that support the organization’s strategy, goals, and culture.
Validity- refers to whether the appraisal measures all the relevant aspects of performance and omits irrelevant aspects of performance.
Reliability describes the consistency of the results that the performance measure will deliver. Interrater-reliability has consistency of results when more than one person measures performance. Test-retest reliability refers to consistency of results over time. If a performance measure lacks test-retest reliability, determining whether an employee’s performance has truly changed over time will be impossible.
Acceptability- whether or not a measure is valid and reliable, it must meet the practical standard of being acceptable to the people who use it.
Specific feedback- A performance measure should specifically tell employees what is expected of them and how they can meet those expectations. Being specific helps performance management meet the goals of supporting strategy and developing employees. If a measure does not specify what an employee must do to help the organization achieve its goals, it does not support the strategy. If the measure fails to point out employees’ performance problems, they will not know how to improve.

Criterion contamination
Criterion deficiency
Unreliability

Answer: A

LO 10-4 Compare the major methods for measuring performance.

Organizations have developed a wide variety of methods of measuring performance.

Table 10.1 compares the methods/approaches to measuring performance in terms of our criteria for effective performance management.

Attributes (characteristics or traits) believed desirable. Behaviors measurements that identify whether the employee behaved in desirable ways. Most companies conduct performance appraisals, and the measure used most often is quality of work, according to an annual survey by Business & Legal Resources. Other commonly used performance measures include attitude/cooperation, communication skills, attendance and punctuality and dependability/reliability.

Critical incident method
Behaviorally anchored rating scale (BARS)
Behavioral observation scale (BOS)
Organizational Behavior modification (OBM)

Four components of OBM:

1. Define a set of key behaviors necessary for job performance.

2. Use a measurement system to assess whether the employee exhibits the key behaviors.

3. Inform employees of the key behaviors, perhaps in terms of goals for how often to exhibit the behaviors.

4. Provide feedback and reinforcement based on employees’ behavior.

Goals are specific, difficult, and objective.
Managers and their employees work together to set the goals.

In Table 10.2 the goals listed in the second column provide two examples for a bank. The two right-hand columns are examples of feedback given after one year.

Paired comparisons, Results
Results, Forced distribution
Behavioral, Attributes
Attributes, Comparative

Answer: A

Subjective feedback comes from managers, peers, and customers about the employee’s personal qualities such as cooperation and initiative.
Statistical quality control’s methods use charts to detail causes of problems, measures of performance, or relationships between work-related variables. statistical quality control.

Ask: Why might TQM NOT support decisions about work assignments, training, or compensation?

LO 10-5 Describe major sources of performance information in terms of their advantages and disadvantages.

LO 10-6 Define types of rating errors, and explain how to minimize them.

Leniency; Horn
Strictness; Halo
Similar-to-me; Central Tendency
Horn; Strictness

Answer: B

Sometime raters intentional distort their ratings on purpose to advance their personal goals. One technique to minimize appraisal politics is to hold calibration meetings.

Ask students, “What other factors are important for a feedback session?”

LO 10-8 Summarize ways to produce improvement in unsatisfactory performance.

LO 10-9 Discuss legal and ethical issues that affect performance management.

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Chapter 10-14 Test: employee benefits, performance

Chapter 14 PROVIDING EMPLOYEE BENEFITS

Chapter 13 RECOGNIZING EMPLOYEE CONTRIBUTIONS WITH PAY

Chapter 11 SEPARATING AND RETAINING EMPLOYEES

Chapter 12 ESTABLISHING A PAY STRUCTURE

CHAPTER 10 MANAGING EMPLOYEES’ PERFORMANCE

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