Pay for Performance Part 1_ Theory and Practice.docx

Pay for Performance Part 1: Theory and Practice Transcribed by TurboScribe.ai. Go Unlimited to remove this message. Welcome to Worksman TV. I'm Allison Avalos. And I'm Kerry Hsu. Today we're talking about pay-for-performance programs. Kerry, can you talk about what pay-for-performance is and how pre...

Pay for Performance Part 1: Theory and Practice Transcribed by TurboScribe.ai. Go Unlimited to remove this message. Welcome to Worksman TV. I'm Allison Avalos. And I'm Kerry Hsu. Today we're talking about pay-for-performance programs. Kerry, can you talk about what pay-for-performance is and how prevalent it is in organizations today? Well, pay-for- performance really is the whole notion of differentiation. I think that's a key word. Differentiation, in this course in compensation, we're talking mostly about cash rewards. And it's differentiating those that perform well in the organization, whether that's at the individual level, at the divisional level, at the corporate level, between those individuals or organizations that perform less well. So it's really the whole nut of trying to differentiate to where those that perform well receive significantly more in terms of rewards than those that don't. I would say research after research has shown us that 90, 95 percent of organizations at least claim on the surface that they're a pay-for-performance organization. Now as we get more into our discussion today, we'll probably uncover that fewer than 90 percent of organizations feel like they do it well. But most organizations have a belief or a desire to have a pay-for-performance philosophy. So it's clearly the prevalent practice. Why is it so common? Well, it's common for a few different reasons. Over the past 50 or 60 years, there's really been quite a bit of research, industrial psychologists, psychology, in terms of what motivates people. And there are a number of theories that have come out. Now let me just mention two of the most prevalent theories that really we believe impact pay-for-performance and pay. The first one is called the expectancy theory. And the expectancy theory is really saying that in order to motivate behavior, you kind of need three things. An individual has to believe that the goal that you want them to accomplish can be accomplished. The person has the tools, they have the knowledge, they have the resources to accomplish what the organization wants them to do. Secondly, it's important for the individual then to believe that they're going to receive a reward if they accomplish what they're asked to do in part one. And finally, in part three, we're really saying not only do they have to expect that they're going to get a reward, but that reward that they receive has to be valued. And I think you see underpinnings of that theory coming out often in pay-for-performance. Secondly, another theory that is very influential, I believe, is the equity theory. And the individuals are constantly comparing the ratio of the contributions that they make to the organization versus the rewards they receive for that contribution. And they're always comparing that to the ratio of other employees, their contribution versus the rewards that they're receiving. The theory goes that we want to have equality. We want that equation on our side and on their side to be equal. And to the extent that it's not equal, let's say, for example, we feel our side of the equation, which people often do, that our side of the equation is a little bit low, but we have a couple of options. Either we can demand to have our pay increase, and that'll increase the value of our side of the equation. Or if we can't do that, we might decrease our contribution in terms of calling in sick or becoming disengaged, and so forth. So those are two theories that have been widely taught and accepted over the years, and I think is much of what has driven the popularity of pay-for-performance. So how does an understanding of these theories help the total rewards professional design a better pay-for-performance program? Well, I think there's a few key takeaways from these two theories, and of course there are many others. One of the things that we have to make sure in our pay-for-performance programs is that we have a clear line of sight. So if you have an employee and you ask them to do a job, maybe it's something that has a lot of calculations, and then you say, oh, by the way, you know, your desktop computer won't be here for two weeks. You know, here's an abacus or an old, you know, an old calculator, and just make do with what you have. Well, immediately you reduce the motivation because they're looking at it and they're saying, how can I possibly accomplish this when I don't have the tools? So that's one key takeaway. Secondly, employees have to believe that if they perform well, that they're going to get a reward. So do the extent that you perform well, you perform well, you perform well, and nobody's paying attention, nobody says anything, or you don't see an increase in your paycheck, that's going to not help your pay-for-performance program as well. If I'm a 20-something-year-old employee and I work on this big project for six months, and they come back and say you did a fantastic job, and Carrie, for your huge contribution, we're going to increase your 401k match by 1%. Which is, which for some employees would be wonderful, for maybe a 20-something who, you know, is never going to get old and never going to get, never going to die and could care less about retirement, that's not necessarily the reward they want. So that's another important thing. Lastly, I would say that absolute compensation levels are just as important as relative compensation levels. So Allison, I could provide you with a 10% merit increase, and you might be ecstatic and extremely excited about that, until you find out that all the other co-workers in your group got 15%, and suddenly, you know, the 10% is not only not motivating, you're demotivated. So in compensation, we always have to maintain the understanding in the back of our minds that compensation is both an absolute in terms of how much or what percentage, but it's also relative to, you're always comparing that versus what the other employee received. What I hear is that there's, you know, like with a lot of total rewards programs, there needs to be credibility as well as relevance to each employee in order for it to be successful.