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CHAPTER 5:

FROM THEORY TO PRACTICE: THE ROLE OF MONEY

Money is the most commonly used reward in organizations, as it helps needs get met. But managers often find it difficult to set the right pay levels. A 2010 survey of Canadian Employees found that 46% believed they were underpaid. Therefore, the first question that we seek to address in this section is how managers can set pay levels. 

Setting pay levels (above, at, or below market rates) is a key strategic decision with important trade-offs:

• Paying below market cuts operating cost and increase profit, but morale may suffer.

• Paying above market helps to keep and attract motivated and qualified employees, but decreases company profit.

Setting pay levels requires a balance between external and internal equity:

• Internal Equity: The worth of the job to the organization (job evaluation)

• External Equity: The competitiveness of an organization’s pay relative to industry standards

In practice, different pay programs can be grouped into two categories: 

• Fixed pay programs: Employee's level of pay is fixed at a certain level.

• Variable pay programs:  A portion of an employee’s pay is based on some individual and/or organizational measure of performance. Keep in mind that in variable pay programs only a portion, rather than the full amount, of the pay is variable. Variable pay programs can be further categorized into:

  • Individual-based programs

    • Piece-rate wages

    • Merit-based pay

    • Bonuses

    • Skill-based pay

  • Group-based 

    • Gainsharing

  • Organization-based

    • Profit sharing

    • Employee stock ownership and stock options

• Pay a fixed sum for each unit of production completed.

• It is unfortunately not feasible for all jobs (e.g., administrative positions), as not all jobs can be accurately quantified.

• Pay is based on performance appraisal ratings

• Also influenced by the projected level of future performance

• Only as valid as performance ratings

• Raise can be influenced by economic or other conditions

• Prone to gender and racial discrimination

Bonuses

• One-time rewards for defined work rather than ongoing entitlements.

• Reward for recent performance rather than historical performance

• Subject to economic condition

• Cuts to bonuses can be uneven within a firm

• The desire to gain bonuses may motivate employees to engage unethical practices

• Pay based on how many skills employees have or how many jobs they can do.

• Increases flexibility of the workforce, which facilitates staffing and communication

• Can be frustrating to certain employees, as there are only so many skills that one can master

• No consideration for performance, as not all skills are needed in some organizations

Gainsharing

• Gainsharing focuses on productivity gains.

• Improvements in group productivity determine the rewards to be shared.

• May lead to change in group dynamics (e.g., higher performers pressure low performers to work harder)

It is important to note that gainsharing is different from most other variable-pay program in that the fund comes from savings in production cost, rather than after those products have been sold. As an example of gainsharing, if your department can bring down the cost of manufacturing one unit of product from $10 to $6, members of your department get to receive a portion of that $4 saving as incentive from the gainsharing program.

Profit sharing plans

• Profit sharing plans are organization-wide programs that distribute compensation based on some established formula designed around a company’s profitability

• Profit sharing plans often result in greater feeling of psychological ownership

• One downside of profit sharing plans is that they lack of focus on the future, as profit is calculated based on past, rather than future, performance

• The other downside is that they lack of consideration for programs that maintain long-term profitability, such as customer service and employee development, as these programs do not directly generate profits.

• ESOPs are company-established benefit plans in which employees acquire stock as part of their benefits

• Stock options give employees the right to buy stocks in the company at a later date for a guaranteed price

• Compared with other variable pay programs, ESOPs and stock options have the advantage of being future-oriented, as employees who receive these benefits have to hold onto the stocks they acquired from ESOPs or stock options for some time before selling or exercising them. As a consequence, these programs motivate employees by aligning employee self-interest with the best interest of their organizations.  

Variable pay programs are among the most popular pay programs in use today. However, adoption of these programs is not without obstacles. Generally speaking, these obstacles can be grouped into the following four categories:

• Teamwork

• Unions

• Public Sector Employees

• Ethical Considerations

When choosing variable pay programs, managers often forget that not all variable pay programs are created equal. While group-based programs are beneficial for teams, programs based on individual incentives can harm team performance.

• Canada has more unionized workplaces than in the United States

• Unionized employees are paid on the basis of seniority and job category, rather than performance

• There is often little range within a category and few opportunities to receive performance-based pay

Variable pay programs may also be difficult to implement in public sectors, as jobs in public sectors are mostly service in nature, which makes them difficult to quantify.

• Performance-based pay programs lead to manipulation of performance. For example, managers may force staff to work without pay to keep his or her own bonus

Reward systems contain not only monetary compensation but also benefits packages that seek to enhance employee well-being indirectly. For a long time, benefits packages were designed following the one-benefit-plan-fits-all approach. Over time, organizations became increasingly aware that the one-benefit-fits-all approach is costly and ineffective, as individuals have different needs. For example, employees with families may prefer insurance coverage for their entire family while others without families may prefer coverages only for themselves at a lower cost. Therefore, almost all benefits packages are flexible in nature. 

A flexible benefits plan permits each employee to create a package to suit their individual needs, defined by factors such as marital status, age, spouses’ benefits status, number of dependents, etc.

Modular Plans: predesigned packages of benefits, with each module put together to meet the needs of specific groups of employers

Core-Plus Plans: plans that consist of essential benefits and a menu-like selection of other benefit options from which employees can select

Flexible Spending Plans: plans that allow employees to set aside pretax dollars up to the dollar amount offered in the plan to pay for particular benefits, such as eye care and dental premiums 

There are several practices that organizations use to make jobs more motivating:

• Job rotation

• Job enrichment

• Relational job design

• Flexible work time

• Job sharing

• Telecommuting (teleworking or virtual office)

• Employee involvement

  • Participative management

  • Representative participation

• Periodic shifting of workers from one task to another.

• Often used to increase flexibility and avoid layoff

• Mostly for assembly line and manufacturing employees, job rotation is also used for new managers

• Reduces boredom, increases motivation, and helps employees understand how their work contributes to the organization

• Increases training cost, reduces productivity during training, and creates disruptions

• The vertical expansion of jobs that allows employees to do a complete activity

  • Employee controls the planning, execution, and evaluation of the work

• Expands the employee’s freedom and independence

• Increases responsibility

• Provides feedback so individuals can assess and correct their own performance

• Seeks to increase meaningfulness of work

• The frequency of feedback is key for job enrichment to be effective

• How can managers design work so employees are motivated to promote the well-being of the organization’s beneficiaries, such as customers, clients, or other users of their services and products

• Relating employees with customers, which can be accomplished with:

  • Stories from customers

  • Direct interactions between employees and beneficiaries

• Why does relational job design motivate?

  • Evidence of tangible consequences associated with work

  • Make customers more accessible in the minds of employees

  • Allow employees to take the perspective of customers

• Employees work a specific number of hours a week, but they are free to vary the hours of work within certain limits (common core (e.g., 9am-3pm) + flexibility band (e.g., 6am-9am or 3pm-6pm)

• Reduces absenteeism and improves productivity and satisfaction

  • Alignment between work and personal demands

  • Work is done when people are most productive

  • Work-life balance

• Works well with clerical tasks in which interaction with other departments is limited but not so well with professions in which people’s presence is required at predetermined times

• Two or more people splitting a 40 hour a week job

• Popular in Europe (14% Canadian employers offer this arrangement)

• Allows employers to draw upon the talents of more than one individual in a given job

• Accommodates skilled employees who are not available on a full-time basis

• Increases flexibility, motivation, and satisfaction for those who can’t work full-time

• Difficult to find compatible partners to share a job

• Employees complete their work at home for at least two days a week on a computer linked to the employer’s office

• Best for routine information-handling tasks, mobile activities, professional and other knowledge-related tasks

• Writers, attorneys, analysts, and employees who spend the majority of their time on computers or the phone

• Employee involvement programs are participative processes that use employees’ input to increase their commitment to the organization’s success

• The assumption behind employee involvement programs is that if employees are engaged in making the decisions that affect them and increase their autonomy and control, they will be more motivated, committed, productive, and satisfied (i.e., procedural justice)

• Employee involvement programs usually belong to one of the following two categories:

  • Participative management

  • Representative participation

• A process in which subordinates share a significant degree of decision-making power with their immediate superiors (joint decision making)

• An effective solution for poor morale and low productivity

• Most effective when:

  • employees have trust and confidence in their leaders

  • leaders to avoid coercive techniques and stress organizational consequences of decision-making to employees

• Effect on performance is limited

• A system in which employees participate in organizational decision making through a small group of representative employees

• It represents redistribution of power within an organization by putting labor on a more equal footing with the interests of management and stockholders

• Representative participation often appears in organizations as councils and board representatives

  •  Work councils involve groups of nominated or elected employees who must be consulted about decisions pertinent to employees

  • Board representatives involve employees who sit on a company’s board of directors and represent employees’ interests

• Effect on motivation and performance is minimal: It may increase motivation and satisfaction for representatives, but there is little to no effect on individual employees. Therefore, its effect is more symbolic than functional.